Income Taxes



	Quarter ended						Year to date
	9/3/2011			9/4/2010			9/3/2011			9/4/2010
Income taxes	$	67		$	139		$	220		$	307
Effective tax rate	14.6		%	27.5		%	18.4		%	25.4		%

Our effective tax rates were lower than the expected U.S. federal statutory rate of 35% primarily due to the majority of our income being earned outside of the U.S. where tax rates are generally lower than the U.S. rate.

Our third quarter 2011 rate was lower than the prior year primarily due to the one-time $53 million tax benefit recognized as a result of tax losses associated with the planned sales of the LJS and A&W brands. Our rate was also favorably impacted by changes to audit reserves.

Year to date, our effective tax rate was lower than the prior year due to the one-time $53 million tax benefit mentioned above as well as the favorable impact of changes to audit reserves. This was partially offset by lapping a more favorable impact of foreign and U.S. tax effects attributable to ongoing foreign operations, including a 2010 foreign law change.

On June 23, 2010, the Company received a Revenue Agent Report (“RAR”) from the Internal Revenue Service (the “IRS”) relating to its examination of our U.S. federal income tax returns for fiscal years 2004 through 2006. The IRS has proposed an adjustment to increase the taxable value of rights to intangibles used outside the U.S. that YUM transferred to certain of its foreign subsidiaries. The proposed adjustment would result in approximately $700 million of additional taxes plus net interest to date of approximately $165 million. Furthermore, if the IRS prevails it is likely to make similar claims for years subsequent to fiscal 2006. The potential additional taxes for these later years, through 2010, computed on a similar basis to the 2004-2006 additional taxes, would be approximately $320 million plus net interest through 2010 of approximately $20 million.

We believe that the Company has properly reported taxable income and paid taxes in accordance with applicable laws and that the proposed adjustment is inconsistent with applicable income tax laws, Treasury Regulations and relevant case law. We intend to defend our position vigorously and have filed a protest with the IRS. As the final resolution of the proposed adjustment remains uncertain, the Company will continue to provide for its position in accordance with GAAP. There can be no assurance that payments due upon final resolution of this issue will not exceed our currently recorded reserve and such payments could have a material adverse effect on our financial position. Additionally, if increases to our reserves are deemed necessary due to future developments related to this issue, such increases could have a material, adverse effect on our results of operations as they are recorded. The Company does not expect resolution of this matter within twelve months and cannot predict with certainty the timing of such resolution.