Income Taxes



	Quarter ended						Year to date
	2014			2013			2014			2013
Income tax provision	$	119		$	182		$	370		$	384
Effective tax rate	22.7		%	57.2		%	24.5		%	33.9		%

Our overall effective tax rate continues to be favorably impacted by the majority of our income being earned outside the U.S. where tax rates are generally lower than the U.S. tax rate.

Our third quarter and year to date effective tax rates were lower than the prior year primarily due to the impact of lapping a $222 million non-cash impairment of Little Sheep goodwill, which resulted in no related tax benefit, and lapping the unfavorable impact of increasing prior year unrecognized tax benefits related to a dispute with the Internal Revenue Service (the “IRS”) regarding the valuation of intangibles. This dispute was settled in the quarter ended September 6, 2014 and is discussed in further detail below. The third quarter 2014 effective tax rate was lower than our full year expected tax rate primarily due to a change in the estimated cost of repatriating foreign earnings.

On June 23, 2010, the Company received a Revenue Agent Report ("RAR") from the IRS relating to its examination of our U.S. federal income tax returns for fiscal years 2004 through 2006. The IRS 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. On January 9, 2013, the Company received a RAR from the IRS for fiscal years 2007 and 2008 proposing a similar adjustment. The valuation issue impacted tax returns for fiscal years 2004 through 2013.

On July 31, 2014, the Company reached a final agreement with the IRS Appeals Division regarding the valuation issue. As a result of this agreement, we closed out our 2004-2006 audit cycle and made a cash payment of $120 million to the IRS, which was effectively fully reserved, during the quarter ended September 6, 2014 to settle all issues for this audit cycle. The agreement also resolves the valuation issue for all later, impacted years. Additional cash payments of lesser amounts, for which we are fully reserved, will be required related to the valuation issue upon the closure of the examinations of fiscal years 2007-2013.

The resolution of this issue resulted in a reduction in the Company’s unrecognized tax benefits. As of September 6, 2014, the Company had $125 million of unrecognized tax benefits, $30 million of which, if recognized, would impact the effective income tax rate.