Estee Lauder 2012 Annual Report Download - page 142

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140 THE EST{E LAUDER COMPANIES INC.
The Company classifies applicable interest and penal-
ties related to unrecognized tax benefits as a component
of the provision for income taxes. During fiscal 2012 and
2011, the Company recognized gross interest and penalty
benefits of $6.8 million and $1.0 million, respectively, in
the accompanying consolidated statements of earnings.
The total gross accrued interest and penalties in the
accompanying consolidated balance sheets at June 30,
2012 and 2011 were $28.6 million and $37.7 million,
respectively. A reconciliation of the beginning and ending
amount of gross unrecognized tax benefits is as follows:
JUNE 30 2012 2011
(In millions)
Beginning of the year balance of gross unrecognized tax benefits $104.8 $157.3
Gross amounts of increases as a result of tax positions taken during a prior period 16.4 21.9
Gross amounts of decreases as a result of tax positions taken during a prior period (16.4) (22.0)
Gross amounts of increases as a result of tax positions taken during the current period 5.5 7.0
Amounts of decreases in unrecognized tax benefits relating to settlements with
taxing authorities (12.2) (42.0)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable
statutes of limitations (19.6) (17.4)
End of year balance of gross unrecognized tax benefits $ 78.5 $104.8
Earnings from the Company’s global operations are sub-
ject to tax in various jurisdictions both within and outside
the United States. During fiscal 2011, the Company com-
menced participation in the U.S. Internal Revenue Service
(the “IRS”) Compliance Assurance Program (“CAP”). The
objective of CAP is to reduce taxpayer burden and uncer-
tainty while assuring the IRS of the accuracy of income
tax returns prior to filing, thereby reducing or eliminating
the need for post-filing examinations. As of June 30, 2012,
the compliance process was ongoing with respect to
fiscal 2011 and fiscal 2012.
During the second quarter of fiscal 2012, the Company
formally concluded the IRS examination of fiscal years
2009 and 2010. The conclusion of this examination did
not materially impact the Company’s consolidated finan-
cial statements.
During the second quarter of fiscal 2011, the Company
reached a formal agreement with the IRS concerning the
examination adjustments proposed for fiscal 2006
through 2008. As a result, the Company applied a prior
cash payment of $20.5 million made to the U.S. Treasury
as an advance deposit toward these agreed-to adjust-
ments. As a result of the settlement, the Company recog-
nized a tax and interest benefit of $11 million, net of tax.
The Company is currently undergoing income tax
examinations and controversies in several state, local and
foreign jurisdictions. These matters are in various stages of
completion and involve complex multi-jurisdictional issues
common among multinational enterprises, including
transfer pricing, which may require an extended period of
time for resolution.
The Company had been notified of a disallowance of
tax deductions claimed by its subsidiary in Spain for fiscal
years 1999 through 2002. An appeal against this reassess-
ment was filed with the Chief Tax Inspector. On July 18,
2005, the final assessment made by the Chief Tax Inspec-
tor was received, confirming the reassessment made by
the tax auditors. During fiscal 2006, an appeal against this
final assessment was filed with the Madrid Regional
Economic Administrative Tribunal (“TEAR”). In view of the
TEAR’s silence, during fiscal 2007 the claim was presumed
to be dismissed and an appeal was filed against it with the
Central Economic-Administrative Tribunal (“TEAC”).
During the fiscal 2008 fourth quarter, the TEAC dismissed
the claim and, on June 10, 2008, the Company filed an
appeal for judicial review with the National Appellate
Court. During fiscal 2009, the Company completed the
appeal proceedings with the National Appellate Court
and, as of June 30, 2011, awaited the court’s decision.
During the first quarter of fiscal 2012, the National Appel-
late Court notified the Company that the appeal was
denied. The Company has been assessed corporate
income tax and interest of $3.8 million, net of tax, at cur-
rent exchange rates. In response, the Company filed an