Office Depot 2011 Annual Report Download - page 134

The establishment of valuation allowances and development of projected annual effective tax rates requires
significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the
objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a
valuation allowance on deferred tax assets. An accumulation of recent pre-tax losses is considered strong
negative evidence in that evaluation. The charge to establish the valuation allowance followed the third quarter
2009 condition of reaching or nearly reaching a 36 month cumulative loss position in certain taxing jurisdictions.
While the company believes positive evidence exists with regard to the realizability of these deferred tax assets,
it is not considered sufficient to outweigh the objectively verifiable negative evidence, including the cumulative
36 month pre-tax loss history. Valuation allowances in certain foreign jurisdictions were removed during 2010
and 2011 because sufficient positive financial information existed, resulting in tax benefit recognition of $10
million and $9 million, respectively. Deferred tax assets without valuation allowances remain in certain foreign
tax jurisdictions where supported by the evidence.
(Dollars in millions)
Beginning
Balance
Net
Change
Ending
Balance
Valuation allowances at:
December 31, 2011 ......................................... $648.9 $(27.2) $621.7
December 25, 2010 ......................................... $657.0 $ (8.1) $648.9
Of the $621.7 million valuation allowance as of December 31, 2011, $4.4 million is attributable to net operating
loss carryforward assets generated from equity compensation deductions that if realized in future period would
benefit additional paid-in capital.
The following is a reconciliation of income taxes at the Federal statutory rate to the provision (benefit) for
income taxes:
(Dollars in thousands) 2011 2010 2009
Federal tax computed at the statutory rate ............................. $ 11,417 $(19,836) $(108,903)
State taxes, net of Federal benefit ................................... 1,417 1,434 1,951
Foreign income taxed at rates other than Federal ....................... (22,290) (15,926) (21,882)
Increase (reduction) in valuation allowance ........................... (7,927) 29,777 387,735
Non-deductible foreign interest ..................................... 11,818 5,094 13,198
Change in uncertain tax positions ................................... (77,085) (32,283) 5,526
Tax expense from intercompany transactions .......................... 4,955 1,090 —
Subpart F income ................................................ 10,101 ——
Change in tax rate ................................................ 1,529 ——
Disposition of foreign affiliates ..................................... —(8,562) —
Gain on intercompany sale ......................................... —20,216 —
Other items, net ................................................. 2,993 8,526 9,947
Income tax expense (benefit) ....................................... $(63,072) $(10,470) $ 287,572
The significant tax jurisdictions related to the line item foreign income taxed at rates other than Federal include
the UK, the Netherlands and France.
The following table summarizes the activity related to our uncertain tax positions (“UTPs”):
(Dollars in thousands) 2011 2010 2009
Beginning Balance .......................................... $ 110,540 $141,125 $119,626
Additions based on tax positions related to the current year .......... —3,436 5,505
Additions for tax positions of prior years ......................... 471,081 24,936 19,149
Reductions for tax positions of prior years ........................ (40,083) (32,572) (2,820)
Statute expirations ........................................... (60,131) (17) (335)
Settlements ................................................ (474,880) (26,368) —
Ending Balance ............................................. $ 6,527 $110,540 $141,125
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