Mattel 2008 Annual Report Download - page 76

Of the $80.3 million of unrecognized tax benefits as of December 31, 2008, $76.4 million would impact the
effective tax rate if recognized.
During 2008, Mattel recognized $1.7 million of interest and penalties related to unrecognized tax benefits,
of which $0.7 million was recorded as a decrease to goodwill. As of December 31, 2008, Mattel had accrued
$16.8 million in interest and penalties related to unrecognized tax benefits. Of this balance, $16.0 million would
impact the effective tax rate if recognized.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax
authorities. The Internal Revenue Service (“IRS”) is currently auditing Mattel’s 2006 and 2007 federal income
tax returns. Mattel files multiple state and local income tax returns and remains subject to examination in various
of these jurisdictions, including California for the 2005 through 2008 tax years, and New York and Wisconsin for
the 2004 through 2008 tax years. Mattel files multiple foreign income tax returns and remains subject to
examination in major foreign jurisdictions, including Hong Kong, the Netherlands, Brazil, Mexico, and
Venezuela for the 2002 through 2008 tax years. Significant changes in unrecognized tax benefits are not expected
during the next twelve months.
In 2007, income was positively impacted by net tax benefits of $42.0 million. Mattel recognized tax benefits
of $47.3 million as a result of reassessments of tax exposures based on the status of current audits in various
jurisdictions around the world, including settlements. Mattel also recognized tax expense of $5.3 million related
to enacted New York tax law changes.
In 2006, Mattel recognized total tax benefits of $63.0 million related to settlements and refunds of ongoing
audits with foreign and state tax authorities. Of the $63.0 million of total tax benefits recorded, $57.5 million
represents refunds of previously paid taxes, which was recorded as an expense in previous years. Accordingly,
these refunds were recorded as a reduction to income tax expense in the period the refunds were received by
Mattel. The remainder of the tax benefit recorded in 2006 is a net reduction to total income tax reserves resulting
from tax settlements with foreign and state tax authorities.
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 approximately $3.0 billion as of
December 31, 2008. Management periodically reviews the undistributed earnings of its foreign subsidiaries and
reassesses the intent to permanently reinvest such earnings.
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.
Accounting principles generally accepted in the United States of America require that tax benefits related to
the exercise of nonqualified stock options and stock warrants be credited to additional paid-in-capital. The
exercise of nonqualified stock options and vesting of other stock compensation awards resulted in (decreases)/
increases to additional paid-in-capital for related income tax benefits totaling ($2.3) million, $5.7 million, and
$8.5 million, in 2008, 2007, and 2006, respectively.
Note 5—Product Recalls and Withdrawals
During 2007, Mattel recalled products with high-powered magnets that may become dislodged and other
products, some of which were produced using non-approved paint containing lead in excess of applicable
regulatory and Mattel standards. During the second half of 2007, additional products were recalled, withdrawn
from retail stores, or replaced at the request of consumers as a result of safety or quality issues (collectively, the
“2007 Product Recalls”). In the second quarter of 2008, Mattel determined that certain products had been shipped
into foreign markets in which the products did not meet all applicable regulatory standards for those markets.
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