Amazon.com 2007 Annual Report Download - page 80

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Tax Contingencies
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is
required in evaluating our tax positions and determining our provision for income taxes. During the ordinary
course of business, there are many transactions and calculations for which the ultimate tax determination is
uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to
which, additional taxes will be due. These reserves are established when we believe that certain positions might
be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in
light of changing facts and circumstances, such as the outcome of tax audit. The provision for income taxes
includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for
tax contingencies are provided for in accordance with the requirements of FIN 48.
The reconciliation of our tax contingencies is as follows (in millions):
Gross tax contingencies—January 1, 2007 .................................. $110
Gross increases to tax positions in prior periods .............................. 6
Gross decreases to tax positions in prior periods ............................. (3)
Gross increases to current period tax positions ............................... 4
Audit settlements paid during 2007 ....................................... (5)
Gross tax contingencies—December 31, 2007 (1) ............................ $112
(1) As of December 31, 2007, we had $112 million of tax contingencies of which $118 million, if fully
recognized, would affect our effective tax rate and increase additional paid-in capital by $6 million to reflect
the tax benefits of excess stock-based compensation deductions.
As of December 31, 2007, changes to our tax contingencies that are reasonably possible in the next 12
months are not material. Our policy is to include interest and penalties related to our tax contingencies in income
tax expense. As of December 31, 2007, we had accrued interest and penalties related to tax contingencies of $9
million, net of federal income tax benefits, on our balance sheet. Interest and penalties recognized for the year
ended December 31, 2007 was $1 million, net of federal income tax benefits.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for
calendar years 2004 through 2006. Additionally, any net operating losses that were generated in prior years and
utilized in these years may also be subject to examination by the IRS. We are under examination, or may be
subject to examination, in the following major jurisdictions for the years specified: Kentucky for 2003 through
2006, France for 2005 through 2006, Germany for 2004 through 2006, Luxembourg for 2003 through 2006, and
the United Kingdom for 1999 through 2006. In addition, in February 2007, Japanese tax authorities assessed
income tax, including penalties and interest, of approximately $93 million against one of our U.S. subsidiaries for
the years 2003 through 2005. We believe that these claims are without merit and are disputing the assessment.
Further proceedings on the assessment will be stayed during negotiations between U.S. and Japanese authorities
over the double taxation issues the assessment raises, and we have provided bank guarantees to suspend
enforcement of the assessment. We also may be subject to income tax examination by Japanese tax authorities
for 2006.
Note 13—SEGMENT INFORMATION
We have organized our operations into two principal segments: North America and International. We
present our segment information along the same lines that our chief executive reviews our operating results in
assessing performance and allocating resources.
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