McDonalds 2013 Annual Report Download - page 46

38 | McDonald’s Corporation 2013 Annual Report
Net deferred tax liabilities consisted of:
In millions December 31, 2013 2012
Property and equipment $1,812.4 $1,713.9
Other 639.8 636.4
Total deferred tax liabilities 2,452.2 2,350.3
Property and equipment (407.9) (403.6)
Employee benefit plans (388.9) (362.9)
Intangible assets (210.1) (258.0)
Deferred foreign tax credits (192.3) (179.5)
Operating loss carryforwards (154.0) (92.4)
Other (347.6) (319.4)
Total deferred tax assets
before valuation allowance (1,700.8) (1,615.8)
Valuation allowance 172.8 127.0
Net deferred tax liabilities $ 924.2 $ 861.5
Balance sheet presentation:
Deferred income taxes $1,647.7 $1,531.1
Other assets-miscellaneous (621.4) (603.6)
Current assets-prepaid expenses
and other current assets (102.1) (66.0)
Net deferred tax liabilities $ 924.2 $ 861.5
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
2013 2012 2011
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.3 1.6 1.4
Benefits and taxes related to foreign
operations (4.0) (4.1) (4.7)
Other, net (0.4) (0.1) (0.4)
Effective income tax rates 31.9% 32.4% 31.3%
As of December 31, 2013 and 2012, the Company’s gross
unrecognized tax benefits totaled $512.7 million and $482.4
million, respectively. After considering the deferred tax accounting
impact, it is expected that about $380 million of the total as of
December 31, 2013 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 2013 2012
Balance at January 1 $ 482.4 $ 565.0
Decreases for positions taken in prior years (38.3) (65.7)
Increases for positions taken in prior years 29.4 36.9
Increases for positions related to the current
year 53.8 47.3
Settlements with taxing authorities (2.4) (95.8)
Lapsing of statutes of limitations (12.2) (5.3)
Balance at December 31(1) $ 512.7 $ 482.4
(1) Of this amount, $495.1 million and $481.7 million are included in long-term
liabilities for 2013 and 2012, respectively, and $16.8 million is included in
current liabilities - income taxes for 2013 on the Consolidated balance
sheet. The remainder is included in deferred income taxes on the
Consolidated balance sheet.
In December 2012, the Company reached a final settlement
with the Internal Revenue Service ("IRS") Appeals Division
regarding its U.S. federal income tax returns for 2007 and 2008.
The Company agreed to a settlement of about $80 million,
primarily related to proposed foreign tax credit adjustments of
about $400 million. The liabilities previously recorded and
determined in accordance with Topic 740 - Income Taxes of the
Accounting Standards Codification ("ASC") related to this matter
were adequate. Additionally, no cash payment was made related
to this settlement as the Company had previously made a tax
deposit with the IRS. The agreement did not have a material
impact on the Company's cash flows, results of operations or
financial position.
The Company's 2009 and 2010 U.S. federal income tax
returns are currently under examination and the completion of the
field examination is expected in 2014. In connection with this
examination, the Company agreed to certain adjustments that
have been proposed by the IRS and appropriately accounted for
these adjustments in accordance with ASC 740. The Company is
also under audit in multiple state and foreign tax jurisdictions. It is
reasonably possible that the audits in certain of these jurisdictions
could be completed within 12 months. Due to the expected
settlement of the 2009 and 2010 IRS agreed adjustments, the
possible completion of the aforementioned state and foreign tax
audits and the expiration of the statute of limitations in multiple tax
jurisdictions, it is reasonably possible that the total amount of
unrecognized tax benefits could decrease within the next 12
months by $120 million to $140 million, of which $5 million to $10
million could favorably affect the effective tax rate.
Also in connection with the Company’s 2009 and 2010 U.S.
federal income tax returns, the Company received notices of
proposed adjustments ("NOPAs") in 2014 and expects to receive
additional NOPAs within the next 12 months from the IRS related
to certain transfer pricing matters. It is reasonably possible that the
receipt of these future NOPAs will provide new information that
causes the Company to reassess the total amount of
unrecognized tax benefits recorded. In addition, the Company is
currently under audit in other tax jurisdictions. Completion of the
tax audits for certain jurisdictions is not expected within 12
months. However, it is reasonably possible that, as a result
of audit progression within the next 12 months, there may be new
information that causes the Company to reassess the total amount
of unrecognized tax benefits recorded. While the Company cannot
estimate the impact that new information may have on our
unrecognized tax benefit balance, we believe that the liabilities
recorded are appropriate and adequate as determined under ASC
740.
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 2007.
The Company had $55.4 million and $37.7 million accrued for
interest and penalties at December 31, 2013 and 2012,
respectively. The Company recognized interest and penalties
related to tax matters of $14.4 million in 2013, $11.2 million in
2012, and $4.8 million in 2011, which are included in the provision
for income taxes.
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 $16.1 billion at December 31,
2013 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.