SYSCO CORP | 2013 | FY |

 

18.   INCOME TAXES

 

Income Tax Provisions

 

For financial reporting purposes, earnings before income taxes consists of the following:

 

 

 

The income tax provision for each fiscal year consists of the following:

 

 

The current and deferred components of the income tax provisions for each fiscal year are as follows:

 

 

The deferred tax provisions result from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Deferred Tax Assets and Liabilities

 

Significant components of Sysco’s deferred tax assets and liabilities are as follows:

 

 

The company had state net operating tax loss carryforwards as of June 29, 2013 and June 30, 2012.  The net operating tax loss carryforwards outstanding as of June 29, 2013 expire in fiscal years 2014 through 2033.  There were no valuation allowances recorded for the state tax loss carryforwards as of June 29, 2013 and June 30, 2012 because management believes it is more likely than not that these benefits will be realized based on utilization forecasts.    

 

Sysco’s deferred taxes were impacted by an IRS settlement related to Sysco’s affiliate, Baugh Supply Chain Cooperative, which resulted in payments of deferred taxes of $212.0 million in each of fiscal 2012, 2011, and 2010. Sysco reclassified amounts due within one year from deferred taxes to accrued income taxes at the beginning of each of fiscal 2012, 2011, and 2010. 

 

 

Effective Tax Rates

 

Reconciliations of the statutory federal income tax rate to the effective income tax rates for each fiscal year are as follows:

 

 

The effective tax rate of 35.87% for fiscal 2013 was favorably impacted primarily by two items.  First, the company recorded a tax benefit of $14.0 million related to changes in estimates for the prior year domestic tax provision.  Second, the company recorded a tax benefit of $8.8 million related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements.  The effective tax rate was negatively impacted by the recording of $5.7 million in tax and interest related to various federal, foreign and state uncertain tax positions.  Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.

 

The effective tax rate for fiscal 2012 was 37.13%.  Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had the impact of reducing the effective tax rate.

 

The effective tax rate of 36.96% for fiscal 2011 was favorably impacted primarily by two items.  First, the company recorded a tax benefit of approximately $17.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.  Second, the company adjusted the carrying values of the company’s COLI policies to their cash surrender values.  The gain of $28.2 million recorded in fiscal 2011 was primarily non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.1 million.  Partially offsetting these favorable impacts was the recording of $9.3 million in tax and interest related to various federal, foreign and state uncertain tax positions.

 

Uncertain Tax Positions

 

In the third quarter of fiscal 2013, we reclassified a receivable that would arise upon the resolution of an unrecognized tax benefit from a net position in other long-term liabilities to a gross position in other assets and other long-term liabilities on our consolidated balance sheet.  Prior year amounts within the consolidated balance sheets have been reclassified to conform to the current year presentation.  Prior year amounts in schedule below have also been adjusted to conform to the current year gross presentation of the unrecognized tax benefit on this tax position.

 

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:

 

 

As of June 29, 2013, $11.6 million of the gross liability for unrecognized tax benefits was netted within prepaid income taxes due to expected payment in fiscal 2014.  As of June 29, 2013, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $36.8 million, of which $5.8 million was netted within prepaid income taxes due to expected payment in fiscal 2014.  The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2013 was $5.0 million. 

 

As of June 30, 2012, $15.9 million of the gross liability for unrecognized tax benefits was netted within prepaid income taxes relating to a payment that occurred during fiscal 2011; however, the liability is considered outstanding until the matters have been settled with the respective jurisdiction.  As of June 30, 2012, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $43.2 million, of which $8.7 million was netted within prepaid income taxes relating to a payment that occurred during fiscal 2011; however, the liability is considered outstanding until the matters have been settled with the respective jurisdiction.  The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2012 was $4.7 million. 

 

If Sysco were to recognize all unrecognized tax benefits recorded as of June 29, 2013, approximately $42.0 million of the $108.3 million reserve would reduce the effective tax rate.  If Sysco were to recognize all unrecognized tax benefits recorded as of June 30, 2012, approximately $37.1 million of the $104.0 million reserve would reduce the effective tax rate.    It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco’s positions are sustained on audit or because the company agrees to their disallowance.  Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various states and the allocation of income and expense between tax jurisdictions.  In addition, the amount of unrecognized tax benefits recognized within the next twelve months may decrease due to the expiration of the statute of limitations for certain years in various jurisdictions; however, it is possible that a jurisdiction may open an audit on one of these years prior to the statute of limitations expiring.  At this time, an estimate of the range of the reasonably possible change cannot be made. 

 

The IRS has open audits for Sysco’s 2006, 2007, 2008 and 2009 federal income tax returns.  As of June 29, 2013, Sysco’s tax returns in the majority of the state and local jurisdictions and Canada are no longer subject to audit for the years before 2007.  However, some jurisdictions have audits open prior to 2007, with the earliest dating back to 2002.  Certain tax jurisdictions require partial to full payment on audit assessments or the posting of letters of credit in order to proceed to the appeals process.  Although the outcome of tax audits is generally uncertain, the company believes that adequate amounts of tax, including interest and penalties, have been accrued for any adjustments that may result from those open years. 

 

Other

 

Undistributed income of certain consolidated foreign subsidiaries at June 29, 2013 amounted to $1,052.0 million for which no deferred U.S. income tax provision has been recorded because Sysco intends to permanently reinvest such income in those foreign operations.  An estimate of any U.S. or foreign withholding taxes that may be applicable upon actual or deemed repatriation is not practical due to the complexities associated with the hypothetical calculation.