Carnival Cruises 2004 Annual Report Download - page 26

Carnival Corporation & plc 23
cation clauses and we are not able to estimate the
maximum potential amount of future payments, if any,
under these indemnification clauses. We have not been
required to make any material payments under such
indemnification clauses in the past and, under current
circumstances, we do not believe a request for material
future indemnification is probable.
Note 9—Income and Other Taxes
We believe that substantially all of our income in fis-
cal 2004, 2003 and 2002, with the exception of our U.S.
source income principally from the transportation, hotel
and tour businesses of Holland America Tours and
Princess Tours, is exempt from U.S. federal income
taxes. If we were found not to qualify for exemption
pursuant to applicable income tax treaties or under the
Internal Revenue Code or if the income tax treaties or
Internal Revenue Code were to be changed in a manner
adverse to us, a portion of our income would become
subject to taxation by the U.S. at higher than normal
corporate tax rates.
In August 2003, final regulations under Section 883
of the Internal Revenue Code were published in the
Federal Register. Section 883 is the primary provision
upon which we rely to exempt certain of our interna-
tional ship operation earnings from U.S. income taxes.
The final regulations list elements of income that are
not considered to be incidental to ship operations and,
to the extent earned within the U.S., are subject to U.S.
income tax. Among the items identified in the final reg-
ulations are income from the sale of air transportation,
shore excursions and pre-and post cruise land packages.
These rules will first be effective for us in fiscal 2005.
AIDA, through October 2004, Cunard, Ocean Village,
P&O Cruises, P&O Cruises Australia and Swan Hellenic
are all strategically and commercially managed in the
UK and have elected to enter the UK tonnage tax regime.
Accordingly, these operations pay UK corporation tax on
shipping profits calculated by reference to the net ton-
nage of qualifying vessels. Income not considered to be
shipping profits is taxable under the normal UK income
tax rules. We believe that substantially all of the income
attributable to these brands constitutes shipping profits
and, accordingly, UK income tax expense from these
operations has been and is expected to be minimal.
Some of our subsidiaries, including AIDA, a subsidiary
of Costa commencing in November 2004, Costa, Holland
America Tours, Princess Tours and other of our non-
shipping activities, are subject to foreign and/or U.S.
federal and state income taxes. In fiscal 2004 and 2003,
we recognized a net $47 million and $29 million income
tax expense, primarily related to these operations. In
2002, we recognized a net $57 million income tax bene-
fit primarily due to an Italian investment incentive law,
which allowed Costa to receive a $51 million income
tax benefit based on contractual expenditures during
2002 on the construction of a new ship. At November
30, 2004, Costa had a remaining net deferred tax asset
of approximately $13 million relating primarily to the tax
benefit of the net operating loss carryforwards arising
from this incentive law, which expire in 2007.
We do not expect to incur income taxes on future
distributions of undistributed earnings of foreign sub-
sidiaries and, accordingly, no deferred income taxes have
been provided for the distribution of these earnings.
In addition to or in place of income taxes, virtually all
jurisdictions where our ships call, impose taxes based
on passenger counts, ship tonnage or some other
measure. These taxes, other than those directly charged
to and/or collected from passengers by us, are recorded
as operating expenses in the accompanying statements
of operations.
Note 10—Shareholders’ Equity
Carnival Corporation’s articles of incorporation author-
ize its Board of Directors, at its discretion, to issue up
to 40 million shares of its preferred stock and Carnival
plc has 100,000 authorized preference shares. At
November 30, 2004 and 2003, no Carnival Corporation
preferred stock had been issued and only a nominal
amount of Carnival plc preferred shares had been issued.
In October 2004, the Board of Directors authorized
the repurchase of either Carnival Corporation common
stock and/or Carnival plc ordinary shares up to an aggre-
gate of $1 billion commencing in 2005, subject to certain
repurchase restrictions on Carnival plc shares.
At November 30, 2004, there were 88.4 million
shares of Carnival Corporation common stock reserved
for issuance pursuant to its convertible notes and its
employee benefit and dividend reinvestment plans. In
addition, Carnival plc shareholders have authorized 3.2
million ordinary shares for future issuance under its
employee benefit plans.
At November 30, 2004 and 2003 accumulated other
comprehensive income was as follows (in millions):
2004 2003
Cumulative foreign currency
translation adjustments, net . . . . . . . . . . . $588 $190
Unrealized gain on marketable securities . . . 1
Minimum pension liability adjustments. . . . . (17) (14)
Unrealized losses on cash flow
derivative hedges, net . . . . . . . . . . . . . . . (30) (17)
$541 $160