Chapter 19- Income Tax Disclosures
SOUTHWEST AIRLINES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities at December31, 2004 and 2003, are as follows:
(In millions) / 2004 / 2003DEFERRED TAX LIABILITIES:
Accelerated depreciation / $ / 2,027 / $ / 1,640
Scheduled airframe maintenance / 83 / 77
Fuel hedges / 264 / 79
Other / 11 / 19
Total deferred tax liabilities / 2,385 / 1,815
DEFERRED TAX ASSETS:
Deferred gains from sale and leaseback of aircraft / 83 / 89
Capital and operating leases / 73 / 73
Accrued employee benefits / 110 / 108
State taxes / 52 / 47
Net operating loss carry forward / 186 / —
Other / 53 / 40
Total deferred tax assets / 557 / 357
Net deferred tax liability / $ / 1,828 / $ / 1,458
The provision for income taxes is composed of the following:
(In millions) / 2004 / 2003 / 2002CURRENT:
Federal / $ / (8) / $ / 73 / $ / (19)
State / — / 10 / 1
Total current / (8) / 83 / (18)
DEFERRED:
Federal / 178 / 170 / 157
State / 6 / 13 / 13
Total deferred / 184 / 183 / 170
$ / 176 / $ / 266 / $ / 152
For the year 2004, Southwest Airlines Co. had a tax net operating loss of $612million for federal income tax purposes. The Company estimates that a federal tax refund will be realized as a result of utilizing a portion of this net operating loss as a carryback to prior taxable years. This refund, estimated at $35million at December31, 2004, is included in “Accounts and other receivables” in the Consolidated Balance Sheet. The remainder of the tax benefit related to the year 2004 federal net operating loss is carried forward to future years, and expires in 2024.
The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the following reasons:
(In millions) / 2004 / 2003 / 2002Tax at statutory U.S. tax rates / $ / 171 / $ / 247 / $ / 138
Nondeductible items / 7 / 7 / 6
State income taxes, net of federal benefit / 4 / 15 / 9
Other, net / (6) / (3) / (1)
Total income
tax provision / $ / 176 / $ / 266 / $ / 152
The Internal Revenue Service (IRS)regularly examines the Company’s federal income tax returns and, in the course of which, may propose adjustments to the Company’s federal income tax liability reported on such returns. It is the Company’s practice to vigorously contest those proposed adjustments that it deems lacking of merit. The Company’s management does not expect that the outcome of any proposed adjustments presented to date by the IRS, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
KELLOGG CO.
Notes to Consolidated Financial Statements
NOTE 11 INCOME TAXES
Earnings before income taxes and and the provision for U. S.
federal,state,and foreign taxes on these earnings were:
(millions) 2004 2003 2002
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EARNINGS BEFORE INCOME TAXES
United States $ 952.0 $ 799.9 $ 791.3
Foreign 413.9 369.6 353.0
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$ 1,365.9 $ 1,169.5 $ 1,144.3
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INCOME TAXES
Currently payable:
Federal $ 249.8 $ 141.9 $ 157.1
State 30.0 40.5 46.2
Foreign 137.8 125.2 108.9
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417.6 307.6 312.2
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DEFERRED:
Federal 51.5 91.7 82.8
State 5.3 (8.6) 8.4
Foreign .9 (8.3) 20.0
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57.7 74.8 111.2
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Total income taxes $ 475.3 $ 382.4 $ 423.4
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The difference between the U.S. federal statutory tax rate and the Company's effective income tax rate was:
2004 2003 2002
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U. S. statutory tax rate 35.0% 35.0% 35.0%
Foreign rates varying from 35% -.5 -.9 -.8
State income taxes, net of
federal benefit 1.7 1.8 3.1
Foreign earnings repatriation 2.1 -- 2.8
Donation of appreciated assets -- -- -1.5
Net change in valuation
allowances -1.5 -.1 -.2
Statutory rate changes, deferred
tax impact .1 -.1 --
Other -2.1 -3.0 -1.4
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Effective income tax rate 34.8% 32.7% 37.0%
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The Company's consolidated effective income tax rate has benefited from tax planning initiatives over the past several years, declining from 37% in 2002 to slightly less than 35% in 2004. The 2003 rate was even lower at less than 33%, as it included over 200 basis points of discrete benefits, such as favorable audit closures and revaluation of deferred state tax liabilities.
