Yahoo 2012 Annual Report Download - page 65

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During the fourth quarter of 2011, we commenced discussions with the IRS Appeals Division to settle the
contested adjustments for certain intercompany transfer-pricing matters from the 2005 and 2006 income tax
examination. A tentative agreement has been reached and if the matter is resolved on the basis that is currently
being discussed with the IRS, then the settlement will not cause us to have tax exposure beyond what has already
been provided. We have protested similar transfer-pricing adjustments to our 2007 and 2008 income tax returns.
No hearings with the IRS Appeals Division have been held. Our 2009 and 2010 U.S. income tax returns are
currently under IRS examination.
As of December 31, 2012, our 2005 through 2008 tax returns are also under various stages of audit by the
California Franchise Tax Board. While the Franchise Tax Board has not reached any conclusions on the 2007
and 2008 returns, we have protested the proposed adjustments to the 2005 and 2006 returns. We are also in
various stages of examination and appeal in connection with our taxes in foreign jurisdictions, which generally
span tax years 2005 through 2010.
While it is difficult to determine when these examinations will be settled or what their final outcomes will be,
certain audits in various jurisdictions related to multinational income tax issues are expected to be resolved in the
foreseeable future. As a result, it is reasonably possible that the unrecognized tax benefits could be reduced by up
to approximately $90 million in the next twelve months. We believe that we have adequately provided for any
reasonably foreseeable adjustment and that any settlement will not have a material adverse effect on our
consolidated financial position, results of operations, or cash flows. Our gross amount of unrecognized tax
benefits as of December 31, 2012 is $727 million, of which $644 million is recorded on the consolidated balance
sheets.
The federal research and development credit expired on December 31, 2011. On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit
was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014.
The effects of these changes in the tax law will result in a tax benefit which will be recognized in the first quarter
of 2013, which is the quarter in which the law was enacted.
We may have additional tax liabilities in China related to the sale to Alibaba Group of 523 million ordinary
shares of Alibaba Group that took place during the year ended December 31, 2012. Any taxes assessed and paid
in China are expected to be ultimately offset and recovered in the U.S.
During the year ended December 31, 2012, tax authorities from the Brazilian State of Sao Paulo assessed certain
indirect taxes against our Brazilian subsidiary, Yahoo! do Brasil Internet Ltda., related to online advertising
services. The assessment totaling approximately $85 million is for calendar years 2008 and 2009. We currently
believe the assessment is without merit. We do not believe that it is probable the assessment will be sustained
upon appeal and, accordingly, have not recorded an accrual for the assessment.
Earnings in Equity Interests. Earnings in equity interests for the year ended December 31, 2012 were
approximately $676 million, compared to $477 million and $396 million for 2011 and 2010, respectively.
Earnings in equity interests increased during the year ended December 31, 2012 compared to 2011 due to Yahoo
Japan and Alibaba Group’s continued improved financial performance in the year ended December 31, 2012
despite our reduced ownership interest (24 percent) in the fourth quarter of 2012 for Alibaba Group. Going
forward we will record our share of the results of Alibaba Group in the consolidated statements of income based
on a reduced percentage of ownership of 24 percent.
Earnings in equity interests increased during the year ended December 31, 2011 compared to 2010 due primarily
to Yahoo Japan and Alibaba Group’s continued improved financial performance and the recognition of a dilution
gain of $25 million, net of tax in the third quarter of 2011, related to our ownership interest in Alibaba Group
offset by $33 million in non-cash losses related to the impairment of assets held by Yahoo Japan.
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