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:

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

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:

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:

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 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:

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.