Amazon.com 2007 Annual Report Download - page 46

(2) Represents the gains (losses) associated with the remeasurement of intercompany balances due to changes in
foreign exchange rates. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—
Description of Business and Accounting Policies—Foreign Currency.”
Income Taxes
We recorded a provision for income taxes of $184 million, $187 million, and $95 million, in 2007, 2006 and
2005. The effective tax rate in 2007 was lower than the 35% U.S. federal statutory rate primarily due to earnings
of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. The
effective tax rate in 2006 was higher than the 35% U.S. federal statutory rate resulting from establishment of our
European headquarters in Luxembourg, which we expect will benefit our effective tax rate over time. Associated
with the establishment of our European headquarters, we transferred certain of our operating assets in 2005 and
2006 from the U.S. to international locations. These transfers resulted in taxable income and exposure to
additional taxable income assertions by taxing jurisdictions.
Included in the 2005 provision and reducing the impact of the international restructure is a tax benefit of $90
million, resulting from certain of our deferred tax assets becoming more likely than not realizable. This tax
benefit represented $0.22 and $0.21 of basic and diluted earnings per share.
We expect our effective tax rate in 2008 to be approximately 30%. However, our effective tax rate is subject
to significant variation due to several factors, including from accurately predicting our taxable income, the
taxable jurisdictions to which it relates, and business acquisitions and investments. We have current tax benefits
and net operating losses relating to excess stock-based compensation deductions that are being utilized to reduce
our U.S. taxable income. As such, we expect a majority of our net tax provision to be non-cash.
Effect of Exchange Rates
The effect on our consolidated statements of operations from changes in exchange rates versus the
U.S. Dollar is as follows (in millions, except per share data):
Year Ended
December 31, 2007
Year Ended
December 31, 2006
Year Ended
December 31, 2005
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
Net sales ............ $14,436 $399 $14,835 $10,687 $24 $10,711 $8,563 $(73) $8,490
Gross profit .......... 3,274 79 3,353 2,455 1 2,456 2,052 (13) 2,039
Operating expenses .... 2,648 50 2,698 2,064 3 2,067 1,612 (5) 1,607
Income from
operations ......... 626 29 655 391 (2) 389 440 (8) 432
Net interest income
(expense) and
other (3) ........... 11 1 12 (17) (6) (23) (52) 6 (46)
Remeasurements and
other income
(expense) (4) ....... (6) (1) (7) (2) 13 11 1 41 42
Net income .......... 456 20 476 188 2 190 328 31 359
(1) Represents the outcome that would have resulted had exchange rates in the reported period been the same as
those in effect in the comparable prior year period for operating results, and if we did not incur the
variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
(2) Represents the increase or decrease in reported amounts resulting from changes in exchange rates from
those in effect in the comparable prior year period for operating results, and if we did not incur the
variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
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