Safeway 2005 Annual Report Download - page 73

SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
53
Significant components of the Company's net deferred tax liability at year-end were as follows (in millions):
2005 2004
Deferred tax assets:
Workers’ compensation and other claims $ 212.6 $ 201.1
Reserves not currently deductible 58.4 63.1
Accrued claims and other liabilities 44.9 34.1
Employee benefits 95.4 56.7
Charitable contribution carryforwards 52.8 29.0
Operating loss carryforwards 81.3 74.4
Other assets 51.4 56.5
596.8 514.9
Valuation allowance (81.3) (74.4)
$ 515.5 $ 440.5
2005 2004
Deferred tax liabilities:
Property $(432.2) $(482.6)
Prepaid pension costs (69.0) (121.1)
Inventory (200.9) (193.9)
Investments in foreign operations (44.8) (123.6)
(746.9) (921.2)
Net deferred tax liability (231.4) (480.7)
Less: current liability (8.3) (17.1)
Long-term portion $(223.1) $(463.6)
At December 31, 2005, certain undistributed earnings of the Company's foreign operations totaling $940.6 million were
considered to be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings
to the U.S., since it is the Company's intention to utilize those earnings in the foreign operations for an indefinite period of
time, or to repatriate such earnings only when tax efficient to do so. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable; however, unrecognized foreign tax credits may be available to reduce some
portion of the U.S. income tax liability.
During 2005, the Company repatriated $500 million of earnings from its Canadian subsidiary to the U.S. to take advantage
of the lower tax rate allowed by the American Jobs Creation Act of 2004. The Canadian subsidiary funded approximately
half of the repatriated earnings with cash on hand and the remainder with borrowings. The U.S. parent company will use
the repatriated earnings to pay down debt in the near term. Deferred taxes previously provided on Canadian earnings to be
repatriated exceeded the tax costs to repatriate the earnings and resulted in a net reduction of $16.5 million in income tax
expense in 2005.
U.S. and Canadian tax authorities notified the Company during 2005 that they have concluded their transfer pricing
negotiations with respect to a bilateral Advance Pricing Agreement for the years 2000 through 2006. The agreement
established arm’s length charges for intercompany sales of goods and services and use of property by the Company and its
Canadian subsidiary which are eliminated in consolidation. As a result of this agreement, foreign income before tax expense
for 2005 has been reduced, and domestic income before tax expense for 2005 has been increased by the amount of the
charges.
At December 31, 2005, GroceryWorks had net operating loss (“NOL”) carryforwards for federal income tax purposes of
approximately $222 million and net operating loss carryforwards for state purposes of approximately $64 million. The NOL
carryforwards expire at various dates from 2006 to 2025. Until it becomes more likely than not that GroceryWorks will have
future taxable income to absorb the NOL carryforwards, Safeway will provide a valuation allowance for the entire deferred