Nike 2010 Annual Report Download - page 80

Table of Contents NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
May 31,
2010 2009 2008
(In millions)
Unrecognized tax benefits, as of the beginning of the period $ 273.9 $251.1 $122.5
Gross increases related to prior period tax positions 86.7 53.2 71.6
Gross decreases related to prior period tax positions (121.6) (61.7) (23.1)
Gross increases related to current period tax positions 52.5 71.5 87.7
Settlements (3.3) (29.3) (13.4)
Lapse of statute of limitations (9.3) (4.1) (0.7)
Changes due to currency translation 3.2 (6.8) 6.5
Unrecognized tax benefits, as of the end of the period $ 282.1 $273.9 $251.1
As of May 31, 2010, the total gross unrecognized tax benefits, excluding related interest and penalties, were $282.1 million, $158.4 million of which
would affect the Company’s effective tax rate if recognized in future periods. Total gross unrecognized tax benefits, excluding interest and penalties, as of
May 31, 2009 was $273.9 million, $110.6 million of which would affect the Company’s effective tax rate if recognized in future periods.
The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties
increased $6.0 million, $2.2 million and $41.2 million during the years ended May 31, 2010, 2009 and 2008, respectively. As of May 31, 2010 and 2009,
accrued interest and penalties related to uncertain tax positions was $81.4 million and $75.4 million, respectively (excluding federal benefit).
The Company is subject to taxation primarily in the U.S., China and the Netherlands as well as various state and other foreign jurisdictions. The
Company has concluded substantially all U.S. federal income tax matters through fiscal year 2006. The Company is currently under audit by the Internal
Revenue Service for the 2007, 2008, 2009 and 2010 tax years. The Company’s major foreign jurisdictions, China and the Netherlands, have concluded
substantially all income tax matters through calendar 1999 and fiscal 2003, respectively. It is reasonably possible that the Internal Revenue Service audits
for the 2007, 2008 and 2009 tax years will be completed during the next 12 months, which could result in a decrease in our balance of unrecognized tax
benefits. An estimate of the range cannot be made at this time; however, we do not anticipate that total gross unrecognized tax benefits will change
significantly as a result of full or partial settlement of audits within the next 12 months.
The Company has indefinitely reinvested approximately $3.6 billion of the cumulative undistributed earnings of certain foreign subsidiaries. Such
earnings would be subject to U.S. taxation if repatriated to the U.S. Determination of the amount of unrecognized deferred tax liability associated with the
permanently reinvested cumulative undistributed earnings is not practicable.
During the year ended May 31, 2009, a portion of the Company’s foreign operations was granted a tax holiday that will phase out in 2019. The
decrease in income tax expense for the year ended May 31, 2010 as a result of this arrangement was approximately $30.1 million ($0.06 per diluted share).
The effect on income tax expense for the year ended May 31, 2009 was not material.
Deferred tax assets at May 31, 2010 and 2009 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating
losses where it is more likely than not that the deferred tax assets will not be realized. The net change in the valuation allowance was an increase of $10.2
million for the year ended May 31, 2010 and a decrease of $14.7 million and $1.6 million for the years ended May 31, 2009 and 2008, respectively.
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