Carnival Cruises 2008 Annual Report Download - page 76

F-17
In September 2008, the credit ratings of AIG and its subsidiaries involved in two of
these transactions were downgraded from AA- to A-. As a result of this downgrade, AIG pledged
collateral to support its continuing payment undertaker obligations as required under the
terms of one of the transactions. Under the other transaction in which AIG was also a payment
undertaker, we replaced them by purchasing $80 million of long-term U.S. Treasury strip
securities (the "Treasury Strips"), which are pledged as our collateral for the repayment of
the $80 million long-term recorded obligation noted above. In November 2008, AIG remitted $77
million to reimburse us. At November 30, 2008, the Treasury Strips are restricted, are
recorded in long-term other assets and are accounted for as marketable securities held-to-
maturity.
Contingent Obligations – Indemnifications
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 contingencies
generally relate to changes in taxes and 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.
NOTE 8 - Income and Other Taxes
We are foreign corporations primarily engaged in the international operation of
vessels. Generally, income from the international operation of vessels is subject to
preferential tax regimes in the countries where the vessel owning and operating companies are
incorporated, and generally exempt from income tax in other countries where the vessels call
due to the application of income tax treaties or domestic law which, in the U.S., is Section
883 of the Internal Revenue Code. Income that we earn which 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.
AIDA, Costa, Cunard, Ibero, 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 the majority of the ordinary income attributable to these brands constitutes
shipping profits and, accordingly, Italian and UK income tax expenses for these operations
have been minimal under the existing tax regimes.
Carnival Cruise Lines, Princess, Holland America Line and Seabourn are primarily subject
to the income tax laws of Panama, Bermuda, the Netherlands Antilles and Bermuda,
respectively. As a general matter, the laws of Panama and the Netherlands Antilles exempt
earnings derived from international ship operations and Bermuda does not have an income tax.
With respect to the U.S. domestic law exemption, Section 883 regulations limit the types of
income deemed to be derived from the international operation of a ship that are exempt from
income tax. Accordingly, our provision for U.S. federal and state 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.
We do not expect to incur income taxes on future distributions 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.
On December 1, 2007, we adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48
clarifies, among other things, the accounting for uncertain income tax positions by