Vistaprint 2007 Annual Report Download - page 38

connection with the formation of VistaPrint Limited, such that additional federal income tax is due
currently, and potentially on an ongoing basis for years subsequent to the formation. A successful
assertion of this position by the Internal Revenue Service could result in an overall tax rate
substantially higher than the rate reflected in our financial statements.
Our intercompany arrangements may be challenged, resulting in higher taxes or penalties and
an adverse effect on our earnings.
We operate pursuant to written intercompany service and related agreements, which we also
refer to as transfer pricing agreements, among VistaPrint Limited and its subsidiaries. These
agreements establish transfer prices for printing, marketing, management, technology development
and other services performed for VistaPrint Limited. Transfer prices are prices that one company in a
group of related companies charges to another member of the group for goods, services or the use of
property. If two or more affiliated companies are located in different countries, the tax laws or
regulations of each country generally will require that transfer prices be the same as those between
unrelated companies dealing at arms’ length. With the exception of our Dutch operations, our transfer
pricing procedures are not binding on applicable tax authorities and no official authority in any other
country has made a determination as to whether or not we are operating in compliance with its transfer
pricing laws. If tax authorities in any of these countries were to successfully challenge our transfer
prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and
thereby reallocate our income to reflect these revised transfer prices. A reallocation of income from a
lower tax jurisdiction to a higher tax jurisdiction would result in a higher tax liability to us. In addition, if
the country from which the income is reallocated does not agree with the reallocation, both countries
could tax the same income, resulting in double taxation. Changes in laws and regulations may require
us to change our transfer pricings or operating procedures. If tax authorities were to allocate income to
a higher tax jurisdiction, subject our income to double taxation or assess penalties, it would result in a
higher tax liability to us, which would adversely affect our earnings.
We will pay taxes even if we are not profitable on a consolidated basis which would cause
increased losses and further harm to our results of operations.
The intercompany service and related agreements among VistaPrint Limited and our direct and
indirect subsidiaries in general guarantee that the subsidiaries realize profits. As a result, even if the
VistaPrint group is not profitable on a consolidated basis, the majority of our subsidiaries will be
profitable and incur income taxes in their respective jurisdictions. If we are unprofitable on a
consolidated basis, as has been the case in some prior periods, this structure will increase our
consolidated losses and further harm our results of operations.
We may be treated as a passive foreign investment company for United States tax purposes,
which may subject United States shareholders to adverse tax consequences.
If our passive income, or our assets that produce passive income, exceed levels provided by law
for any taxable year, we may be characterized as a passive foreign investment company, or a PFIC,
for United States federal income tax purposes. If we are treated as a PFIC, U.S. holders of our
common shares would be subject to a disadvantageous United States federal income tax regime with
respect to the distributions they receive and the gain, if any, they derive from the sale or other
disposition of their common shares. Under the PFIC rules, unless U.S. holders make an election
available under the Internal Revenue Code of 1986, as amended, such shareholders would be liable to
pay United States federal income tax at the then prevailing income tax rates on ordinary income plus
interest upon excess distributions and upon any gain from the disposition of our common shares, as if
the excess distribution or gain had been recognized ratably over the shareholder’s holding period of
our common shares.
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