C.H. Robinson Worldwide, Inc. and its 80% (or more) owned U.S. subsidiaries file a consolidated federal income tax return. We file unitary or separate state returns based on state filing requirements. With few exceptions, we are no longer subject to audits of U.S. federal, state and local, or non-U.S. income tax returns before 2003.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, we recognized a $2.6 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance at January 1, 2007 | $ | 7,246 | |
| Additions based on tax positions related to the current year | 2,808 | ||
| Additions for tax positions of prior years | 789 | ||
| Reductions for tax positions of prior years | (620 | ) | |
| Settlements | - | ||
| Balance at December 31, 2007 | $ | 10,223 |
As of December 31, 2007, we had $10.2 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. We are not aware of any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease in the next twelve months.
We recognize interest and penalties related to uncertain tax positions in the provision for income taxes. During the years ended December 31, 2007, 2006, and 2005, we recognized approximately $1.0 million, $0.6 million, and $0.7 million in interest and penalties. We had approximately $2.6 million and $1.6 million for the payment of interest and penalties accrued within noncurrent taxes payable as of December 31, 2007 and 2006, respectively.
The components of the provision for income taxes consist of the following for the years ended December 31 (in thousands):
| 2007 | 2006 | 2005 | |||||||
| Tax provision: Federal |
$ | 161,476 | $ | 142,142 | $ | 104,759 | |||
| State | 25,806 | 24,238 | 19,031 | ||||||
| Foreign | 10,663 | 6,135 | 6,108 | ||||||
| 197,945 | 172,515 | 129,898 | |||||||
| Deferred provision (benefit) | 1,308 | (9,752 | ) | (503 | ) | ||||
| Total provision | $ | 199,253 | $ | 162,763 | $ | 129,395 | |||
A reconciliation of the provision for income taxes using the statutory federal income tax rate to our effective income tax rate for the years ended December 31 is as follows:
| 2007 | 2006 | 2005 | |||||||
| Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State income taxes, net of federal benefit |
3.3 | 3.6 | 3.5 | ||||||
| Stock-based compensation | 0.1 | 0.2 | 0.4 | ||||||
| Other | (0.3 | ) | (0.9 | ) | 0.0 | ||||
| 38.1 | % | 37.9 | % | 38.9 | % | ||||
Deferred tax assets (liabilities) are comprised of the following at December 31 (in thousands):
| 2007 | 2006 | |||||
| Deferred tax assets: Compensation |
$ | 48,907 | $ | 35,764 | ||
| Receivables | 10,290 | 10,584 | ||||
| Other | 3,858 | 2,232 | ||||
| Deferred tax liabilities: Intangible assets |
(29,558 | ) | (24,136 | ) | ||
| Prepaid assets | (6,534 | ) | (5,533 | ) | ||
| Long-lived assets | (2,514 | ) | (3,552 | ) | ||
| Other | (1,252 | ) | (1,077 | ) | ||
| Net deferred tax assets | $ | 23,197 | $ | 14,282 | ||
Income tax expense considers amounts which may be needed to cover exposures for open tax years. We do not expect any material impact related to open tax years; however, actual settlements may differ from amounts accrued.
