Estee Lauder 2005 Annual Report Download - page 70

THE EST{E LAUDER COMPANIES INC.
As of June 30, 2005 and 2004, the Company had current
net deferred tax assets of $85.3 million and $145.9 million,
respectively, which are included in prepaid expenses and
other current assets in the accompanying consolidated bal-
ance sheets. In addition, the Company had noncurrent net
deferred tax liabilities of $68.1 million and $26.8 million as
of June 30, 2005 and June 30, 2004, respectively, which
are included in other noncurrent liabilities in the accompa-
nying consolidated balance sheets.
During the fourth quarter of fiscal 2005, the Company
formulated a plan to repatriate approximately $690 million
of foreign earnings in fiscal 2006, which includes $500 mil-
lion of extraordinary intercompany dividends under the
provisions of the AJCA. This action resulted in an aggre-
gate tax charge of approximately $35 million, which
includes an incremental tax charge of approximately $28
million in fiscal 2005. Federal income and foreign with-
holding taxes have not been provided on $90.2 million of
remaining undistributed earnings of international
subsidiaries at June 30, 2005. The Company intends to
reinvest these earnings in its foreign operations indefinitely,
except where it is able to repatriate these earnings to the
United States without material incremental tax provision.
As of June 30, 2004 and 2003, the Company had not pro-
vided federal income and foreign withholding taxes on
$560.5 million and $476.6 million, respectively, of undis-
tributed earnings of international subsidiaries.
As of June 30, 2005 and 2004, certain international sub-
sidiaries had tax loss carryforwards for local tax purposes
of approximately $27.7 million and $24.5 million, respec-
tively. With the exception of $12.2 million of losses with
an indefinite carryforward period as of June 30, 2005,
these losses expire at various dates through fiscal 2020.
Deferred tax assets in the amount of $8.2 million and $5.7
million as of June 30, 2005 and 2004, respectively, have
been recorded to reflect the tax benefits of the losses not
utilized to date. A full valuation allowance has been pro-
vided for those deferred tax assets for which, in the opinion
of management, it is more likely than not that the deferred
tax assets will not be realized.
Earnings before income taxes and minority interest
include amounts contributed by the Company’s interna-
tional operations of $585.9 million, $523.0 million and
$393.1 million for fiscal 2005, 2004 and 2003, respectively.
Some of these earnings are taxed in the United States.
Earnings from the Company’s global operations are sub-
ject to tax in various jurisdictions both within and outside
the United States. The Company is routinely audited in
these jurisdictions and these reviews can involve complex
issues that may require an extended period of time for
resolution. The Company’s U.S. Federal income tax returns
have been examined and settled through fiscal 1997. The
Company is currently under examination by the Internal
Revenue Service for fiscal years 1998 through 2001.
In addition, the Company has ongoing audits in various
state and local jurisdictions, as well as audits in various for-
eign jurisdictions.
The Company provides tax reserves for Federal, state,
local and international exposures relating to audit results,
tax planning initiatives and compliance responsibilities. The
development of these reserves requires judgments about
tax issues, potential outcomes and timing, and is a subjec-
tive critical estimate. Although the outcome of these tax
audits is uncertain, in management’s opinion, adequate
provisions for income taxes have been made for potential
liabilities emanating from these reviews. If actual outcomes
differ materially from these estimates, they could have
a material impact on the Company’s results of operations.
The Company has been notified of a disallowance of tax
deductions claimed by its subsidiary in Spain for the fiscal
years 1999 through 2002. As a result, the subsidiary was
reassessed corporate income tax of approximately $3 mil-
lion for this period. An appeal against this reassessment
was filed with the Chief Tax Inspector. On July 18, 2005
the final assessment made by the Chief Tax Inspector was
received, confirming the reassessment made by the tax
auditors. An appeal against this final assessment has been
filed with the Madrid Regional Economic Administrative
Tribunal on July 29, 2005. While no assurance can be given
as to the outcome in respect of this assessment, either dur-
ing the administrative appeals process or in the Spanish
courts, management believes that the subsidiary should
ultimately be successful in its defense against the assess-
ment. Accordingly, no tax reserve has been established for
this potential exposure.
NOTE 7– OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30 2005 2004
(In millions)
Advertising and promotional accruals $297.5 $290.2
Employee compensation 251.8 236.9
Restructuring and special charges 21.9 32.7
Other 303.6 311.7
$874.8 $871.5
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