Carnival Cruises 2011 Annual Report Download - page 21

other financial institutions whose credit ratings are at least AA or meet other specified credit requirements. In
such circumstances we would incur additional costs, although we estimate that they would be immaterial to our
consolidated financial statements. The two financial institution payment undertakers subject to this AA- credit
rating threshold each have a credit rating of AA. If Carnival Corporation’s credit rating, which is BBB+, falls
below BBB, it will be required to provide a standby letter of credit for $47 million, or, alternatively, provide
mortgages for this aggregate amount on these two ships.
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
The following is a summary of our principal taxes and exemptions, which do not result in a material income tax
expense. Income taxes in other jurisdictions where we do business are nominal.
U.S. Income Tax
We are primarily foreign corporations engaged in the business of operating cruise ships in international
transportation. Our North American cruise ship business and certain ship-owning subsidiaries are engaged in a
trade or business within the U.S. Depending on the itinerary of any particular ship, that ship may generate income
from sources within the U.S. We believe that our U.S. source income and the income of our ship-owning
subsidiaries, to the extent derived from, or incidental to, the international operation of a ship or ships, is currently
exempt from U.S. federal income and branch profits tax.
In general, under Section 883 of the Internal Revenue Code, certain non-U.S. corporations (such as our North
American cruise ship businesses) are not subject to U.S. federal income tax or branch profits tax on U.S. source
income derived from, or incidental to, the international operation of a ship or ships. Applicable U.S. Treasury
regulations provide, in general that a foreign corporation will qualify for the benefits of Section 883 if, in
relevant part, (i) the foreign country in which the foreign corporation is organized grants an equivalent exemption
to corporations organized in the U.S. (an “equivalent exemption jurisdiction”) and (ii) the foreign corporation
meets a defined publicly-traded test. Subsidiaries of foreign corporations that are organized in an equivalent
exemption jurisdiction and meet the publicly-traded test also benefit from Section 883. We believe that Panama
is an equivalent exemption jurisdiction and Carnival Corporation currently qualifies as a publicly-traded
corporation under the regulations. Accordingly, substantially all of Carnival Corporation’s income is exempt
from U.S. federal income and branch profits tax.
Regulations under Section 883 list items that the Internal Revenue Service does not consider to be incidental to
ship operations. Among the items identified as not incidental is income from the sale of air transportation,
transfers, shore excursions and pre- and post-cruise land and tour packages to the extent earned from sources
within the U.S.
We believe that the U.S. source transportation income earned by Carnival plc and its UK and Italian resident
subsidiaries currently qualifies for exemption from U.S. federal income tax under applicable bilateral U.S.
income tax treaties.
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