Pizza Hut 2011 Annual Report Download - page 133

29
Decreased Restaurant profit
Increased Franchise and license fees and income
Increased Franchise and license expenses
Decreased G&A
Increase (decrease) in Operating Profit
2010
China
$(3)
3
—
—
$ —
YRI
$(5)
9
—
9
$ 13
U.S.
$(44)
25
—
6
$(13)
Worldwide
$(52)
37
—
15
$ —
Internal Revenue Service Proposed Adjustment
On June 23, 2010 the Company received a Revenue Agent Report from the Internal Revenue Service (the “IRS”) relating to its
examination of our U.S. federal income tax returns for fiscal years 2004 through 2006. The IRS has proposed an adjustment to
increase the taxable value of rights to intangibles used outside the U.S. that YUM transferred to certain of its foreign
subsidiaries. The proposed adjustment would result in approximately $700 million of additional taxes plus net interest to date of
approximately $170 million. Furthermore, if the IRS prevails it is likely to make similar claims for years subsequent to fiscal
2006. The potential additional taxes for these later years, through 2011, computed on a similar basis to the 2004-2006 additional
taxes, would be approximately $350 million plus net interest to date of approximately $25 million.
We believe that the Company has properly reported taxable income and paid taxes in accordance with applicable laws and that
the proposed adjustment is inconsistent with applicable income tax laws, Treasury Regulations and relevant case law. We intend
to defend our position vigorously and have filed a protest with the IRS. As the final resolution of the proposed adjustment remains
uncertain, the Company will continue to provide for its position in accordance with GAAP. There can be no assurance that
payments due upon final resolution of this issue will not exceed our currently recorded reserve and such payments could have a
material adverse effect on our financial position. Additionally, if increases to our reserves are deemed necessary due to future
developments related to this issue, such increases could have a material, adverse effect on our results of operations as they are
recorded. The Company does not expect resolution of this matter within twelve months and cannot predict with certainty the
timing of such resolution.
International Reporting Change
In the first quarter of 2012, we will begin reporting information for our India business as a standalone reporting segment separate
from YRI as a result of changes to our management reporting structure. While our consolidated results will not be impacted, we
will restate our historical segment information during 2012 for consistent presentation. This new segment will also include the
franchise businesses in the neighboring countries of Bangladesh, Mauritius, Nepal and Sri Lanka.
Form 10-K