Annual Report 2010

Adecco Group –
Notes to consolidated financial statements
in millions, except share and per share information

Note 14 • Income taxes

Adecco S.A. is incorporated in Switzerland and the Company operates in various countries with differing tax laws and rates. A substantial portion of the Company’s operations are outside of Switzerland. Since the Company operates worldwide, the weighted-average effective tax rate will vary from year to year depending on the earnings mix by country. The weighted-average tax rate is calculated by aggregating pre-tax operating income or loss in each country in which the Company operates multiplied by the country’s statutory income tax rate. Income before income taxes in Switzerland totalled EUR 114, EUR 162, and EUR 236 in 2010, 2009, and 2008, respectively. Foreign source income/loss before income taxes amounted to income of EUR 489 in 2010, a loss of EUR 153 in 2009, and income of EUR 473 in 2008. The provision for income taxes consists of the following for the fiscal years:

in EUR

2010

2009

2008

 

 

 

 

Provision for income taxes

 

 

 

Current tax provision:

 

 

 

• Domestic

26

16

44

• Foreign

148

61

133

Total current tax provision

174

77

177

 

 

 

 

Deferred tax provision/(benefit):

 

 

 

• Domestic

(2)

21

13

• Foreign

7

(97)

20

Total deferred tax provision/(benefit)

5

(76)

33

 

 

 

 

Total provision for income taxes

179

1

210

The difference between the provision for income taxes and the weighted-average tax rate is reconciled as follows:

in EUR

2010

2009

2008

 

 

 

 

Tax rate reconciliation

 

 

 

Income taxed at weighted-average tax rate

138

(23)

180

Items taxed at other than weighted-average tax rate

22

(29)

(23)

Non-deductible expenses

16

11

11

Net change in valuation allowance

3

11

9

Non-deductible impairment of goodwill

 

38

17

Adjustments to deferred tax assets due to rate changes

 

3

(1)

Tax on undistributed earnings

1

 

10

Other, net

(1)

(10)

7

Total provision for income taxes

179

1

210

In 2010, the reconciling item “items taxed at other than weighted-average tax rate” includes the impact from the change in the French business tax law. Effective as of January 1, 2010, the French government introduced a new business tax law, which requires a portion of the business tax to be computed based on added value and consequently, under U.S. GAAP, this component previously reported as costs of services and SG&A is classified as income tax in 2010.

As of December 31, 2010 and December 31, 2009, a deferred tax liability of EUR 45 and EUR 37 has been provided for non-Swiss withholding taxes and additional Swiss taxes due upon the future dividend payment of cumulative undistributed earnings. In 2010 and 2009, the Company has not provided for Swiss income taxes on one of its Swiss subsidiaries’ undistributed earnings as such amounts are permanently reinvested. As of December 31, 2010 and December 31, 2009, such earnings amounted to approximately EUR 2,695 and EUR 2,234, respectively. It is not practicable to estimate the amount of taxes that would be payable upon remittance of these earnings.

Temporary differences that give rise to deferred income tax assets and liabilities are as follows:

in EUR

31.12.2010

31.12.2009

 

 

 

Temporary differences

 

 

Net operating loss carryforwards

225

220

Tax credits

20

20

Depreciation

14

8

Deferred compensation and accrued employee benefits

86

72

Allowance for doubtful accounts

16

12

Accrued expenses

55

42

Intercompany transactions

25

59

Other

20

20

Gross deferred tax assets

461

453

 

 

 

Unrecognised tax benefits provision, net

(45)

(55)

Valuation allowance

(108)

(101)

Deferred tax assets, net

308

297

 

 

 

Intangible assets basis in excess of tax basis

(151)

(95)

Tax amortisation in excess of financial amortisation

(66)

(18)

Undistributed earnings of subsidiaries

(45)

(37)

Other

(12)

(16)

Deferred tax liabilities

(274)

(166)

 

 

 

Deferred tax assets, net of deferred tax liabilities

34

131

Management’s assessment of the realisation of deferred tax assets is made on a country-by-country basis. The assessment is based upon the weight of all available evidence, including factors such as the recent earnings history and expected future taxable income. A valuation allowance is recorded to reduce deferred tax assets to a level which, more likely than not, will be realised.

Valuation allowances on deferred tax assets of foreign and domestic operations increased by EUR 7 to EUR 108. Included in the change of the valuation allowance is an increase of EUR 3 for losses originated in 2010 and prior years and an increase of EUR 7 for fluctuations in foreign exchange rates. This was partly offset by a decrease of EUR 3 for unrecognised tax benefits.

