Nike 2014 Annual Report Download - page 62

PART II
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
As of May 31,
(In millions) 2014 2013 2012
Unrecognized tax benefits, as of the beginning of the period $ 447 $ 285 $ 212
Gross increases related to prior period tax positions(1) 814 77 48
Gross decreases related to prior period tax positions(1) (166) (3) (25)
Gross increases related to current period tax positions 125 130 91
Gross decreases related to current period tax positions (30) (9) (1)
Settlements(1) (676) — (20)
Lapse of statute of limitations (4) (21) (9)
Changes due to currency translation (4) (12) (11)
UNRECOGNIZED TAX BENEFITS, AS OF THE END OF THE PERIOD $ 506 $ 447 $ 285
(1) During the fourth quarter of the fiscal year ended May 31, 2014, the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany
transfer pricing for fiscal years 2011 through 2020. As a result, the Company recorded a gross increase in unrecognized tax benefits related to prior period tax positions, a gross decrease
in unrecognized tax benefits related to prior period tax positions, and a settlement. The net impact of these items resulted in a decrease to unrecognized tax benefits.
As of May 31, 2014, the total gross unrecognized tax benefits, excluding
related interest and penalties, were $506 million, $264 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 $55 million, $4 million, and $17 million during the years ended
May 31, 2014, 2013, and 2012, respectively. As of May 31, 2014 and 2013,
accrued interest and penalties related to uncertain tax positions were $167
million and $112 million, respectively (excluding federal benefit).
The Company is subject to taxation primarily in the United States, China, the
Netherlands, and Brazil, as well as various state and other foreign
jurisdictions. The Company has concluded substantially all U.S. federal
income tax matters through fiscal 2010. The Company is currently under audit
by the Internal Revenue Service for the 2011 through 2014 tax years, and
many issues are at an advanced stage in the examination process. In
addition, the Company is in appeals regarding the validation of foreign tax
credits taken. The Company’s major foreign jurisdictions, China, the
Netherlands and Brazil, have concluded substantially all income tax matters
through calendar 2005, fiscal 2008 and calendar 2008, respectively. Although
the timing of resolution of audits is not certain, the Company evaluates all
domestic and foreign audit issues in the aggregate, along with the expiration
of applicable statutes of limitations, and estimates that it is reasonably
possible the total gross unrecognized tax benefits could decrease by up to
$70 million within the next 12 months.
The Company provides for U.S. income taxes on the undistributed earnings
of foreign subsidiaries unless they are considered indefinitely reinvested
outside the United States. At May 31, 2014, the indefinitely reinvested
earnings in foreign subsidiaries upon which United States income taxes have
not been provided was approximately $6.6 billion, which includes a reduction
of permanently reinvested earnings for the year ended May 31, 2014. If these
undistributed earnings were repatriated to the United States, or if the shares of
the relevant foreign subsidiaries were sold or otherwise transferred, they
would generate foreign tax credits that would reduce the federal tax liability
associated with the foreign dividend or the otherwise taxable transaction.
Assuming a full utilization of the foreign tax credits, the potential net deferred
tax liability associated with these temporary differences of undistributed
earnings would be approximately $2.1 billion at May 31, 2014.
A portion of the Company’s foreign operations are benefiting from a tax
holiday, which is set to expire in 2021. This tax holiday may be extended when
certain conditions are met or may be terminated early if certain conditions are
not met. The impact of this tax holiday decreased foreign taxes by $138
million, $108 million, and $117 million for the fiscal years ended May 31, 2014,
2013, and 2012, respectively. The benefit of the tax holiday on Diluted
earnings per common share was $0.15, $0.12, and $0.12 for the fiscal years
ended May 31, 2014, 2013, and 2012, respectively.
Deferred tax assets at May 31, 2014 and 2013 were reduced by a valuation
allowance relating to tax benefits of certain subsidiaries with operating losses.
The net change in the valuation allowance was an increase of $4 million, a
decrease of $22 million, and an increase of $23 million for the years ended
May 31, 2014, 2013, and 2012, respectively.
The Company has available domestic and foreign loss carry-forwards of $55 million at May 31, 2014. Such losses will expire as follows:
Year Ending May 31,
(In millions) 2015 2016 2017 2018 2019-2034 Indefinite Total
Net operating losses $ — $ — $ — $ 6 $ 37 $ 12 $ 55
During the years ended May 31, 2014, 2013, and 2012, income tax benefits attributable to employee stock-based compensation transactions of $135 million,
$76 million, and $120 million, respectively, were allocated to Total shareholders’ equity.
NOTE 10 — Redeemable Preferred Stock
Sojitz America is the sole owner of the Company’s authorized Redeemable
preferred stock, $1 par value, which is redeemable at the option of Sojitz
America or the Company at par value aggregating $0.3 million. A cumulative
dividend of $0.10 per share is payable annually on May 31 and no dividends
may be declared or paid on the common stock of the Company unless
dividends on the Redeemable preferred stock have been declared and paid in
full. There have been no changes in the Redeemable preferred stock in the
three years ended May 31, 2014, 2013, and 2012. As the holder of the
Redeemable preferred stock, Sojitz America does not have general voting
rights but does have the right to vote as a separate class on the sale of all or
substantially all of the assets of the Company and its subsidiaries, on merger,
consolidation, liquidation or dissolution of the Company or on the sale or
assignment of the NIKE trademark for athletic footwear sold in the United
States. The Redeemable preferred stock has been fully issued to Sojitz
America and is not blank check preferred stock. The Company’s articles of
incorporation do not permit the issuance of additional preferred stock.
NIKE, INC. 2014 Annual Report and Notice of Annual Meeting 105
FORM 10-K