McDonalds 2014 Annual Report Download - page 47

McDonald’s Corporation 2014 Annual Report 41
Income Taxes
Income before provision for income taxes, classified by source of
income, was as follows:
In millions 2014 2013 2012
U.S. $2,681.9 $2,912.7 $2,879.7
Outside the U.S. 4,690.1 5,291.8 5,199.3
Income before provision for
income taxes $7,372.0 $8,204.5 $8,079.0
The provision for income taxes, classified by the timing and
location of payment, was as follows:
In millions 2014 2013 2012
U.S. federal $1,124.8 $1,238.2 $1,129.9
U.S. state 148.4 175.0 189.8
Outside the U.S. 1,431.7 1,180.2 1,160.0
Current tax provision 2,704.9 2,593.4 2,479.7
U.S. federal (81.8) 46.2 144.9
U.S. state (6.2) (6.7) 5.5
Outside the U.S. (2.7) (14.3) (15.9)
Deferred tax provision (90.7) 25.2 134.5
Provision for income taxes $2,614.2 $2,618.6 $2,614.2
Net deferred tax liabilities consisted of:
In millions December 31, 2014 2013
Property and equipment $1,754.6 $1,812.4
Other 907.0 639.8
Total deferred tax liabilities 2,661.6 2,452.2
Property and equipment (394.4) (407.9)
Employee benefit plans (400.3) (388.9)
Intangible assets (252.2) (210.1)
Deferred foreign tax credits (272.9) (192.3)
Operating loss carryforwards (286.5) (154.0)
Other (331.2) (347.6)
Total deferred tax assets
before valuation allowance (1,937.5) (1,700.8)
Valuation allowance 287.9 172.8
Net deferred tax liabilities $1,012.0 $ 924.2
Balance sheet presentation:
Deferred income taxes $1,624.5 $1,647.7
Other assets-miscellaneous (591.2) (621.4)
Current assets-prepaid expenses
and other current assets (21.3) (102.1)
Net deferred tax liabilities $1,012.0 $ 924.2
At December 31, 2014, the Company had net operating loss
carryforwards of $1.1 billion, of which $760 million has an
indefinite carryforward. The remainder will expire at various dates
from 2015 to 2031.
The Company's effective income tax rate is typically lower
than the U.S. statutory tax rate primarily because non-U.S. income
is generally subject to local statutory country tax rates that are
below the 35% U.S. statutory tax rate and reflect the impact of
global transfer pricing. For 2014, the effective income tax rate is
higher than in 2013 primarily due to changes in tax reserves
related to certain foreign tax matters.
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
2014 2013 2012
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.6 1.3 1.6
Foreign income taxed at different
rates (4.8) (5.1) (4.9)
Taxes related to unfavorable lower tax
court ruling and audit progression
in foreign tax jurisdictions 4.1 — —
Other, net (0.4) 0.7 0.7
Effective income tax rates 35.5% 31.9% 32.4%
As of December 31, 2014 and 2013, the Company’s gross
unrecognized tax benefits totaled $988.1 million and $512.7
million, respectively. After considering the deferred tax accounting
impact, it is expected that about $580 million of the total as of
December 31, 2014 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 2014 2013
Balance at January 1 $ 512.7 $ 482.4
Decreases for positions taken in prior years (19.5) (38.3)
Increases for positions taken in prior years 504.7 29.4
Increases for positions related to the current
year 80.7 53.8
Settlements with taxing authorities (78.0) (2.4)
Lapsing of statutes of limitations (12.5) (12.2)
Balance at December 31(1) $ 988.1 $ 512.7
(1) Of this amount, $909.0 million and $495.1 million are included in Other
long-term liabilities for 2014 and 2013, respectively, and $19.5 million and
$16.8 million are included in Current liabilities - income taxes for 2014 and
2013, respectively, on the Consolidated balance sheet. The remainder is
included in Deferred income taxes on the Consolidated balance sheet.
In 2014, the Internal Revenue Service ("IRS") concluded its
field examination of the Company's 2009 and 2010 U.S. federal
income tax returns. 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. Also in connection with this
examination, the Company received notices of proposed
adjustments ("NOPAs") related to certain transfer pricing matters.
The Company disagrees with the IRS' proposed adjustments and
will file a protest with the IRS Appeals Office in 2015. The
Company is also under audit in multiple foreign tax jurisdictions for
matters primarily related to transfer pricing and exempt income. In
addition, the Company is under audit in multiple state 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 $390 million, of which $10 million to $60
million could favorably affect the effective tax rate. This would be
due to the expected settlement of the 2009 and 2010 IRS agreed-
upon adjustments, the possible settlement of the 2009 and 2010
IRS protest, completion of the aforementioned foreign and state
tax audits and the expiration of the statute of limitations in multiple
tax jurisdictions.
In addition, it is reasonably possible that, as a result of audit
progression in both the U.S. and foreign tax audits within the next
12 months, there may be new information that causes the
Company to reassess the total amount of unrecognized tax