Avis 2006 Annual Report Download - page 85

Table of Contents
on approximately $273 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2006, since it is the
present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the
amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004.”
The American Jobs Creation Act of 2004, which became effective
October 22, 2004, provides a one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. The Company has applied the provisions of this act to qualifying earnings repatriations through
December 31, 2005. In December 2005, the Company repatriated $350 million of unremitted earnings, resulting in income tax expense of
approximately $28 million, which is reflected within discontinued operations.
The Company’s effective income tax rate for continuing operations differs from the U.S. federal statutory rate as follows:
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in
determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of
business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under
audit by tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, “Accounting
for Contingencies.”
Pursuant to the Tax Sharing Agreement and Separation and Distribution Agreement, the Company is indemnified for all non-Avis Budget
Car Rental tax contingencies. The company believes that its accruals for tax liabilities, including the indemnified liabilities outlined in the
Tax Sharing and Separation and Distribution Agreements, are adequate for all remaining open years, based on its assessment of many
factors, including past experience and interpretations of tax law applied to the facts of each matter.
The Company and the Internal Revenue Service (“IRS”) have settled the IRS examination for the Company’s taxable years 1998 through
2002. The Company was adequately reserved for this audit cycle and has reflected the results of that examination in the accompanying
Consolidated Financial Statements. The IRS has begun to examine the Company's taxable years 2003 through 2006. Although the
Company believes there is appropriate support for the positions taken on its tax returns, the Company has recorded liabilities representing
the best estimates of the probable loss on certain positions. The Company believes that the accruals for tax liabilities are adequate for all
open years, based on assessment of many factors including past experience and interpretations of tax law applied to the facts of each
matter. Although the Company believes
F
-
28
As of December 31,
2006
2005
2004
Federal statutory rate
35.0
%
35.0
%
35.0
%
State and local income taxes, net of federal tax benefits
2.1
36.9
89.0
Changes in valuation allowances
(4.3
)
(18.4
)
45.3
Taxes on foreign operations at rates different than U.S. federal statutory rates
(0.2
)
(2.8
)
(26.5
)
Taxes on repatriated foreign income, net of tax credits
(0.1
)
1.9
(28.4
)
Resolution of prior years
’
examination issues
3.5
29.8
(1,153.1
)
Nondeductible expenses
(0.8
)
(20.3
)
156.2
Other
(1.8
)
20.2
(31.8
)
33.4
%
82.3
%
(914.3
)%