eBay 2006 Annual Report Download - page 64

Download and view the complete annual report

Please find page 64 of the 2006 eBay annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation
allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in
our tax provision in our consolidated statement of income.
Our U.S. businesses generate sufficient cash flow to fully fund their operating requirements, and we expect that
profits earned outside the U.S. will be fully utilized to fund our continued international expansion. Accordingly, we
have not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed
earnings as of December 31, 2006, because such earnings are intended to be reinvested indefinitely. In the event that
our future international expansion plans change and such amounts are not reinvested indefinitely, we would be
subject to U.S. income taxes partially offset by foreign tax credits.
The following table illustrates the effective tax rates for 2004, 2005, and 2006 (in thousands, except
percentages):
2004 2005 2006
Year Ended December 31,
Provision for income taxes ............................ $343,885 $467,285 $421,418
As a % of income before income taxes ................... 30% 30% 27%
Historically, these provisions have adequately provided for our actual income tax liabilities. Our future
effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the
valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws, regulations or
accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the
Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income taxes.
Based on our results for the year ended December 31, 2006, a one-percentage point change in our provision for
income taxes as a percentage of income before taxes would have resulted in an increase or decrease in the provision
of approximately $15.5 million. The following analysis demonstrates, for illustrative purposes only, the potential
effect such a one-percentage point deviation change would have upon our consolidated financial statements and is
not intended to provide a range of exposure or expected deviation (in thousands, except per share data):
⫺100 Basis
Points 2006
+100 Basis
Points
Provision for income taxes ........................ $ 405,947 $ 421,418 $ 436,889
Income from operations .......................... 1,438,427 1,422,956 1,407,485
Net income ................................... 1,141,110 1,125,639 1,110,168
Diluted earnings per share ........................ $ 0.80 $ 0.79 $ 0.78
Advertising and Other Revenues
A portion of our net revenues result from fees associated with advertising and other services. Net revenues
from advertising are derived principally from the sale of online advertisements for cash and through barter
arrangements. Other net revenues are derived principally from contractual arrangements with third parties that
provide transaction services to eBay and PayPal users and interest earned from banks on certain PayPal customer
account balances. Advertising and other net revenues, including barter transactions, totaled 3% of our consolidated
net revenues for each of the years ended December 31, 2004, 2005 and 2006, and were primarily generated by our
Marketplaces segment. Revenue from barter arrangements totaled $1.4 million in 2006, $6.7 million in 2005 and
$13.3 million in 2004. Certain judgments are involved in the determination of the appropriate revenue recognition,
including, but not limited to, the assessment and allocation of fair values in multiple element arrangements, the
appropriateness of gross or net revenue recognition and, for barter transactions, the existence of comparable cash
transactions to establish fair values. Our advertising and other net revenues may be affected by the financial
condition of the parties with whom we have these relationships and by the success of online services and promotions
in general. Unlike our transaction revenues, advertising and other net revenues are derived from a relatively
concentrated customer base.
60