McDonalds 2007 Annual Report Download - page 58

The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
2007 2006 2005
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefi t 2.3 1.9 1.8
Benefi ts and taxes related to
foreign operations (7.5) (5.3) (4.7)
Completion of federal tax audit (8.9) (4.8)
Repatriation of foreign earnings
under HIA 2.9
Latam transaction 14.3
Other, net (0.6) (0.6) (0.6)
Effective income tax rates 34.6% 31.0% 29.6%
As of December 31, 2007, the Company’s gross unrecognized
tax benefi ts totaled $249.7 million. After considering the federal
impact on state issues, $200.1 million of this total would
favorably affect the effective tax rate if resolved in the
Company’s favor.
The following table presents a reconciliation of the beginning
and ending amounts of unrecognized tax benefi ts:
IN MILLIONS
Balance at January 1, 2007 $ 664.3
Decreases for positions taken in prior years:
Remeasurement due to completion of audit (295.8)
Disposition of entity (29.9)
Other (60.4)
Increases for positions taken in prior years 18.3
Increases for positions related to the current year 82.5
Settlements with taxing authorities (122.7)
Lapsing of statutes of limitations (6.6)
Balance at December 31, 2007
(1)
$ 249.7
(1) Included in other long-term liabilities in the Consolidated balance sheet.
It is reasonably possible that the total amount of unrecognized
tax benefi ts will change in 2008, ranging from a decrease of
$40 million to an increase of $60 million. Decreases in the unrec-
ognized tax benefi ts will result from the lapsing of statutes of
limitations and the possible completion of tax audits in multiple
jurisdictions. Increases will result from tax positions, primarily re-
lated to foreign operations, expected to be taken on tax returns
for 2008.
The Company is generally no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax
authorities for years prior to 2001.
The continuing practice of the Company is to recognize
interest and penalties related to income tax matters in the provision
for income taxes. The Company had $9.4 million accrued for
interest and no accrual for penalties at December 31, 2007.
The Company recorded interest income related to tax matters
of $34.9 million in 2007 and no expense for penalties.
Deferred U.S. income taxes have not been recorded for
temporary differences related to investments in certain foreign
subsidiaries and corporate joint ventures. These temporary
differences were approximately $6.7 billion at December 31,
2007 and consisted primarily of undistributed earnings
considered permanently invested in operations outside the
U.S. Determination of the deferred income tax liability on these
unremitted earnings is not practicable because such liability,
if any, is dependent on circumstances existing if and when
remittance occurs.
EMPLOYEE BENEFIT PLANS
The Company’s Profi t Sharing and Savings Plan for U.S.-based
employees includes a 401(k) feature, a leveraged employee
stock ownership (ESOP) feature, and a discretionary employer
profi t sharing match. The 401(k) feature allows participants to
make pretax contributions that are partly matched from shares
released under the ESOP. The Profi t Sharing and Savings Plan
also provides for a discretionary employer profi t sharing match
at the end of the year for those eligible participants who have
contributed to the 401(k) feature.
All contributions and related earnings can be invested in several
investment alternatives as well as McDonald’s common stock in
accordance with each participant’s elections. Participants’ con-
tributions to the 401(k) feature and the discretionary employer
match are limited to 20% investment in McDonald’s common
stock.
The Company also maintains certain supplemental benefi t
plans that allow participants to (i) make tax-deferred contribu-
tions and (ii) receive Company-provided allocations that cannot be
made under the Profi t Sharing and Savings Plan because of Inter-
nal Revenue Service limitations. The investment alternatives and
returns are based on certain market-rate investment alternatives
under the Profi t Sharing and Savings Plan. Total liabilities were
$415.3 million at December 31, 2007 and $378.6 million at
December 31, 2006 and were included in other long-term
liabilities in the Consolidated balance sheet.
The Company has entered into derivative contracts
to hedge market-driven changes in certain of the liabilities.
At December 31, 2007, derivatives with a fair value of
$100.8 million indexed to the Company’s stock as well as an in-
vestment totaling $82.0 million indexed to certain market indices
were included in miscellaneous other assets in the Consolidated
balance sheet. All changes in liabilities for these nonqualifi ed
plans and in the fair value of the derivatives are recorded in selling,
general & administrative expenses. Changes in fair value of the
derivatives indexed to the Company’s stock are recorded in the
income statement because the contracts provide the counterparty
with a choice to settle in cash or shares.
Total U.S. costs for the Profi t Sharing and Savings Plan,
including nonqualifi ed benefi ts and related hedging activities, were
(in millions): 2007–$57.6; 2006–$60.1; 2005–$58.0. Certain
subsidiaries outside the U.S. also offer profi t sharing, stock pur-
chase or other similar benefi t plans. Total plan costs outside the
U.S. were (in millions): 2007–$62.7; 2006–$69.8; 2005–$54.1.
The total combined liabilities for international retirement plans
were $129.4 million and $197.6 million at December 31, 2007
and 2006, respectively, primarily in Canada and the U.K.
Other postretirement benefi ts and post-employment benefi ts
were immaterial.
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