Mattel 2006 Annual Report Download - page 81

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valuation allowance for loss carryforwards which expired and were written off. Management believes it is more
likely than not that Mattel will generate sufficient taxable income in the appropriate carryforward periods to
realize the benefit of the remaining net deferred income tax assets of $565.7 million.
Differences between the provision for income taxes at the US federal statutory income tax rate and the
provision in the consolidated statements of operations are as follows (in thousands):
For the Year
2006 2005 2004
Provision at US federal statutory rates ............................... $239,315 $228,217 $243,689
Increase (decrease) resulting from:
Foreign earnings taxed at different rates, including withholding taxes . . (104,846) (70,942) (68,175)
Foreign losses without income tax benefit ........................ 15,738 10,110 7,730
State and local taxes, net of US federal benefit .................... 1,314 583 6,825
Repatriation of foreign earnings under the Jobs Act, including state
taxes ................................................... — 107,010 —
Adjustments to previously accrued taxes ......................... (63,016) (38,572) (65,100)
Other ..................................................... 2,324 (1,376) (1,438)
Provision for income taxes ........................................ $ 90,829 $235,030 $123,531
On May 17, 2006, the Tax Increase Prevention and Reconciliation Act (the “Tax Act”) was signed into law.
As a result of the certain provisions of the Tax Act, Mattel’s 2006 income tax provision was positively impacted
by approximately $37 million. These provisions of the Tax Act impacting Mattel’s 2006 income tax provision
are set to expire on December 31, 2008. On October 22, 2004, the American Jobs Creation Act (the “Jobs Act”)
was signed into law. Among its various provisions, the Jobs Act creates a temporary incentive for US
corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction
for certain dividends from controlled foreign corporations. Mattel repatriated $2.4 billion in foreign earnings
during 2005, resulting in an increase to Mattel’s 2005 income tax provision of $107.0 million.
The cumulative amount of undistributed earnings of foreign subsidiaries that Mattel intends to permanently
invest and upon which no deferred US income taxes have been provided is $1.8 billion as of December 31, 2006.
The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in whole or in part
by foreign tax credits. The extent of this offset would depend on many factors, including the method of
distribution, and specific earnings distributed.
Mattel accrues a tax reserve for additional income taxes and interest, which may become payable in future
years as a result of audit adjustments by tax authorities. Mattel applies a consistent methodology to estimate any
additional tax liabilities based on management’s assessment of all relevant information, including prior audit
experiences. The tax reserves are periodically reviewed and are adjusted as circumstances warrant and as events
occur that affect Mattel’s liability for additional taxes, such as the lapsing of applicable statutes of limitations,
conclusion of tax audits, identification of new issues, and any administrative guidance or administrative
developments.
As of December 31, 2006, Mattel’s tax reserves totaled approximately $127 million, and related to potential
income tax audit adjustments by US federal, state and foreign tax authorities primarily in areas such as transfer
pricing and challenges to Mattel’s global intercompany pricing structure; challenges to tax credits claimed by local
tax authorities; income tax nexus and apportionment issues for which local tax authorities may challenge Mattel’s
nexus activities and apportionment among entities and jurisdictions; and issues identified in current income tax
audits. Mattel will adopt FIN 48 as of January 1, 2007.
In 2006, Mattel recognized total income tax benefits of $63.0 million related to settlements with taxing
authorities, including $56.8 million as a result of settlements with foreign tax authorities and $6.2 million due to
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