Avon 2007 Annual Report Download - page 67

The effective tax rate for the years ended December 31 was as
follows:
2007 2006 2005
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of
federal tax benefit .4 .1 .8
Taxes on foreign income,
including translation .5 (.5) (1.9)
Tax audit settlements, refunds,
amended returns and foreign
tax credits (1.0) (5.7) (10.5)
Repatriation of prior years foreign
earnings – 3.1 –
Net change in valuation
allowances (2.0) – –
Other .1 (.2) .6
Effective tax rate 33.0% 31.8% 24.0%
At December 31, 2007, we had foreign operating loss carryfor-
wards of approximately $994.9. The loss carryforwards expiring
between 2008 and 2022 are $100.8 and the loss carryforwards
which do not expire are $894.1. We also had minimum tax
credit carryforwards of $24.9 which do not expire, capital loss
carryforwards of $11.2 that will expire in 2010, and foreign tax
credit carryforwards of $28.6 that will expire in 2016 and 2017.
Uncertain Tax Positions
Effective January 1, 2007, we adopted Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB State-
ment No. 109, (“FIN 48”). As a result of the implementation of
FIN 48, we recognized an $18.3 increase in the liability for
unrecognized tax benefits (including interest and penalties),
which was accounted for as a reduction to the January 1, 2007
balance of retained earnings. At December 31, 2007, we had
$154.3 of total gross unrecognized tax benefits, of which
approximately $141 would impact the effective tax rate, if
recognized. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
Balance at January 1, 2007 $135.6
Additions based on tax positions related to the
current year 24.2
Additions for tax positions of prior years 5.4
Reductions for tax positions of prior years (3.6)
Reductions due to lapse of statute of limitations (2.9)
Reductions due to settlements with tax authorities (4.4)
Balance at December 31, 2007 $154.3
We recognize interest and penalties accrued related to unrecog-
nized tax benefits in the provision for income taxes. At
December 31, 2007, we had $29.7 accrued for interest and
penalties, net of tax benefit. During 2007, we recorded $3.3 for
interest and penalties, net of tax benefit.
We file income tax returns in the U.S. federal jurisdiction, and
various states and foreign jurisdictions. As of December 31,
2007, the tax years that remained subject to examination by
major tax jurisdiction for our most significant subsidiaries were as
follows:
Jurisdiction Open Years
Brazil 2002 – 2007
China 2003 – 2007
Mexico 2002 – 2007
Poland 2002 – 2007
Russia 2007
United States 2004 – 2007
We anticipate that it is reasonably possible that the total amount
of unrecognized tax benefits could decrease in the range of $65
to $85 within the next 12 months due to the closure of tax years
by expiration of the statute of limitations and audit settlements.
NOTE 7. Financial Instruments and Risk
Management
We operate globally, with manufacturing and distribution facili-
ties in various locations around the world. We may reduce our
exposure to fluctuations in cash flows associated with changes in
interest rates and foreign exchange rates by creating offsetting
positions through the use of derivative financial instruments.
Since we use foreign currency-rate sensitive and interest-rate
sensitive instruments to hedge a certain portion of our existing
and forecasted transactions, we expect that any gain or loss in
value of the hedge instruments generally would be offset by
decreases or increases in the value of the underlying
transactions.
We do not enter into derivative financial instruments for trading
or speculative purposes, nor are we a party to leveraged
derivatives. The master agreements governing our derivative
contracts generally contain standard provisions that could trigger
early termination of the contracts in certain circumstances,
including if we were to merge with another entity and the cred-
itworthiness of the surviving entity were to be “materially
weaker” than that of Avon prior to the merger.
Accounting Policies
Derivatives are recognized on the balance sheet at their fair val-
ues. When we become a party to a derivative instrument, we
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