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86 THE EST{E LAUDER COMPANIES INC.
to reflect the tax benefits of the carryforwards 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.
As of June 30, 2014 and 2013, the Company had gross
unrecognized tax benefits of $58.1 million and $64.0 mil-
lion, respectively. The total amount of unrecognized tax
benefits that, if recognized, would affect the effective tax
rate was $41.1 million.
The Company classifies applicable interest and penal-
ties related to unrecognized tax benefits as a component
of the provision for income taxes. During fiscal 2014 and
2013, the Company recognized gross interest and penalty
benefits of $1.7 million and $8.2 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,
2014 and 2013 were $12.5 million and $17.4 million,
respectively. A reconciliation of the beginning and ending
amount of gross unrecognized tax benefits is as follows:
JUNE 30 2014 2013
(In millions)
Beginning of the year balance of gross unrecognized tax benefits $ 64.0 $ 78.5
Gross amounts of increases as a result of tax positions taken during a prior period 5.1 5.6
Gross amounts of decreases as a result of tax positions taken during a prior period (10.5) (9.8)
Gross amounts of increases as a result of tax positions taken during the current period 10.1 8.4
Amounts of decreases in unrecognized tax benefits relating to settlements with
taxing authorities (6.4) (6.8)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable
statutes of limitations (4.2) (11.9)
End of year balance of gross unrecognized tax benefits $ 58.1 $ 64.0
20142014
$ 64.0$ 64.0
5.15.1
(10.5)(10.5)
10.110.1
(6.4)(6.4)
(4.2)(4.2)
$ 58.1$ 58.1
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.
During the first and fourth quarters of fiscal 2013, the
Company formally concluded the compliance process
with respect to fiscal years 2011 and 2012, respectively,
under the IRS CAP. The conclusion of this process did not
impact the Company’s consolidated financial statements.
As of June 30, 2014, the compliance process was ongoing
with respect to fiscal years 2013 and 2014.
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
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 reassess-
ment 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 quar-
ter of fiscal 2012, the National Appellate Court notified
the Company that the appeal was denied. The Company
had been assessed corporate income tax and interest
of $3.8 million, net of tax, at current exchange rates.