Note 9—Income Taxes
Income before income taxes is comprised of the following:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Domestic (including Puerto Rico) | $ | 2,070 |
| | $ | 1,809 |
| | $ | 1,526 |
|
Foreign | 981 |
| | 958 |
| | 857 |
|
Total | $ | 3,051 |
| | $ | 2,767 |
| | $ | 2,383 |
|
The provisions for income taxes for 2013, 2012, and 2011 are as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Federal: | | | | | |
Current | $ | 572 |
| | $ | 591 |
| | $ | 409 |
|
Deferred | 16 |
| | 12 |
| | 74 |
|
Total federal | 588 |
| | 603 |
| | 483 |
|
State: | | | | | |
Current | 109 |
| | 100 |
| | 78 |
|
Deferred | 4 |
| | 2 |
| | 14 |
|
Total state | 113 |
| | 102 |
| | 92 |
|
Foreign: | | | | | |
Current | 302 |
| | 312 |
| | 270 |
|
Deferred | (13 | ) | | (17 | ) | | (4 | ) |
Total foreign | 289 |
| | 295 |
| | 266 |
|
Total provision for income taxes | $ | 990 |
| | $ | 1,000 |
| | $ | 841 |
|
Tax benefits associated with the exercise of employee stock options and other employee stock programs were allocated to equity attributable to Costco in the amount of $59, $65, and $59, in 2013, 2012, and 2011, respectively.
The reconciliation between the statutory tax rate and the effective rate for 2013, 2012, and 2011 is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Federal taxes at statutory rate | $ | 1,068 |
| | 35.0 | % | | $ | 969 |
| | 35.0 | % | | $ | 834 |
| | 35.0 | % |
State taxes, net | 66 |
| | 2.1 |
| | 59 |
| | 2.1 |
| | 55 |
| | 2.4 |
|
Foreign taxes, net | (87 | ) | | (2.8 | ) | | (61 | ) | | (2.2 | ) | | (66 | ) | | (2.8 | ) |
Employee stock ownership plan (ESOP) | (65 | ) | | (2.1 | ) | | (7 | ) | | (0.3 | ) | | (6 | ) | | (0.3 | ) |
Other | 8 |
| | 0.2 |
| | 40 |
| | 1.5 |
| | 24 |
| | 1.0 |
|
Total | $ | 990 |
| | 32.4 | % | | $ | 1,000 |
| | 36.1 | % | | $ | 841 |
| | 35.3 | % |
The Company’s provision for income taxes for 2013 was favorably impacted by a $62 nonrecurring tax benefit in connection with the special cash dividend of $7.00 per share paid by the Company to employees, who through the Company's 401(k) Retirement Plan owned 22,600,000 shares of Company stock through an ESOP. Dividends paid on these shares are deductible for U.S. income tax purposes.
The Company’s provision for income taxes for 2012 was adversely impacted by nonrecurring net tax expense of $25 relating primarily to the following items: the adverse impact of an audit of Costco Mexico by the Mexican tax authority; the tax effects of the cash dividend declared by Costco Mexico (included in Other in the table above); and the tax effects of nondeductible expenses for the Company’s contribution to an initiative reforming alcohol beverage laws in Washington State.
The components of the deferred tax assets (liabilities) are as follows:
|
| | | | | | | |
| 2013 | | 2012 |
Equity compensation | $ | 80 |
| | $ | 79 |
|
Deferred income/membership fees | 130 |
| | 148 |
|
Accrued liabilities and reserves | 530 |
| | 461 |
|
Other | 42 |
| | 55 |
|
Property and equipment | (558 | ) | | (522 | ) |
Merchandise inventories | (190 | ) | | (182 | ) |
Net deferred tax assets | $ | 34 |
| | $ | 39 |
|
The deferred tax accounts at the end of 2013 and 2012 include current deferred income tax assets of $422 and $393 respectively, included in deferred income taxes and other current assets; non-current deferred income tax assets of $62 and $58, respectively, included in other assets; and non-current deferred income tax liabilities of $450 and $412, respectively, included in deferred income taxes and other liabilities.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,619 and $3,162 at the end of 2013 and 2012, respectively, of certain non-U.S. consolidated subsidiaries as such earnings are deemed by the Company to be indefinitely reinvested. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these subsidiaries.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2013 and 2012 is as follows:
|
| | | | | | | |
| 2013 | | 2012 |
Gross unrecognized tax benefit at beginning of year | $ | 116 |
| | $ | 106 |
|
Gross increases—current year tax positions | 10 |
| | 15 |
|
Gross increases—tax positions in prior years | 5 |
| | 3 |
|
Gross decreases—tax positions in prior years | (13 | ) | | (3 | ) |
Settlements | (38 | ) | | (3 | ) |
Lapse of statute of limitations | 0 |
| | (2 | ) |
Gross unrecognized tax benefit at end of year | $ | 80 |
| | $ | 116 |
|
Included in the balance at the end of 2013, are $36 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $46 and $36 at the end of 2013 and 2012, respectively.
Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2013 and 2012. Accrued interest and penalties were $11 and $16 at the end of 2013 and 2012, respectively.
The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we have recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next twelve months.
The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2007. The Company is currently subject to examination in Canada for fiscal years 2009 to present and in California for fiscal years 2004 to present. No other examinations are believed to be material.