Other current assets include current net deferred tax assets of EUR 152 and EUR 125 as of December 31, 2010 and December 31, 2009, respectively. Other long-term assets include EUR 110 and EUR 151 of net deferred tax assets as of December 31, 2010 and December 31, 2009, respectively. Other accrued expenses include current deferred tax liabilities of EUR 6 and EUR 7 as of December 31, 2010 and December 31, 2009, respectively. Other liabilities include EUR 222 and EUR 138 of non-current deferred tax liabilities as of December 31, 2010 and December 31, 2009, respectively.

As of December 31, 2010, the Company had approximately EUR 725 of net operating loss carryforwards. These losses will expire as follows:

in EUR

2011

2012

2013

2014

2015

Thereafter

No expiry

Total

 

 

 

 

 

 

 

 

 

Expiration of losses by period

6

3

8

3

13

166

526

725

The largest net operating loss carryforwards are in the USA, France, Germany, the UK, Brazil, and the Netherlands and total EUR 575 as of December 31, 2010. The losses in the USA and the Netherlands begin to expire in 2023 and 2018, respectively. The losses in France, Germany, the UK, and Brazil do not expire. In addition, tax credits of EUR 20 are predominantly related to the US operations and begin to expire in 2018.

As of December 31, 2010, the amount of unrecognised tax benefits including interest and penalties is EUR 291 of which EUR 244 would, if recognised, decrease the Company’s effective tax rate. As of December 31, 2009, the amount of unrecognised tax benefits including interest and penalties was EUR 266 of which EUR 228 would have, if recognised, decreased the Company’s effective tax rate.

The following table summarises the activity related to the Company’s unrecognised tax benefits:

in EUR

Unrecognised tax benefits

 

 

Balance as of January 1, 2008

325

Increases related to current year tax positions

39

Expiration of the statutes of limitation for the assessment of taxes

(6)

Settlements with tax authorities

(13)

Additions to prior years

13

Decreases to prior years

(78)

Foreign exchange currency movement

9

Balance as of December 31, 2008

289

 

 

Increases related to current year tax positions

25

Expiration of the statutes of limitation for the assessment of taxes

(5)

Settlements with tax authorities

(8)

Additions to prior years

2

Decreases to prior years

(59)

Foreign exchange currency movement

(1)

Balance as of December 31, 2009

243

 

 

Increases related to current year tax positions

35

Expiration of the statutes of limitation for the assessment of taxes

(16)

Settlements with tax authorities

(6)

Additions to prior years including acquisitions

27

Decreases to prior years

(56)

Foreign exchange currency movement

16

Balance as of December 31, 2010

243

In 2010, the item “decreases to prior years” includes EUR 51 related to a settlement of contingencies with a corresponding offset to net operating losses carryforwards and a favourable impact of EUR 27 to the income tax expense. Furthermore, in 2010 the item “additions to prior years including acquisitions” mainly relates to changes in estimates due to current year audit activity and pre-acquisition contingencies. In 2009, the item “decreases to prior years” includes EUR 53 related to a settlement of contingencies with a corresponding offset to net operating losses carryforwards and a favourable impact of EUR 13 to the income tax expense. In 2008, the item “decreases to prior years” includes EUR 50 related to a settlement of pre-acquisition contingencies with limited impact to the income tax expense.

The Company recognises interest and penalties related to unrecognised tax benefits as a component of the provision for income taxes. As of December 31, 2010 and December 31, 2009, the amount of interest and penalties recognised in the balance sheet amounted to EUR 48 and EUR 23, respectively. The total amount of interest and penalties recognised in the statement of operations was a net expense of EUR 22 and EUR 2 in 2010 and 2009, respectively, and a net benefit of EUR 10 in 2008.

The Company and its subsidiaries file income tax returns in multiple jurisdictions with varying statutes of limitation. The open tax years by major jurisdiction are the following:

 

Open tax years

 

 

Country

 

Australia

2001 onwards

Canada

1999 onwards

France

2006 onwards

Germany

2002 onwards

Italy

2003 onwards

Japan

2004 onwards

Netherlands

2004 onwards

Spain

2006 onwards

UK

2006 onwards

USA

2006 onwards

In certain jurisdictions, the Company may have more than one tax payer. The table above reflects the statutes of years open to examination for the major tax payers in each major tax jurisdiction.

Based on the outcome of examinations, or as a result of the expiration of statutes of limitation for specific jurisdictions, it is reasonably possible that the related unrecognised tax benefits for tax positions taken regarding previously filed tax returns could materially change in the next 12 months from those recorded as liabilities for uncertain tax positions in the financial statements. An estimate of the range of the possible changes cannot be made until issues are further developed or examinations close.

Significant estimates are required in determining income tax expense and benefits. Various internal and external factors may have favourable or unfavourable effects on the future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, results of tax audits, and changes in the overall level of pre-tax earnings.