Carnival Cruises 2007 Annual Report Download - page 23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20 | CARNIVAL CORPORATION & PLC
In the unlikely event that Carnival Corporation were to
terminate the three lease agreements early or default on its
obligations, it would, as of November 30, 2007, have to pay a
total of $179 million in stipulated damages. As of November 30,
2007, $183 million of standby letters of credit have been
issued by a major financial institution in order to provide further
security for the payment of these contingent stipulated dam-
ages. In addition, we have a $170 million back-up letter of
credit issued under a loan facility in support of these standby
letters of credit. Between 2017 and 2022, we have the right
to exercise options that would terminate these three lease
transactions at no cost to us.
Some of the debt agreements that we enter into include
indemnification provisions that obligate us to make payments
to the counterparty if certain events occur. These contingen-
cies generally relate to changes in taxes, changes in laws that
increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms
and were entered into in the normal course of business.
There are no stated or notional amounts included in the
indemnification 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
payments is probable.
War Risk Insurance
We maintain war risk insurance, subject to coverage limits,
deductibles and exclusions for claims such as those arising
from chemical, nuclear and biological attacks, on all of our
ships covering our legal liability to crew, guests and other third
parties as well as loss or damage to our vessels arising from
war or war-like actions, including terrorist incidents. Under the
terms of our war risk insurance coverage, which is typical for
war risk policies in the marine industry, underwriters can give
seven days notice to the insured that the liability and physical
damage policies will be cancelled.
NOTE 8—INCOME AND OTHER TAXES
We are foreign corporations primarily engaged in the inter-
national operation of vessels. Generally, income from the
international operation of vessels is subject to preferential tax
regimes in the countries where the vessel owning companies
are incorporated and exempt from income tax in other coun-
tries where the vessels call due to the application of income
tax treaties or, in the case of the U.S., treaties or Section 883
of the Internal Revenue Code. Income we earn that is not
associated with the international operation of ships or earned
in countries without preferential tax regimes is subject to
income tax in the countries where such income is earned.
Regulations have been issued under Section 883 that limit
the types of income deemed to be derived from the interna-
tional operation of a ship. Accordingly, our provision for U.S.
federal income taxes includes taxes on a portion of our ship
operations in addition to the transportation, hotel and tour
businesses of Holland America Tours and Princess Tours.
In addition, during the fourth quarter of 2005 and first quarter
of 2006 we chartered three ships to the Military Sealift
Command in connection with the Hurricane Katrina relief
effort. Income from these charters is not considered to be
income from the international operation of our ships and,
accordingly, approximately $11 million and $18 million of
income taxes were provided on the net earnings of these
charters in fiscal 2006 and 2005, respectively, at a tax rate
of approximately 57%.
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.
AIDA, Costa, Cunard, Ocean Village, P&O Cruises and
P&O Cruises Australia are subject to income tax under the
tonnage tax regimes of either Italy or the United Kingdom.
Under both tonnage tax regimes, shipping profits, as defined
under the applicable law, are subject to corporation tax by
reference to the net tonnage of qualifying vessels. Income not
considered to be shipping profits under tonnage tax rules is
taxable under either the Italian tax regime applicable to Italian-
registered ships or the normal UK income tax rules. We believe
that substantially all of the ordinary income attributable to
these brands constitutes shipping profits and, accordingly,
Italian and UK income tax expenses for these operations
have been and are expected to be minimal under the current
tax regimes.
We do not expect to incur income taxes on future distri-
butions of undistributed earnings of foreign subsidiaries and,
accordingly, no deferred income taxes have been provided
for the distribution of these earnings. All interest expense
related to income tax liabilities are classified as income tax
expenses. In addition to or in place of income taxes, virtually
all jurisdictions where our ships call impose taxes and/or fees
based on guest counts, ship tonnage, ship capacity or some
other measure.