Pepsi 2007 Annual Report Download - page 44

Our annual tax rate is based on our
income, statutory tax rates and tax plan-
ning opportunities available to us in the
various jurisdictions in which we oper-
ate. Signifi cant judgment is required in
determining our annual tax rate and in
evaluating our tax positions. We establish
reserves when, despite our belief that
our tax return positions are fully support-
able, we believe that certain positions are
subject to challenge and that we may not
succeed. We adjust these reserves, as well
as the related interest, in light of chang-
ing facts and circumstances, such as the
progress of a tax audit.
An estimated effective tax rate for a
year is applied to our quarterly operating
results. In the event there is a signifi cant
or unusual item recognized in our quar-
terly operating results, the tax attributable
to that item is separately calculated and
recorded at the same time as that item.
We consider the tax adjustments from the
resolution of prior year tax matters to be
such items.
Tax law requires items to be included
in our tax returns at different times than
the items are refl ected in our fi nancial
statements. As a result, our annual tax
rate refl ected in our fi nancial statements
is different than that reported in our
tax returns (our cash tax rate). Some of
these differences are permanent, such as
expenses that are not deductible in our
tax return, and some differences reverse
over time, such as depreciation expense.
These temporary differences create
deferred tax assets and liabilities. Deferred
tax assets generally represent items that
can be used as a tax deduction or credit
in our tax returns in future years for which
we have already recorded the tax benefi t
in our income statement. We establish
valuation allowances for our deferred
tax assets if, based on the available
evidence, it is more likely than not that
some portion or all of the deferred tax
assets will not be realized. Deferred tax
liabilities generally represent tax expense
recognized in our fi nancial statements for
which payment has been deferred,
or expense for which we have already
taken a deduction in our tax return but
have not yet recognized as expense in
our fi nancial statements.
In 2006, the Financial Accounting
Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109
(FIN 48), which clarifi es the accounting
for uncertainty in tax positions. FIN 48
requires that we recognize in our fi nancial
statements the impact of a tax position,
if that position is more likely than not
of being sustained on audit, based on
the technical merits of the position. We
adopted the provisions of FIN 48 as of the
beginning of our 2007 fi scal year. As a
result of our adoption of FIN 48, we rec-
ognized a $7 million decrease to reserves
for income taxes, with a corresponding
increase to opening retained earnings.
See Note 5 for additional information
regarding our tax reserves and our adop-
tion of FIN 48.
In 2007, our annual tax rate was 25.9%
compared to 19.3% in 2006 as discussed
in “Other Consolidated Results.” The tax
rate in 2007 increased 6.6 percentage
points primarily refl ecting an unfavorable
comparison to the prior year’s non-cash
tax benefi ts. In 2008, our annual tax
rate is expected to be 27.5%, primarily
refl ecting the absence of the non-cash tax
benefi ts recorded in 2007.
Income Tax Expense and Accruals
We adopted the provisions of
FIN 48 as of the beginning of our
2007 fiscal year.
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