On October 22, 2004, the American Jobs Creation Act ("AJCA") became law. The AJCA creates a temporary incentive for U.S. multinationals to repatriate foreign earnings by providing an 85 percent dividend received deduction for qualified dividends. The Company may elect to claim this deduction for qualified dividends received in either its fiscal 2004 or 2005 years, and management currently plans to elect this deduction for 2005. Management cannot fully evaluate the effects of this repatriation provision until the Treasury Department issues clarifying regulations. Furthermore, pending technical corrections legislation is needed to clarify that the dividend received deduction applies to both the cash and "section 78 gross-up" portions of qualifying dividend repatriations. While management believes that technical corrections legislation will pass in 2005, the Company has currently developed its repatriation plan based on the less favorable AJCA provisions in force as of year-end 2004. Under these assumptions, management currently intends to repatriate during 2005 approximately $70 million of foreign earnings under the AJCA and an additional $550 million of foreign earnings under regular rules. Prior to 2004, it was management's intention to indefinitely reinvest substantially all of the Company's undistributed foreign earnings. Accordingly, no deferred tax liability had been recorded in connection with the future repatriation of these earnings. Now that repatriation is foreseeable for up to $620 million of these earnings, the Company provided in 2004 a deferred tax liability of approximately $41 million. Within the preceding table, this amount is shown net of related foreign tax credits of approximately $12 million, for a net rate increase due to repatriation of 2.1 percent.
Should the technical corrections legislation pass during 2005, management currently believes that the Company would most likely repatriate a higher amount of foreign subsidiary earnings up to $1.1 billion under AJCA for a similar amount of tax cost. However, under the law as enacted at January 1, 2005, management has determined that reinvestment of these earnings in the local businesses should provide a superior rate of return to the Company, as compared to repatriation. Accordingly, U.S. income taxes have not yet been provided on approximately $730 million of foreign subsidiary earnings.
Generally, the changes in valuation allowances on deferred tax assets and corresponding impacts on the effective income tax rate result from management's assessment of the Company's ability to utilize certain operating loss and tax credit carryforwards. For 2004, the 1.5 percent rate reduction presented in the preceding table primarily reflects reversal of a valuation allowance against U.S. foreign tax credits, which management currently believes will be utilized in conjunction with the aforementioned 2005 foreign earnings repatriation. Total tax benefits of carryforwards at year-end 2004 and 2003 were approximately $48 million and $40 million, respectively. Of the total carryforwards at year-end 2004, approximately $3 million expire in 2005 and another $4 million will expire within five years. Based on management's assessment of the Company's ability to utilize these benefits prior to expiration, the carrying value of deferred tax assets associated with carryforwards was reduced by valuation allowances to approximately $37 million at January 1, 2005.
The deferred tax assets and liabilities included in the balance sheet at year-end were:
Deferred tax assets Deferred tax liabilities
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(millions) 2004 2003 2004 2003
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CURRENT:
Promotion and advertising $ 17.0 $ 19.0 $ 8.9 $ 8.0
Wages and payroll taxes 29.5 39.9 -- --
Inventory valuation 20.2 18.0 13.4 16.0
Health and postretirement
benefits 34.7 41.2 .1 --
State taxes 6.8 12.4 -- --
Operating loss and credit
carryforwards 31.8 1.0 -- --
Unrealized hedging losses, net 26.5 31.2 -- .1
Foreign earnings repatriation -- -- 40.5 --
Other 27.8 34.5 20.6 11.0
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194.3 197.2 83.5 35.1 Less valuation allowance (3.9) (3.2) -- --
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190.4 194.0 83.5 35.1
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NONCURRENT:
Depreciation and asset
disposals 8.0 10.2 376.9 365.4
Health and postretirement
benefits 134.8 238.9 229.8 223.1
Capitalized interest -- -- 9.7 12.6 State taxes -- -- 74.5 74.8
Operating loss and credit
carryforwards 16.3 39.1 -- --
Trademarks and other
intangibles -- -- 664.2 665.7
Deferred compensation 37.6 39.8 -- -- Other 12.6 11.3 7.3 6.5
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209.3 339.3 1,362.4 1,348.1 Less valuation allowance (12.9) (33.6) -- --
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196.4 305.7 1,362.4 1,348.1
------Total deferred taxes $ 386.8 $ 499.7 $1,445.9 $1,383.2
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Cash paid for income taxes was (in millions): 2004-$421; 2003-$289; 2002-$250.
