Carnival Cruises 2014 Annual Report Download - page 24

applicable financial institution with another financial institution whose credit rating is at least AA or meets other
specified credit requirements. In such circumstances, it would incur additional costs, although we estimate that
they would not be material to our consolidated financial statements. The financial institution payment undertaker
subject to the AA- credit rating threshold has a credit rating of AA, and the financial institution subject to the
A-credit rating threshold has a credit rating of A+. If Carnival Corporation’s credit rating, which is BBB+, falls
below BBB, it will be required to provide a standby letter of credit for $36 million, or, alternatively, provide
mortgages for this aggregate amount on these two ships.
Contingent Obligations – Indemnifications
Some of the debt contracts 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 – Taxation
A summary of our principal taxes and exemptions in the jurisdictions where our significant operations are located
is as follows:
U.S. Income Tax
We are primarily foreign corporations engaged in the business of operating cruise ships in international
transportation. We also own and operate, among other businesses, the U.S. hotel and transportation business of
Holland America Princess Alaska Tours through U.S. corporations.
Our North American cruise ship businesses and certain ship-owning subsidiaries are engaged in a trade or
business within the U.S. Depending on its itinerary, any particular 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 profit taxes.
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 profit taxes.
Regulations under Section 883 list items that the Internal Revenue Service (“IRS”) does not consider to be
incidental to ship operations. Among the items identified as not incidental are income from the sale of air
transportation, transfers, shore excursions and pre- and post-cruise land packages to the extent earned from
sources within the U.S.
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