Estee Lauder 2009 Annual Report Download - page 136

other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual
effective tax rate but would accelerate 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
benefi ts for all years subject to examination based upon
management’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
benefi t will be sustained, no tax benefi t has been recog-
nized in the fi nancial statements. Where applicable, asso-
ciated interest and penalties have also been recognized.
Although the outcome related to these exposures is
uncertain, in management’s opinion, adequate provisions
for income taxes have been made for estimable potential
liabilities emanating from these exposures. In certain
circumstances, the ultimate outcome of exposures and
risks involve signifi cant uncertainties which render them
inestimable. If actual outcomes differ materially from
these estimates, they could have a material impact on the
Company’s results of operations.
The Company is currently undergoing a U.S. federal
income tax audit as well as examinations and controver-
sies in several state, local and international jurisdictions.
These matters are in various stages of completion and
involve complex multi-jurisdictional issues common
among multinational enterprises, including transfer pric-
ing, that may require an extended period of time for reso-
lution. During the fourth quarter of fi scal 2008, the IRS
completed the examination phase of fi scal years 2002
through 2005. During fi scal 2008, the Company pre-
sented disputed computations concerning U.S. foreign
tax credit determinations to the Appeals Division of the
IRS and a claim was entered pursuant to an administrative
process of the tax treaty between the U.S. and Belgium
(commonly referred to as the “Competent Authority”
process). During the fourth quarter of fi scal 2009, the
Company reached a formal settlement with the Appeals
Division. As a result of the settlement, the Company has
recognized a tax and interest benefi t of $19.2 million, net
of tax. This benefi t favorably impacted the Company’s
fi scal 2009 effective tax rate but had no impact on the
amount of unrecognized tax benefi ts or related interest.
A resolution of remaining computations in dispute is sub-
ject to the outcome of the Company’s pending Compe-
tent Authority claim.
Notwithstanding the Company’s pending Competent
Authority claim, the Company reached a tentative agree-
ment with the IRS concerning the examination adjustments
proposed for fi scal years 2002 through 2005 in the fourth
quarter of fi scal 2008. Also in the fourth quarter of fi scal
2008, the Company made a cash payment of $35.0 million
to the U.S. Treasury as an advance deposit in anticipation
of a formal resolution to the tentatively agreed-to adjust-
ments. Although the advance deposit limits the accrual of
additional interest that would be due to the U.S. Treasury,
there is no impact on the amount of unrecognized tax ben-
efi ts until a fi nal agreement is reached. Separately, during
the third quarter of fi scal 2009, the IRS commenced an
examination of fi scal years 2006 through 2008.
The Company had been notifi ed of a disallowance of
tax deductions claimed by its subsidiary in Spain for the
fi scal years 1999 through 2002. As a result, the subsidiary
was reassessed corporate income tax of $2.9 million for
this period, at current exchange rates. An appeal against
this reassessment was fi led with the Chief Tax Inspector.
On July 18, 2005, the fi nal assessment made by the Chief
Tax Inspector was received, confi rming the reassessment
made by the tax auditors. During fi scal 2006, an appeal
against this fi nal assessment was fi led with the Madrid
Regional Economic Administrative Tribunal (“TEAR”). In
view of the TEAR’s silence, during fi scal 2007 the claim
was presumed to be dismissed and an appeal was fi led
against it with the Central Economic-Administrative
Tribunal (“TEAC”). During the fourth quarter of fi scal
2008, the TEAC dismissed the claim and, on June 10, 2008,
the Company fi led an appeal for judicial review with the
National Appellate Court. During fi scal 2009, the Com-
pany completed the appeal proceedings with the National
Appellate Court and awaits the court’s decision. While no
assurance can be given as to the outcome in respect of
this assessment and pending appeal in the Spanish courts,
management believes it is more-likely-than-not that the
subsidiary will be successful in its defense against the
assessment and continues to measure the full amount of
the tax benefi t. Accordingly, no tax reserve has been
established for this potential exposure.
During fi scal 2009, the Company concluded various
state, local and foreign income tax audits and examinations
while several other matters, including those noted above,
THE EST{E LAUDER COMPANIES INC. 135