WAL MART STORES INC.
Notes to Consolidated Financial Statements
5 Income Taxes
The income tax provision consists of the following (in millions):
Fiscal years ended January 31, / 2005 / 2004 / 2003Current:
Federal / $ / 4,116 / $ / 4,039 / $ / 3,299
State and local / 640 / 333 / 229
International / 570 / 569 / 355
Total current tax provision / 5,326 / 4,941 / 3,883
Deferred:
Federal / 311 / 31 / 305
State and local / (71) / 2 / 26
International / 23 / 144 / 143
Total deferred tax provision / 263 / 177 / 474
Total provision for income taxes / $ / 5,589 / $ / 5,118 / $ / 4,357
Income from continuing operations before income taxes and minority interest is as follows (in millions):
Fiscal years ended January 31, / 2005 / 2004 / 2003United States / $ / 13,599 / $ / 12,075 / $ / 10,490
Outside the United States / 2,506 / 2,118 / 1,878
Total income from continuing operations before income taxes and minority interest / $ / 16,105 / $ / 14,193 / $ / 12,368
42 WAL-MART 2005 ANNUAL REPORT
Items that give rise to significant portions of the deferred tax accounts are as follows (in millions):
January 31, / 2005 / 2004Deferred tax liabilities
Property and equipment / $ / 2,045 / $ / 1,581
International, principally asset basis difference / 1,054 / 1,087
Inventory / 187 / 419
Capital leases / 165 / 92
Other / 230 / 146
Total deferred tax liabilities / $ / 3,681 / $ / 3,325
Deferred tax assets
Amounts accrued for financial reporting purposes not yet deductible for tax purposes / $ / 1,361 / $ / 1,280
International loss carryforwards / 1,460 / 1,186
Deferred revenue / 15 / 140
Other / 506 / 298
Total deferred tax assets / 3,342 / 2,904
Valuation allowance / (526) / (344)
Total deferred tax assets, net of valuation allowance / $ / 2,816 / $ / 2,560
Net deferred tax liabilities / $ / 865 / $ / 765
A reconciliation of the significant differences between the effective income tax rate and the federal statutory rate on pretax income is as follows:
Fiscal years ended January 31, / 2005 / 2004 / 2003Statutory tax rate / 35.00% / 35.00% / 35.00%
State income taxes, net of federal income tax benefit / 2.30% / 1.53% / 1.36%
Income taxes outside the United States / (1.81%) / (0.20%) / (1.29%)
Other / (0.79%) / (0.27%) / 0.16%
Effective income tax rate / 34.70% / 36.06% / 35.23%
Federal and state income taxes have not been provided on accumulated but undistributed earnings of foreign subsidiaries aggregating approximately $5.3 billion at January 31, 2005 and $4.0 billion at January 31, 2004, as such earnings have been permanently reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable. The American Jobs Creation Act, which was signed into law on October 22, 2004, created a special one-time tax deduction relating to the repatriation of certain foreign earnings. The Company has not completed its evaluation of the likelihood of repatriation of our foreign earnings and the resulting effect of the one-time tax deduction.
A valuation allowance has been established to reduce certain foreign subsidiaries’ deferred tax assets relating primarily to net operating loss carryforwards. During the fourth quarter of fiscal 2004, as the result of new tax legislation in Germany, we re-evaluated the recoverability of the deferred tax asset related to our German operations. Based on the results of our review, we recorded a valuation allowance resulting in a charge of $150 million.