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YUM! BRANDS, INC.-2012 Form10-K 21
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
The following table summarizes the impact of refranchising on Total revenues as described above:
2012
China YRI U.S. India Worldwide
Decreased Company sales $ (54 ) $ (113) $ (606) $ — $ (773)
Increased Franchise and license fees
andincome 9 10 43 — 62
DECREASE IN TOTAL REVENUES $ (45) $ (103) $ (563) $ — $ (711)
2011
China YRI U.S. India Worldwide
Decreased Company sales $ (36) $ (311) $ (404) $ — $ (751)
Increased Franchise and license fees
andincome 6 25 27 — 58
DECREASE IN TOTAL REVENUES $ (30) $ (286) $ (377) $ — $ (693)
The following table summarizes the impact of refranchising on Operating Profi t as described above:
2012
China YRI U.S. India Worldwide
Decreased Restaurant profi t $ (8) $ (7) $ (46) $ — $ (61)
Increased Franchise and license fees
andincome 9 10 43 — 62
Increased Franchise and license expenses (4) (4) (6) — (14)
Decreased G&A — 2 12 — 14
INCREASE (DECREASE) IN OPERATING
PROFIT $ (3) $ 1 $ 3 $ — $ 1
2011
China YRI U.S. India Worldwide
Decreased Restaurant profi t $ (5) $ (25) $ (43) $ — $ (73)
Increased Franchise and license fees
and income 6 25 27 — 58
Increased Franchise and license expenses (2) (2) (2) — (6)
Decreased G&A — 21 6 — 27
INCREASE (DECREASE) IN OPERATING
PROFIT $ (1) $ 19 $ (12) $ — $ 6
Internal Revenue Service Proposed
Adjustments
On June23, 2010, the Company received a Revenue Agent Report (RAR)
from the Internal Revenue Service (the “IRS”) relating to its examination
of our U.S. federal income tax returns for fi scal 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 $220million for fi scal years 2004-2006.On January9,
2013, the Company received an RAR from the IRS for fi scal years 2007
and 2008. As expected, the IRS proposed an adjustment similar to their
proposal for 2004-2006 that would result in approximately $270million of
additional taxes plus net interest to date of approximately $30million for
fi scal years 2007 and 2008. Furthermore, the Company expects the IRS
to make similar claims for years subsequent to fi scal 2008. The potential
additional taxes for 2009 through 2012, computed on a similar basis to
the 2004-2008 additional taxes, would be approximately $130million plus
net interest to date of approximately $5million.
We believe that the Company has properly reported taxable income and
paid taxes in accordance with applicable laws and that the proposed
adjustments are inconsistent with applicable income tax laws, Treasury
Regulations and relevant case law.We intend to defend our position
vigorously and have fi led a protest with the IRS.As the fi nal resolution of
the proposed adjustments remains uncertain, the Company will continue
to provide for its position in accordance with GAAP. There can be no
assurance that payments due upon fi nal resolution of this issue will not
exceed our currently recorded reserve and such payments could have a
material, adverse effect on our fi nancial 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.
China Value Added Tax Regulation
A tax regulation was issued in November2011 in China which addresses
the imposition of a Value Added Tax on certain food sales where the food
is not consumed on the premises where sold.The applicability of the
regulation, if any, to the sales under certain of our restaurant distribution
methods is unclear at this time. While we do not anticipate that the
regulation will have a material impact on our results of operations or cash
fl ows, we currently cannot quantify the potential impact, if any, until we
have further clarity as to its applicability.