Pizza Hut 2015 Annual Report Download - page 167

YUM! BRANDS, INC.-2015 Form10-K 59
Form 10-K
PART II
ITEM 8Financial Statements and Supplementary Data
Statutory rate differential attributable to foreign operations. This item includes
local taxes, withholding taxes, and shareholder-level taxes, net of foreign
tax credits. The favorable impact is primarily attributable to a majority of our
income being earned outside of the U.S. where tax rates are generally lower
than the U.S. rate.
Adjustments to reserves and prior years. This item includes: (1) changes in
tax reserves, including interest thereon, established for potential exposure
we may incur if a taxing authority takes a position on a matter contrary to our
position; and (2) the effects of reconciling income tax amounts recorded in our
Consolidated Statements of Income to amounts reflected on our tax returns,
including any adjustments to the Consolidated Balance Sheets. The impact
of certain effects or changes may offset items reflected in the ‘Statutory rate
differential attributable to foreign operations’ line.
In 2014, this item was favorably impacted by the resolution of uncertain tax
positions in certain foreign jurisdictions.
In 2013 the Company recorded incremental reserves related to an IRS-proposed
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
Company and the IRS reached a final agreement on this valuation issue,
which impacted tax returns for fiscal years 2004–2013, during 2014. As a
result of this agreement, we closed out our 2004–2006 and 2007-2008 audit
cycles and made cash payments in 2014 to the IRS of $200 million, which
were effectively fully reserved, to settle all issues for these audit cycles. The
agreement also resolved the valuation issue for all later impacted years. While
additional cash payments related to the valuation issue will be required upon
the closure of the examinations of future impacted fiscal years, the amounts
will not be significant and have been fully reserved.
Change in valuation allowances. This item relates to changes for deferred
tax assets generated or utilized during the current year and changes in our
judgment regarding the likelihood of using deferred tax assets that existed
at the beginning of the year. The impact of certain changes may offset items
reflected in the ‘Statutory rate differential attributable to foreign operations’ line.
In 2015, $54 million of net tax expense was driven by $30 million for valuation
allowances recorded against deferred tax assets generated in the current
year and $24 million in net tax expense resulting from a change in judgment
regarding the future use of certain deferred tax assets that existed at the
beginning of the year.
In 2014, $35 million of net tax expense was driven by $41 million for valuation
allowances recorded against deferred tax assets generated during the current
year, partially offset by $6 million in net tax benefit resulting from a change in
judgment regarding the future use of certain deferred tax assets that existed
at the beginning of the year.
In 2013, $23 million of net tax expense was driven by $32 million for valuation
allowances recorded against deferred tax assets generated during the current
year, partially offset by a $9 million net tax benefit resulting from a change in
judgment regarding the future use of certain deferred tax assets that existed
at the beginning of the year.
Other. This item primarily includes the impact of permanent differences related
to current year earnings as well as U.S. tax credits and deductions.
In years 2014 and 2013, this item was negatively impacted by the $160million
and $222 million, respectively, of non-cash impairments of Little Sheep goodwill,
which resulted in no related tax benefit. See Note 4.
The details of 2015 and 2014 deferred tax assets (liabilities) are set forth below:
2015 2014
Operating losses $ 239 $ 271
Tax credit carryforwards 282 162
Employee benefits 154 238
Share-based compensation 126 119
Self-insured casualty claims 36 42
Lease-related liabilities 112 119
Various liabilities 82 73
Property, plant and equipment 33 39
Deferred income and other 86 102
Gross deferred tax assets 1,150 1,165
Deferred tax asset valuation allowances (250) (228)
Net deferred tax assets $ 900 $ 937
Intangible assets, including goodwill $ (130) $ (148)
Property, plant and equipment (56) (63)
Other (70) (104)
Gross deferred tax liabilities $ (256) $ (315)
Net deferred tax assets (liabilities) $ 644 $ 622
Reported in Consolidated Balance Sheets as:
Deferred income taxes $ 676 $ 653
Other liabilities and deferred credits (32) (31)
$ 644 $ 622
We have investments in foreign subsidiaries where the carrying values for
financial reporting exceed the tax basis. We have not provided deferred tax
on the portion of the excess that we believe is indefinitely reinvested, as we
have the ability and intent to indefinitely postpone these basis differences
from reversing with a tax consequence. We estimate that our total temporary
difference upon which we have not provided deferred tax is approximately
$2.3billion at December 26, 2015. A determination of the deferred tax
liability on this amount is not practicable. A portion of the above temporary
difference relates to carrying value for financial reporting in excess of tax
basis for the investment in our China business.
In October, 2015 YUM announced its intent to separate its China business
into an independent publicly-traded company by the end of 2016. This
transaction is intended to qualify as a tax-free reorganization for U.S. income
tax purposes. As such, any reversal of this temporary difference would not
result in U.S. tax.