Costco 2006 Annual Report Download - page 65

The reconciliation between the statutory tax rate and the effective rate for fiscal 2006, 2005 and 2004
is as follows:
2006 2005 2004
Federal taxes at statutory
rate .................... $612,996 35.00% $542,137 35.00% $490,218 35.00%
State taxes, net ............ 42,338 2.42 39,193 2.53 48,157 3.44
Foreign taxes, net .......... 1,701 0.10 (15,506) (1.00) (5,729) (0.41)
Transfer pricing settlement . . . — 0.00 (54,155) (3.50) — 0.00
Tax benefit on unremitted
earnings ................ (11,978) (0.68) (30,602) (1.98) — 0.00
Translation gain on unremitted
earnings ................ 5,333 0.30 10,010 0.65 — 0.00
Other .................... (2,188) (0.13) (5,207) (0.33) (14,415) (1.03)
Total ................. $648,202 37.01% $485,870 31.37% $518,231 37.00%
The components of the deferred tax assets and liabilities are as follows:
September 3,
2006 August 28, 2005
Stock options .......................................... $ 73,148 $ 30,480
Deferred income/membership fees ........................ 69,704 36,594
Excess foreign tax credits ............................... 4,177 30,602
Accrued liabilities and reserves ........................... 237,079 266,337
Other ................................................ 23,578 3,880
Total deferred tax assets ............................ 407,686 367,893
Property and equipment ................................. 295,424 273,794
Merchandise inventories ................................ 95,868 91,407
Translation gain ....................................... 1,532 16,047
Total deferred tax liabilities ........................... 392,824 381,248
Net deferred tax assets (liabilities) ........................ $ 14,862 $ (13,355)
The deferred tax accounts at September 3, 2006 and August 28, 2005 include current deferred income
tax assets of $162,534 and $159,197, respectively, included in deferred income taxes and other
current assets; non-current deferred income tax assets of $12,109 and $7,962, respectively, included
in other assets; and non-current deferred income tax liabilities of $159,781 and $180,514, respectively,
included in deferred income taxes and other liabilities. Income taxes payable at September 3, 2006
and August 28, 2005 are $69,154 and $27,695, respectively, included in other current liabilities.
The effective income tax rate on earnings was 37.0% in fiscal 2006, 31.4% in fiscal 2005 and 37.0% in
fiscal 2004. The decrease in the effective income tax rate in fiscal 2005 from fiscal 2004 is primarily
attributable to a $54,155 income tax benefit resulting from the settlement of a transfer pricing dispute
between the United States and Canada (covering the years 1996-2003) and a net tax benefit on
unremitted foreign earnings of $20,592. The Company recognized a tax benefit of $30,602, resulting
from excess foreign tax credits on unremitted foreign earnings, and recognized a tax expense of
$10,010, resulting from tax expense on translation gains accumulated to the date that the Company
determined that certain unremitted foreign earnings were no longer permanently reinvested. The net
benefit of $20,592 related to that portion of unremitted foreign earnings that the Company planned to
repatriate in the foreseeable future. Excluding these benefits the effective income tax rate on earnings
in fiscal 2005 was 36.2%. During the third quarter of fiscal 2006, the Company distributed $427,296
from its Canadian operations.
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