Annual Report 2011

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 215, EUR 114, and EUR 162 in 2011, 2010, and 2009, respectively. Foreign source income/(loss) before income taxes amounted to income of EUR 471 and EUR 489 in 2011 and 2010, respectively, and a loss of EUR 153 in 2009. The provision for income taxes consists of the following:

in EUR

2011

2010

2009

 

 

 

 

Provision for income taxes

 

 

 

Current tax provision:

 

 

 

• Domestic

26

26

16

• Foreign

192

148

61

Total current tax provision

218

174

77

 

 

 

 

Deferred tax provision/(benefit):

 

 

 

• Domestic

5

(2)

21

• Foreign

(57)

7

(97)

Total deferred tax provision/(benefit)

(52)

5

(76)

 

 

 

 

Total provision for income taxes

166

179

1

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

in EUR

2011

2010

2009

 

 

 

 

Tax rate reconciliation

 

 

 

Income taxed at weighted-average tax rate

128

138

(23)

Items taxed at other than weighted-average tax rate

58

22

(29)

Non-deductible expenses

11

16

11

Net change in valuation allowance

4

3

11

Non-deductible impairment of goodwill

 

 

38

Adjustments to deferred tax assets due to rate changes

(2)

 

3

Tax on undistributed earnings

(31)

1

 

Other, net

(2)

(1)

(10)

Total provision for income taxes

166

179

1

In 2011 and 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 2011 and 2010. Furthermore, in 2011, 2010, and 2009, the reconciling item “items taxed at other than weighted-average tax rate” includes EUR 31, EUR 27, and EUR 13 positive impact related to the settlement of tax contingencies.

In 2011, the reconciling item “tax on undistributed earnings” includes a benefit of EUR 31 in connection with the reversal of a deferred tax liability related to distributable earnings of the Company’s Japanese subsidiary following the ratification of the Swiss-Japanese Tax Treaty, which resulted in a reduction of withholding taxes payable upon distribution of dividends to Switzerland. As of December 31, 2011 and December 31, 2010, a deferred tax liability of EUR 16 and EUR 45 has been provided for non-Swiss withholding taxes and additional Swiss taxes due upon the future dividend payment of cumulative undistributed earnings. In 2011 and 2010, 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, 2011 and December 31, 2010, such earnings amounted to approximately EUR 2,773 and EUR 2,695, 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

31.12.2011

31.12.2010

 

 

 

Temporary differences

 

 

Net operating loss carryforwards and capital losses

218

237

Tax credits

27

20

Depreciation

9

14

Deferred compensation and accrued employee benefits

101

86

Allowance for doubtful accounts

14

16

Accrued expenses

66

55

Intercompany transactions

26

25

Other

30

20

Gross deferred tax assets

491

473

 

 

 

Unrecognised tax benefits provision, net

(33)

(45)

Valuation allowance

(125)

(120)

Deferred tax assets, net

333

308

 

 

 

Intangible assets book basis in excess of tax basis

(147)

(151)

Tax amortisation in excess of financial amortisation

(91)

(66)

Undistributed earnings of subsidiaries

(16)

(45)

Other

(26)

(12)

Deferred tax liabilities

(280)

(274)

 

 

 

Deferred tax assets, net of deferred tax liabilities

53

34

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 5 to EUR 125. Included in the change of the valuation allowance is an increase of EUR 4 for 2011 and prior years’ losses and EUR 3 for losses generated by acquired companies prior to acquisition. This was partly offset by a decrease of EUR 2 related to unrecognised tax benefits and reversal of prior years‘ losses and related valuation allowance.

The following table summarises the deferred tax assets and deferred tax liabilities reported by the Company as of December 31, 2011 and December 31, 2010:

in EUR

Balance sheet location

31.12.2011

31.12.2010

 

 

 

 

Deferred tax assets – current

Other current assets

161

152

Deferred tax assets – non-current

Other assets

106

110

Deferred tax liabilities – current

Other accrued expenses

(20)

(6)

Deferred tax liabilities – non-current

Other liabilities

(194)

(222)

Deferred tax assets, net of deferred tax liabilities

 

53

34

As of December 31, 2011, the Company had approximately EUR 732 of net operating loss carryforwards and capital losses. These losses will expire as follows:

in EUR

2012

2013

2014

2015

2016

Thereafter

No expiry

Total

 

 

 

 

 

 

 

 

 

Expiration of losses by year

2

9

3

13

11

120

574

732

The largest net operating loss carryforwards are in the UK, Germany, Netherlands, France, and Brazil and total EUR 529 as of December 31, 2011. The losses in the Netherlands begin to expire in 2018. The losses in the UK, Germany, France, and Brazil do not expire. In addition, tax credits of EUR 27 are predominantly related to the US operations and begin to expire in 2018.

As of December 31, 2011, the amount of unrecognised tax benefits including interest and penalties is EUR 287 of which EUR 197 would, if recognised, decrease the Company’s effective tax rate. As of December 31, 2010, the amount of unrecognised tax benefits including interest and penalties was EUR 291 of which EUR 244 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, 2009

289

 

 

Increases related to current year tax positions

25

Expiration of the statute of limitations 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 statute of limitations 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

 

 

Increases related to current year tax positions

26

Expiration of the statute of limitations for the assessment of taxes

(14)

Settlements with tax authorities

(3)

Additions to prior years including acquisitions

33

Decreases to prior years

(60)

Foreign exchange currency movement

5

Balance as of December 31, 2011

230

In 2011, the item “decreases to prior years” includes EUR 57 related to a settlement of contingencies with a corresponding offset to net operating losses carryforwards and a favourable impact of EUR 31 to the income tax expense. Furthermore, in 2011 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 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.

The Company recognises interest and penalties related to unrecognised tax benefits as a component of the provision for income taxes. As of December 31, 2011 and December 31, 2010, the amount of interest and penalties recognised in the balance sheet amounted to EUR 57 and EUR 48, respectively. The total amount of interest and penalties recognised in the statement of operations was a net expense of EUR 9, EUR 22, and EUR 2 in 2011, 2010, and 2009, respectively.

The Company and its subsidiaries file income tax returns in multiple jurisdictions with varying statute of limitations. The open tax years by major jurisdiction are as follows:

 

Open tax years

Country

 

Australia

2001 onwards

Canada

1999 onwards

France

2006 onwards

Germany

2002 onwards

Italy

2003 onwards

Japan

2005 onwards

Netherlands

2005 onwards

Spain

2007 onwards

UK

2008 onwards

USA

2010 onwards

In certain jurisdictions, the Company may have more than one tax payer. The table above reflects the statute of limitations 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 the statute of limitations 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.