Sara Lee 2011 Annual Report Download - page 77

74/75 Sara Lee Corporation and Subsidiaries
corporation’s effective tax rate will occur over time as a result of these and other factors which could materially change the estimated cost of future repatriation actions. • Tax legislation in the jurisdictions in which the corporation does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the corporation’s tax assets and obligations will need to be measured and recognized in the financial statements. • The corporation has ongoing U.S. and foreign tax audits for various tax periods. The U.S. federal tax years from 2007 onward remain subject to audit. Fiscal years remaining open to examination in the Netherlands include 2003 forward. Other foreign jurisdictions remain open to audits ranging from 1999 forward. With few excep- tions, the corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2005. The tax reserves for uncertain tax positions recorded in the financial state- ments reflect the expected finalization of worldwide examinations. The corporation regularly reviews its tax positions based on the individual facts, circumstances, and technical merits of each tax position. If the corporation determines it is more likely than not that it is entitled to the economic benefits associated with a tax position, it then considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement with a taxing author- ity, taking into consideration all available facts, circumstances, and information. The corporation believes that it has sufficient cash resources to fund the settlement of these audits.
As a result of audit resolutions, expirations of statutes of
limitations, and changes in estimate on tax contingencies in 2011, 2010 and 2009, the corporation recognized tax benefits of $20 mil- lion, $177 million and $21 million, respectively. However, audit outcomes and the timing of audit settlements are subject to signifi- cant uncertainty. The corporation estimates reserves for uncertain tax positions, but is not able to control or predict the extent to which tax authorities will examine specific periods, the outcome of exami- nations, or the time period in which examinations will be conducted and finalized. Favorable or unfavorable past audit experience in any particular tax jurisdiction is not indicative of the outcome of future examinations by those tax authorities. Based on the nature of uncertain tax positions and the examination process, management is not able to predict the potential outcome with respect to tax peri- ods that have not yet been examined or the impact of any potential reserve adjustments on the corporation’s tax rate or net earnings trends. As of the end of 2011, the corporation believes that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $15 million to $40 million over the next 12 months.
The corporation’s tax returns are routinely audited by federal,
state, and foreign tax authorities. Reserves for uncertain tax posi- tions represent a provision for the corporation’s best estimate of taxes expected to be paid based upon all available evidence recog- nizing that over time, as more information is known, these reserves may require adjustment. Reserves are adjusted when (a) new infor- mation indicates a different estimated reserve is appropriate; (b) the corporation finalizes an examination with a tax authority, eliminating uncertainty regarding tax positions taken; or (c) a tax authority does not examine a tax year within a given statute of limitations, also eliminating the uncertainty with regard to tax positions for a specific tax period. The actual amounts settled with respect to these exami- nations were the result of discussions and settlement negotiations involving the interpretation of complex income tax laws in the context of our fact patterns. Any adjustment to a tax reserve impacts the cor- poration’s tax expense in the period in which the adjustment is made.
As a global commercial enterprise, the corporation’s tax rate from
period to period can be affected by many factors. The most significant of these factors are changes in tax legislation, the corporation’s global mix of earnings, the tax characteristics of the corporation’s income, the timing and recognition of goodwill impairments, acqui- sitions and dispositions, adjustments to the corporation’s reserves related to uncertain tax positions, changes in valuation allowances, and the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. It is reasonably possible that the following items can have a material impact on income tax expense, net income and liquidity in future periods: • The company’s international operations provide a significant portion of the company’s cash flow from operating activities, which is expected to require the company to continue to repatriate a significant portion of the cash generated outside of the U.S. The repatriation of these funds has and is expected to continue to result in a higher effective income tax expense and cash taxes paid. The tax provision associated with the repatriation of foreign earnings for both contin- uing and discontinued operations in fiscal years 2011, 2010 and 2009 was $214 million, $574 million and $58 million, respectively. In 2010, the tax expense for repatriation of foreign earnings was significantly higher due to the corporation’s decision to no longer reinvest overseas earnings primarily attributable to existing overseas cash and the book value of the household and body care businesses. In its determination of which foreign earnings are permanently rein- vested, the corporation considers numerous factors, including the financial requirements of the U.S. parent company, the financial requirements of its foreign subsidiaries, and the tax consequences of remitting the foreign earnings to the U.S. Variability in the