McDonalds 2008 Annual Report Download - page 53

Rent expense included percent rents in excess of minimum
rents (in millions) as follows–Company-operated restaurants:
2008–$130.2; 2007–$118.3; 2006–$106.9. Franchised restau-
rants: 2008–$143.5; 2007–$136.1; 2006–$124.3.
INCOME TAXES
Income from continuing operations before provision for income
taxes, classified by source of income, was as follows:
In millions 2008 2007 2006
U.S. $2,769.4 $2,455.0 $2,126.2
Outside the U.S. 3,388.6 1,117.1 2,028.2
Income from continuing
operations before provision for
income taxes $6,158.0 $3,572.1 $4,154.4
The provision for income taxes, classified by the timing and
location of payment, was as follows:
In millions 2008 2007 2006
U.S. federal $ 808.4 $ 480.8 $ 624.8
U.S. state 134.7 84.9 107.4
Outside the U.S. 800.2 710.5 522.7
Current tax provision 1,743.3 1,276.2 1,254.9
U.S. federal 75.6 (14.3) 55.7
U.S. state 28.7 10.0 10.8
Outside the U.S. (2.8) (34.8) (33.1)
Deferred tax provision
(benefit) 101.5 (39.1) 33.4
Provision for income taxes $1,844.8 $1,237.1 $1,288.3
Net deferred tax liabilities consisted of:
In millions December 31, 2008 2007
Property and equipment $1,587.5 $ 1,532.7
Other 308.1 231.8
Total deferred tax liabilities 1,895.6 1,764.5
Property and equipment (243.4) (370.5)
Employee benefit plans (300.9) (292.8)
Intangible assets (227.8) (282.4)
Capital loss carryforwards (161.9) (228.3)
Deferred foreign tax credits (131.1) (127.2)
Operating loss carryforwards (70.9) (102.6)
Indemnification liabilities (49.6) (62.7)
Other (462.3) (295.8)
Total deferred tax assets
before valuation allowance (1,647.9) (1,762.3)
Valuation allowance 199.7 385.1
Net deferred tax liabilities $ 447.4 $ 387.3
Balance sheet presentation:
Deferred income taxes $ 944.9 $ 960.9
Other assets–miscellaneous (417.4) (502.8)
Current assets–prepaid
expenses and other current
assets (80.1) (70.8)
Net deferred tax liabilities $ 447.4 $ 387.3
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
2008 2007 2006
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related federal
income tax benefit 1.8 2.3 1.9
Benefits and taxes related to foreign
operations (6.4) (7.5) (5.3)
Completion of federal tax audit (8.9)
Latam transaction 14.3
Other, net (0.4) (0.6) (0.6)
Effective income tax rates 30.0% 34.6% 31.0%
As of December 31, 2008 and 2007, the Company’s gross
unrecognized tax benefits totaled $272.5 million and $249.7 mil-
lion, respectively. After considering the federal impact on state
issues, about $225 million of the total as of December 31, 2008
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 benefits:
In millions 2008 2007
Balance at January 1 $249.7 $ 664.3
Decreases for positions taken in prior years:
Remeasurement due to completion of audit (7.6) (295.8)
Disposition of entity (29.9)
Other (14.2) (60.4)
Increases for positions taken in prior years 25.0 18.3
Increases for positions related to the current
year 65.9 82.5
Settlements with taxing authorities (39.5) (122.7)
Lapsing of statutes of limitations (6.8) (6.6)
Balance at December 31(1) $272.5 $ 249.7
(1) Included in other long-term liabilities on the Consolidated balance sheet.
It is reasonably possible that the total amount of unrecognized
tax benefits could decrease within the next 12 months by
$30 million to $40 million. This decrease would result from the
expiration of the statute of limitations and the completion of tax
audits in multiple tax jurisdictions.
The Company is generally no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax author-
ities for years prior to 2002.
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 $24.1 million and $9.4 million
accrued for interest at December 31, 2008 and 2007,
respectively, and no accrual for penalties in either year. The Com-
pany recorded interest expense related to tax matters of
$13.7 million in 2008 and interest income related to tax matters
of $34.9 million in 2007, and no expense for penalties in either
year.
Deferred U.S. income taxes have not been recorded for tempo-
rary differences related to investments in certain foreign
subsidiaries and corporate joint ventures. These temporary differ-
ences were approximately $6.9 billion at December 31, 2008 and
consisted primarily of undistributed earnings considered perma-
nently 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 circum-
stances existing if and when remittance occurs.
McDonald’s Corporation Annual Report 2008 51