Pepsi 2007 Annual Report Download - page 70

For additional unaudited information
on our income tax policies, includ-
ing our reserves for income taxes, see
“Our Critical Accounting Policies” in
Management’s Discussion and Analysis.
In 2007, we recognized $129 million
of non-cash tax benefi ts related to the
favorable resolution of certain foreign tax
matters. In 2006, we recognized non-cash
tax benefi ts of $602 million, substantially
all of which related to the IRS’s exami-
nation of our consolidated income tax
returns for the years 1998 through 2002.
In 2005, we repatriated approximately
$7.5 billion in earnings previously consid-
ered indefi nitely reinvested outside the
U.S. and recorded income tax expense
of $460 million related to the AJCA. The
AJCA created a one-time incentive for
U.S. corporations to repatriate undistrib-
uted international earnings by providing
an 85% dividends received deduction.
Reserves
A number of years may elapse before
a particular matter, for which we have
established a reserve, is audited and fi nally
resolved. The number of years with open
tax audits varies depending on the tax
jurisdiction. Our major taxing jurisdictions
and the related open tax audits are as
follows:
the U.S. — in 2006, the IRS issued a
•
Revenue Agent’s Report (RAR) related
to the years 1998 through 2002. We
are in agreement with their conclu-
sion, except for one matter which we
continue to dispute. We made the
appropriate cash payment during 2006
to settle the agreed-upon issues, and
we do not anticipate the resolution of
the open matter will signifi cantly impact
our fi nancial statements. In 2007,
the IRS initiated their audit of our
U.S. tax returns for the years 2003
through 2005;
Mexico — in 2006, we completed and
•
agreed with the conclusions of an audit
of our tax returns for the years 2001
through 2005;
the United Kingdom — audits have
•
been completed for all taxable years
prior to 2004; and
Canada — audits have been completed
•
for all taxable years through 2004. We
are disputing some of the adjustments
for the years 1999 through 2004. We
do not anticipate the resolution of the
1999 through 2004 tax years will signif-
icantly impact our fi nancial statements.
The Canadian tax return for 2005 is cur-
rently under audit and no adjustments
are expected to signifi cantly impact our
fi nancial statements.
While it is often diffi cult to predict the
fi nal outcome or the timing of resolution
of any particular tax matter, we believe
that our reserves refl ect the probable
outcome of known tax contingencies.
We adjust these reserves, as well as the
related interest, in light of changing facts
and circumstances. Settlement of any par-
ticular issue would usually require the use
of cash. Favorable resolution would be
recognized as a reduction to our annual
tax rate in the year of resolution.
For further unaudited information on
the impact of the resolution of open tax
issues, see “Other Consolidated Results.”
In 2006, the FASB issued 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 recognized a $7 million
decrease to reserves for income taxes,
with a corresponding increase to opening
retained earnings.
As of December 29, 2007, the total
gross amount of reserves for income
taxes, reported in other liabilities, was
$1.5 billion. Of that amount, $1.4 billion,
if recognized, would affect our effective
tax rate. Any prospective adjustments
to our reserves for income taxes will
be recorded as an increase or decrease
to our provision for income taxes and
would impact our effective tax rate. In
addition, we accrue interest related to
reserves for income taxes in our provi-
sion for income taxes and any associated
penalties are recorded in selling, general
and administrative expenses. The gross
amount of interest accrued, reported in
other liabilities, was $338 million as of
December 29, 2007, of which $34 million
was recognized in 2007.
A rollforward of our reserves in 2007
for all federal, state and foreign tax juris-
dictions, is as follows:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,435
FIN 48 adoption adjustment to retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
Reclassification of deductible state tax and
interest benefits to other balance sheet accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144)
Adjusted balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284
Additions for tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
Additions for tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Reductions for tax positions from prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73)
Settlement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (174)
Statute of limitations expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Balance, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,461
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