|12 Months Ended|
Dec. 31, 2011
|Income Taxes [Abstract]|
12. Income Taxes
The components of income before income taxes are as follows (in millions):
Income taxes are as follows (in millions):
The Company recognizes excess tax benefits associated with share-based compensation to shareholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach which was adopted in the second quarter of 2011. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company, which are also subject to applicable limitations. As of December 31, 2011 and 2010, the Company had $20.6 million and $8.7 million, respectively, of unrealized excess tax benefits. Of the $20.6 million of excess tax benefits at December 31, 2011, $11.6 million relate to foreign tax credits generated and carried forward on US federal income tax returns. If unused, tax credit carryforwards of $5.6 million will expire in 2020 and $6.0 million will expire in 2021. See Note 2, Basis of Presentation, for further discussion of the Company’s change in method of accounting from the tax-law-ordering method to the with-and-without approach.
Venezuela has experienced cumulative inflation of at least 100% during the three year period ended December 31, 2009. Therefore, as of January 1, 2010 the Bolivar is hyperinflationary for U.S. federal income tax purposes. As a result, because Herbalife Venezuela is considered a dual incorporated entity, it is now required to account for its operations using the Dollar Approximate Separate Transactions Method of accounting, or DASTM. The transitional impact of DASTM resulted in a deferred income tax benefit of approximately $14.5 million recorded during the first quarter of 2010 which is included within the Company’s consolidated statement of income for the year ended December 31, 2010. See Note 2, Basis of Presentation, for a further discussion on Herbalife Venezuela and Venezuela’s highly inflationary economy.
The significant categories of temporary differences that gave rise to deferred tax assets and liabilities are as follows (tax effected in millions):
Net operating loss carryforwards of subsidiaries for 2011 and 2010 were $2.8 million and $5.7 million, respectively. If unused, net operating losses of $0.9 million will expire between 2012 and 2020 and $1.9 million can be carried forward indefinitely. Deferred interest carryforwards of subsidiaries for 2011 and 2010 were $205.6 million and $118.4 million, respectively, and can be carried forward indefinitely.
The Company recognizes valuation allowances on deferred tax assets reported if, based on the weight of the evidence it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2011 and December 31, 2010 the Company held valuation allowances against net deferred tax assets of certain subsidiaries, primarily related to deferred interest expense carryforwards, in the amount of $208.3 million and $124.2 million, respectively. The change in the Company’s valuation allowance during 2011 of $84.1 million was related to $88.1 million of additions charged to income tax expense, reduced by $2.1 million of reductions recognized as income tax benefits and $1.9 million of currency translation adjustments recognized within other comprehensive income. The change in the Company’s valuation allowance during 2010 and 2009 of $64.6 million and $47.4 million, respectively, was primarily related to additions charged to income tax expense.
At December 31, 2011, the Company’s U.S. consolidated group had approximately $82.2 million of unremitted earnings that were permanently reinvested from substantially all of its foreign subsidiaries. In addition, at December 31, 2011, Herbalife Ltd. had approximately $1.8 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. Since these unremitted earnings have been permanently reinvested, deferred taxes were not provided on these unremitted earnings. Further, it is not practicable to determine the amount of unrecognized deferred taxes with respect to these unremitted earnings. Deferred taxes have been accrued for earnings that are not considered indefinitely reinvested. The deferred tax liability on the unremitted foreign earnings as of December 31, 2011 and 2010, was $8.7 million and $6.0 million, respectively.
The applicable statutory income tax rate in the Cayman Islands was zero for Herbalife Ltd. for the years being reported. For purposes of the reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate, a notional 35% tax rate is applied as follows (in millions):
During the years ended December 31, 2011, 2010 and 2009, the Company benefited from the terms of a tax holiday in the People’s Republic of China. The tax holiday commenced on January 1, 2008 and will conclude on December 31, 2012. Under the terms of the holiday, the Company was subject to a zero tax rate in China during 2008 and 2009, an 11% tax rate in 2010, a 12% tax rate in 2011, and will be subject to a 12.5% tax rate in 2012.
As of December 31, 2011, the total amount of unrecognized tax benefits, including related interest and penalties was $39.0 million. If the total amount of unrecognized tax benefits was recognized, $32.1 million of unrecognized tax benefits, $5.5 million of interest and $1.1 million of penalties would impact the effective tax rate. As of December 31, 2010, the total amount of unrecognized tax benefits, including related interest and penalties was $38.5 million. If the total amount of unrecognized tax benefits was recognized, $31.6 million of unrecognized tax benefits, $5.6 million of interest and $1.3 million of penalties would impact the effective tax rate.
The Company accounts for the interest and penalties generated by tax contingencies as a component of income tax expense. During the year ended December 31, 2011, the Company recorded an increase in interest expense and a reversal of penalties expense related to uncertain tax positions of $0.1 million and $0.1 million, respectively. During the years ended December 31, 2010 and December 31, 2009, the Company recorded a reversal of interest and penalties expense related to uncertain tax positions of $2.9 million and $1.9 million, respectively. As of December 31, 2011, total accrued interest and penalties were $5.5 million and $1.1 million respectively. As of December 31, 2010, total accrued interest and penalties were $5.6 million and $1.3 million respectively.
The following changes occurred in the amount of unrecognized tax benefits during the years ended December 31, 2011, 2010 and 2009 (in millions):
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate. As of December 31, 2011, the Company’s tax filings are generally subject to examination in major tax jurisdictions for years ending on or after December 31, 2007.
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $26.1 million within the next twelve months. Of this possible decrease, $22.6 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $3.5 million would be due to the expiration of statute of limitations in various jurisdictions.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef