Pizza Hut 2015 Annual Report Download - page 168

YUM! BRANDS, INC.-2015 Form10-K60
Form 10-K
PART II
ITEM 8Financial Statements and Supplementary Data
Additionally, the China State Administration of Taxation (SAT) recently issued
Bulletin 7 on Income arising from Indirect Transfers of Assets by Non-resident
Enterprises. Pursuant to Bulletin 7, an “indirect transfer” of People’s Republic
of China (PRC) taxable assets, including equity interests in a PRC resident
enterprise, by a non-resident enterprise, may be recharacterized and treated
as a direct transfer of PRC taxable assets, if such arrangement does not have
reasonable commercial purpose and the transferor has avoided payment of
PRC enterprise income tax. As a result, gains derived from such an indirect
transfer may be subject to PRC enterprise income tax of 10%.
We have evaluated the potential applicability of Bulletin 7 to our plan to
separate our China business in a tax-free restructuring and believe it is more
likely than not that Bulletin 7 does not apply. We believe that the restructuring
has reasonable commercial purpose.
If Bulletin 7 is deemed to apply, tax could be assessed on the difference between
the fair market value and the tax basis of the separated China business. As
our tax basis in the China business is minimal, the amount of such a tax could
be significant and have a material adverse effect on our results of operations
and our financial condition.
At December 26, 2015, the Company has foreign operating and capital loss
carryforwards of $0.6 billion and U.S. state operating loss, capital loss and
tax credit carryforwards of $1.0 billion and U.S. federal capital loss and tax
credit carryforwards of $0.3 billion. These losses are being carried forward in
jurisdictions where we are permitted to use tax losses from prior periods to
reduce future taxable income and will expire as follows:
Year of Expiration
Total2016 2017-2020 2021-2035 Indefinitely
Foreign $ 5 $ 211 $ 98 $ 305 $ 619
U.S. state 53 26 876 — 955
U.S. federal 64 — 277 — 341
$ 122 $ 237 $ 1,251 $ 305 $ 1,915
We recognize the benefit of positions taken or expected to be taken in tax
returns in the financial statements when it is more likely than not that the
position would be sustained upon examination by tax authorities. A recognized
tax position is measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement.
The Company had $98 million and $115 million of unrecognized tax benefits
at December 26, 2015 and December 27, 2014, respectively, $89 million
and $98 million of which are temporary in nature and if recognized, would
not impact the effective income tax rate. A reconciliation of the beginning and
ending amount of unrecognized tax benefits follows:
2015 2014
Beginning of Year $ 115 $ 243
Additions on tax positions – current year — 19
Additions for tax positions – prior years 5 31
Reductions for tax positions – prior years (13) (20)
Reductions for settlements (7) (144)
Reductions due to statute expiration (2) (13)
Foreign currency translation adjustment — (1)
End of Year $ 98 $ 115
In 2014, the reduction in unrecognized tax benefits was primarily attributable
to the resolution of the dispute with the IRS regarding the valuation of rights
to intangibles transferred to certain foreign subsidiaries.
The Company believes it is reasonably possible its unrecognized tax benefits
may decrease by approximately $6 million in the next 12 months, including
approximately $4 million which, if recognized upon audit settlement or statute
expiration, would affect the 2016 effective tax rate. Each of these positions
is individually insignificant.
The Company’s income tax returns are subject to examination in the U.S.federal
jurisdiction and numerous foreign jurisdictions.
The Company has settled audits with the IRS through fiscal year 2008. Our
operations in certain foreign jurisdictions remain subject to examination for
tax years as far back as 2005, some of which years are currently under
audit by local tax authorities. In addition, the Company is subject to various
U.S. state income tax examinations, for which, in the aggregate, we had
significant unrecognized tax benefits at December 26, 2015, each of which
is individually insignificant.
The accrued interest and penalties related to income taxes at December 26, 2015 and December 27, 2014 are set forth below:
2015 2014
Accrued interest and penalties $ 15 $ 5
During 2015, 2014 and 2013, a net expense of $5 million, $11 million and $18 million, respectively, for interest and penalties was recognized in our
Consolidated Statements of Income as components of its income tax provision.