Income Taxes

12 Months Ended

Oct. 02, 2011

Income Taxes

Income Taxes

Note 13:    Income Taxes

The components of earnings before income taxes were as follows:

Fiscal Year Ended	Oct 2, 2011		Oct 3, 2010		Sep 27, 2009
United States	$	1,523.4	$	1,308.9	$	494.6
Foreign		287.7		128.1		65.3
Total earnings before income taxes	$	1,811.1	$	1,437.0	$	559.9

Provision for income taxes (in millions):

Fiscal Year Ended	Oct 2, 2011		Oct 3, 2010			Sep 27, 2009
Current taxes:
Federal	$	344.7	$	457.5		$	165.3
State		61.2		79.6			35.0
Foreign		37.3		38.3			26.3
Total current taxes		443.2		575.4			226.6
Deferred taxes:
Federal		111.6		(76.0	)		(48.3	)
State		8.3		(9.3	)		(10.7	)
Foreign		0.0		(1.4	)		0.8
Total deferred taxes		119.9		(86.7	)		(58.2	)
Total provision for income taxes	$	563.1	$	488.7		$	168.4

Reconciliation of the statutory US federal income tax rate with our effective income tax rate:

Fiscal Year Ended	Oct 2, 2011			Oct 3, 2010			Sep 27, 2009
Statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.5	%		2.5	%		2.6	%
Benefits and taxes related to foreign operations		(3.1	)%		(2.5	)%		(2.3	)%
Domestic production activity deduction		(0.8	)%		(0.9	)%		(2.3	)%
Credit resulting from employment audit		0.0	%		0.0	%		(2.0	)%
Other, net(1)		(2.5	)%		(0.1	)%		(0.9	)%
Effective tax rate		31.1	%		34.0	%		30.1	%

⁽¹⁾  Fiscal 2011 includes a benefit of 0.9% related to the acquisition of the remaining ownership interest in Switzerland and Austria.

US income and foreign withholding taxes have not been provided on approximately $987 million of cumulative undistributed earnings of foreign subsidiaries and equity investees. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the US, in the form of dividends or otherwise, we would be subject to additional US income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in millions):

	Oct 2, 2011			Oct 3, 2010
Deferred tax assets:
Property, plant and equipment	$	46.4		$	32.6
Accrued occupancy costs		55.9			55.2
Accrued compensation and related costs		69.6			100.8
Other accrued liabilities		27.8			25.0
Asset retirement obligation asset		19.0			14.9
Deferred revenue		47.8			58.4
Asset impairments		60.0			94.8
Tax credits		23.0			41.0
Stock based compensation		128.8			115.9
Net operating losses		85.5			43.7
Other		58.6			50.6
Total	$	622.4		$	632.9
Valuation allowance		(137.4	)		(88.1	)
Total deferred tax asset, net of valuation allowance	$	485.0		$	544.8
Deferred tax liabilities:
Property, plant and equipment		(66.4	)		(26.2	)
Other		(43.3	)		(19.1	)
Total		(109.7	)		(45.3	)
Net deferred tax asset	$	375.3		$	499.5
Reported as:
Current deferred income tax assets	$	230.4		$	304.2
Long-term deferred income tax assets (included in Other assets)		156.3			195.3
Current deferred income tax liabilities		(4.9	)		0.0
Long-term deferred income tax liabilities		(6.5	)		0.0
Net deferred tax asset	$	375.3		$	499.5

We will establish a valuation allowance if either it is more likely than not that the deferred tax asset will expire before we are able to realize the benefit, or the future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on our assessments of the likelihood of realizing the benefit of our deferred tax assets. The valuation allowance as of October 2, 2011 and October 3, 2010 primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries. The net change in the total valuation allowance for the years ended October 2, 2011 and October 3, 2010, was an increase of $49.3 million and $67.8 million, respectively. During fiscal 2011 and 2010, we recognized approximately $32 million and $40 million, respectively, of previously unrecognized deferred tax assets in certain foreign jurisdictions, with a corresponding increase to the valuation allowance due to the uncertainty of their realization.

As of October 2, 2011, Starbucks had foreign tax credit carryforwards of $7.5 million, with expiration dates between fiscal years 2018 and 2019, capital loss carryforwards of $7.8 million, with an expiration date of 2015, and foreign net operating losses of $305.4 million, with the predominant amount having no expiration date.

Taxes currently payable of $30.1 million and $24.7 million are included in accrued taxes on the consolidated balance sheets as of October 2, 2011 and October 3, 2010, respectively.

Uncertain Tax Positions

As of October 2, 2011, we had $52.9 million of gross unrecognized tax benefits of which $27.3 million, if recognized, would affect our effective tax rate. We recognize interest and penalties related to income tax matters in income tax expense. As of October 2, 2011 and October 3, 2010, we had accrued interest and penalties of $6.2 million and $16.8 million, respectively, before the benefit of the federal tax deduction, recorded on our consolidated balance sheets.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):

	Oct 2, 2011			Oct 3, 2010			Sep 27, 2009
Beginning balance	$	68.4		$	49.1		$	52.6
Increase related to prior year tax positions		4.4			35.0			4.2
Decrease related to prior year tax positions		(32.3	)		(21.4	)		(11.6	)
Increase related to current year tax positions		26.0			14.1			8.4
Decrease related to current year tax positions		(0.8	)		(8.1	)		(0.9	)
Decreases related to settlements with taxing authorities		(5.0	)		0.0			(3.0	)
Decreases related to lapsing of statute of limitations		(7.8	)		(0.3	)		(0.6	)
Ending balance	$	52.9		$	68.4		$	49.1

We are currently under routine audit by various jurisdictions outside the US as well as US state taxing jurisdictions for fiscal years 2006 through 2010. We are no longer subject to US federal or state examination for years prior to fiscal year 2008, with the exception of nine states. We are subject to income tax in many jurisdictions outside the US. We are no longer subject to examination in any material international markets prior to 2006.

There is a reasonable possibility that $4.5 million of the currently remaining unrecognized tax benefits, each of which is individually insignificant, may be recognized by the end of fiscal 2012 as a result of a lapse of the statute of limitations.