Estee Lauder 2008 Annual Report Download - page 92

90 THE EST{E LAUDER COMPANIES INC.
JUNE 30, 2008
(In millions)
Balance of gross unrecognized tax benefi ts as of
July 1, 2007 $142.7
Gross amounts of increases as a result of
tax positions taken during a prior period 85.7
Gross amounts of decreases as a result of
tax positions taken during a prior period (47.0)
Gross amounts of increases as a result of
tax positions taken during the current period 22.5
Amounts of decreases in the unrecognized tax
benefi ts relating to settlements with
taxing authorities (2.1)
Reductions to unrecognized tax benefi ts
as a result of a lapse of the applicable
statute of limitations (2.8)
Balance of gross unrecognized tax benefi ts as of
June 30, 2008 $199.0
Included in the balance at June 30, 2008 are $31.6 million
of tax positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the
timing of such deductibility. Because of the impact of
deferred tax accounting, other than interest and penalties,
the disallowance of the shorter deductibility period would
not affect the annual effective tax rate but would acceler-
ate the payment of cash to the taxing authority to an
earlier period.
Earnings from the Company’s global operations are
subject to tax in various jurisdictions both within and out-
side the United States. The Company is routinely audited
and examined in these jurisdictions. The Company
provides tax reserves for U.S. federal, state, local and inter-
national unrecognized tax benefi ts for periods subject to
audit. The development of reserves for these exposures
requires judgments about tax issues, potential outcomes
and timing, and is a subjective critical estimate. The
Company assesses its tax positions and records tax bene-
fi ts for all years subject to examination based upon man-
agement’s evaluation of the facts, circumstances, and
information available at the reporting dates. For those tax
positions where it is more-likely-than-not that a tax benefi t
will be sustained, the Company has recorded the largest
amount of tax benefi t with a greater than 50% likelihood
of being realized upon settlement with a tax authority that
has full knowledge of all relevant information. For those
tax positions where it is not more-likely-than-not that a tax
benefit will be sustained, no tax benefit has been
recognized in the fi nancial statements. Where applicable,
associated interest and penalties have also been recog-
nized. Although the outcome related to these exposures
is uncertain, in management’s opinion, adequate provi-
sions for income taxes have been made for estimable
potential liabilities emanating from these exposures. In
As of June 30, 2008 and 2007, certain international
subsidiaries had tax loss carryforwards for local tax pur-
poses of approximately $27 million and $11 million,
respectively. With the exception of $21.6 million of losses
with an indefi nite carryforward period as of June 30,
2008, these losses expire at various dates through fi scal
2023. Deferred tax assets, net of valuation allowances, in
the amount of $4.5 million and $1.2 million as of June 30,
2008 and 2007, respectively, have been recorded to
refl ect the tax benefi ts of the losses not utilized to date.
A full valuation allowance has been provided for those
deferred tax assets for which, in the opinion of manage-
ment, 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 inter-
national operations of approximately $905 million, $696
million and $603 million for fi scal 2008, 2007 and 2006,
respectively. A portion of these earnings are taxed in the
United States.
The Company adopted the provisions of FIN 48, as
amended, effective July 1, 2007. As a result, the Company
recognized an increase in the liability for unrecognized
tax benefi ts and interest of $13.1 million (after tax), which,
as required, was recorded as an adjustment to opening
retained earnings as of July 1, 2007. The Company elected
to continue its historical practice of classifying applicable
interest and penalties as a component of the provision for
income taxes. At adoption, the Company had $142.7 mil-
lion of gross unrecognized tax benefi ts. The Company’s
gross accrual for interest and penalties related to unrecog-
nized tax benefi ts was $42.0 million upon adoption of FIN
48. As of June 30, 2008, the Company had gross unrec-
ognized tax benefi ts of $199.0 million. The total amount
of unrecognized tax benefi ts that, if recognized, would
affect the effective tax rate was $119.4 million. The total
gross accrued interest and penalties during the fi scal year
ended June 30, 2008 in the accompanying consolidated
statement of earnings was $12.0 million and the total
gross accrued interest and penalties in the accompanying
consolidated balance sheet at June 30, 2008 was $54.0
million. As of June 30, 2008, current and noncurrent
liabilities have been increased by $90.8 million, with a
correlative increase in current and noncurrent assets to
reflect the Company’s gross income tax and interest
liabilities for unrecognized tax benefi ts as well as related
deferred tax assets. A reconciliation of the beginning and
ending amount of gross unrecognized tax benefi ts is
as follows: