McDonalds 2015 Annual Report Download - page 44

42 McDonald's Corporation 2015 Annual Report
Income Taxes
Income before provision for income taxes, classified by source of
income, was as follows:
In millions 2015 2014 2013
U.S. $2,597.8 $2,681.9 $2,912.7
Outside the U.S. 3,957.9 4,690.1 5,291.8
Income before provision for
income taxes $6,555.7 $7,372.0 $8,204.5
The provision for income taxes, classified by the timing and
location of payment, was as follows:
In millions 2015 2014 2013
U.S. federal $1,072.3 $1,124.8 $1,238.2
U.S. state 139.5 148.4 175.0
Outside the U.S. 816.0 1,431.7 1,180.2
Current tax provision 2,027.8 2,704.9 2,593.4
U.S. federal 6.8 (81.8) 46.2
U.S. state (3.9) (6.2) (6.7)
Outside the U.S. (4.3) (2.7) (14.3)
Deferred tax provision (1.4) (90.7) 25.2
Provision for income taxes $2,026.4 $2,614.2 $2,618.6
Net deferred tax liabilities consisted of:
In millions December 31, 2015 2014
Property and equipment $1,751.7 $1,754.6
Intangibles and other 1,188.8 907.0
Total deferred tax liabilities 2,940.5 2,661.6
Property and equipment (472.7) (394.4)
Employee benefit plans (390.1) (400.3)
Intangible assets (222.6) (252.2)
Deferred foreign tax credits (289.2) (272.9)
Operating loss carryforwards (419.8) (286.5)
Other (297.0) (331.2)
Total deferred tax assets
before valuation allowance (2,091.4) (1,937.5)
Valuation allowance 322.4 287.9
Net deferred tax liabilities $1,171.5 $1,012.0
Balance sheet presentation:
Deferred income taxes $1,704.3 $1,624.5
Other assets-miscellaneous (532.8) (591.2)
Current assets-prepaid expenses
and other current assets 0.0 (21.3)
Net deferred tax liabilities $1,171.5 $1,012.0
At December 31, 2015, the Company had net operating loss
carryforwards of $1.5 billion, of which $1.2 billion has an indefinite
carryforward. The remainder will expire at various dates from 2016
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.
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
2015 2014 2013
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 1.6 1.3
Foreign income taxed at different
rates (4.9) (4.8) (5.1)
Taxes related to unfavorable lower tax
court ruling and audit progression
in foreign tax jurisdictions 0.0 4.1 0.0
Cash repatriation (2.3) (1.2) (0.5)
Other, net 1.5 0.8 1.2
Effective income tax rates 30.9% 35.5% 31.9%
As of December 31, 2015 and 2014, the Company’s gross
unrecognized tax benefits totaled $781.2 million and $988.1
million, respectively. After considering the deferred tax accounting
impact, it is expected that about $470 million of the total as of
December 31, 2015 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 2015 2014
Balance at January 1 $988.1 $ 512.7
Decreases for positions taken in prior years (49.9) (19.5)
Increases for positions taken in prior years 30.5 504.7
Increases for positions related to the current
year 83.7 80.7
Settlements with taxing authorities (258.0) (78.0)
Lapsing of statutes of limitations (13.2) (12.5)
Balance at December 31(1) $781.2 $988.1
(1) Of this amount, $704.0 million and $909.0 million are included in Other
long-term liabilities for 2015 and 2014, respectively, and $21.9 million and
$19.5 million are included in Current liabilities - income taxes for 2015 and
2014, 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 had been proposed
by the IRS and appropriately accounted for these adjustments in
accordance with ASC 740. In early 2015, the IRS issued a
Revenue Agent Report for these agreed adjustments,and the
balance of unrecognized tax benefits was reduced accordingly.
Also in connection with this examination, in 2014 the Company
received notices of proposed adjustments ("NOPAs") related to
certain transfer pricing matters. The Company disagrees with the
IRS' proposed adjustments and filed 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. 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 up to $250
million within the next 12 months, of which up to $50 million could
favorably affect the effective tax rate. This would be due to 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