Income Taxes



	Quarter ended						Year to date
	9/8/2012			9/3/2011			9/8/2012			9/3/2011
Income taxes	$	161		$	67		$	410		$	220
Effective tax rate	25.1		%	14.6		%	24.4		%	18.4		%

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 effective tax rate for the quarter ended September 8, 2012 was higher than the prior year primarily due to lapping the one-time $53 million tax benefit recognized as a result of tax losses associated with the LJS and A&W divestitures.

Year to date, our effective tax rate was higher than the prior year due to lapping the favorable impact of the item mentioned above and lapping favorability resulting from the 37% tax benefit related to the $82 million non-cash impairment of LJS and A&W intangible assets in the year to date ended September 3, 2011. This was partially offset by the positive impact of the $74 million gain recognized in 2012 upon our acquisition of additional interest in Little Sheep, which resulted in no related tax expense.

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 $210 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 2011, computed on a similar basis to the 2004-2006 additional taxes, would be approximately $350 million plus net interest of approximately $25 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.