15.

Income Taxes

The Company operates in several tax jurisdictions primarily: the United States of America, Poland, Hungary, Russia and Ukraine. All subsidiaries file their own corporate tax returns as well as account for their own deferred tax assets and liabilities. The Company does not file a tax return in the United States of America based upon its consolidated income, but does file a return in the United States based on its income taxable in the United States of America.

Statutory rate reconciliation for continuing operations:


	Year ended December 31,
	2012			2011 (Restated, see Note 2)			2010 (Restated, see Note 2)
Tax at US statutory rate of 35%	$	(123,039	)	$	(445,922	)	$	(56,582	)
Tax rate differences		43,142			201,837			22,293
Valuation allowance		13,538			61,293			29,675
Permanent differences		86,906			220,304			(9,247	)
Other		(8,850	)		0			0

Income tax (benefit)/expense	$	11,697		$	37,512		$	(13,861	)

The jurisdictions with lower tax rates that have the most significant effective tax rate impact in the periods presented include Russia and Poland, where the income tax rates are 20% and 19% respectively.

The permanent differences for 2012 and for 2011 are primarily the result of goodwill impairment charges recognized during the year of $327.8 million and $930.1 million respectively. The permanent differences related to goodwill impairment amounted to $63.3 million and $202.5 million for 2012 and 2011 respectively.

The Company’s significant components of the provision for income taxes from continuing operations were as follows:


	2012			2011 (Restated, see Note 2)		2010 (Restated, see Note 2)
Current (domestic)	$	483		$	0	$	0
Current (foreign)		12,797			14,687		17,391
Deferred (domestic)		(1,680	)		1,499		(3,367	)
Deferred (foreign)		97			21,326		(27,885	)

Income tax (benefit)/expense	$	11,697		$	37,512	$	(13,861	)

The Company is headquartered in the US. Pre-tax book loss earned from continuing operations in the US (domestic) and outside the US (foreign) in 2012, 2011 and 2010 was as follows:


	2012			2011			2010
Pre-tax income/(loss)—domestic	$	(44,928	)	$	(9,394	)	$	(21,068	)
Pre-tax income/(loss)—foreign		(306,613	)		(1,278,714	)		(135,317	)

	$	(351,541	)	$	(1,288,108	)	$	(156,385	)

Total income tax payments during 2012, 2011 and 2010 were $5.7 million, $5.1 million and $29.5 million respectively. CEDC has paid no U.S. income taxes and has net operating loss carry-forward for U.S. federal tax purposes totaling $19.4 million.

The Company’s US Net Operating Loss (NOL) carry-forward may be restricted under Section 382 of the Internal Revenue Code (“IRC”). IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percentage points. As a result, the taxable income for any post change year that may be offset by a pre-change NOL may not exceed the general IRC Section 382 limitation, which is the fair market value of the pre-change entity multiplied by the IRC long-term tax exempt rate. The Company has not completed an analysis to determine whether or to what extent limitations under IRC Section 382 apply to its US NOL carryforward.

Significant components of the Company’s deferred tax assets and liabilities are as follows:


	December 31,
	2012			2011 (Restated, see Note 2)			2010 (Restated, see Note 2)
Deferred tax assets
Accrued expenses, deferred income and prepaid	$	18,275		$	20,149		$	11,163
Allowance for doubtful accounts receivable		7,083			3,050			6,493
Unrealized foreign exchange losses		14,473			29,224			8,510
Net operating loss carry-forward benefit		55,834			54,708			70,596
Receivables		8,289			0			0
Property, plant & equipment, intangibles		5,775			0			0
Other		7,810			1,664			144
Valuation allowance		(99,656	)		(86,118	)		(35,778	)

Deferred tax asset, net of valuation allowance	$	17,883		$	22,677		$	61,128

Deferred tax liability
Trademarks		81,546			78,956			110,832
Unrealized foreign exchange gains		184			13,320			535
Investments in subsidiaries		3,335			4,135			0
Property, plant and equipment		14,868			6,735			0
Customer relationships		0			1,425			0
Timing differences in finance type leases		0			339			349
Deferred income		0			1,265			276
ASC 470 impact		276			1,500			2,998
Payables		7,770			0			0
Receivables		2,572			0			0
Other		938			5,637			9,771

Deferred tax liability	$	111,489		$	113,312		$	124,761


Total deferred tax asset, net of valuation allowance		17,883			22,677			61,128
Total deferred tax liability		111,489			113,312			124,761

Total net deferred tax		(93,606	)		(90,635	)		(63,633	)

Classified as
Current deferred tax asset		2,298			4,717			51,682
Non-current deferred tax asset		3,037			0			6,649
Current deferred tax liability		(4,907	)		0			0
Non-current deferred tax liability		(94,034	)		(95,352	)		(121,964	)

Total net deferred tax	$	(93,606	)	$	(90,635	)	$	(63,633	)

The Company’s valuation allowance relates primarily to losses carried forward in Poland and Russia, that we believe it is more likely than not will not be utilized in the future.

During 2012 and 2011 due to deteriorating performance of certain of the Company’s subsidiaries, the Company determined that an additional non cash valuation allowance for deferred tax asset of $13.5 million and $61.3 million respectively was required and took the charge during the year. Additionally, the Company did not recognize a tax asset for losses at these subsidiaries therefore the tax expense for the profitable entities was not offset by a tax benefit at loss making entities.

Tax losses can be carried forward for the following periods:


Hungary*			Unrestricted period
U.S.			20 years
Russia			10 years
Poland			5 years

*	In some circumstances the Tax Office’s permission to carry the loss forward is required.

The amounts and expiration dates of operating loss carryforwards for tax purposes


Expiration date	Amount of operating loss carried forward
31 December 2013	$	32,326
31 December 2014		94,305
31 December 2015		87,016
31 December 2016		14,026
31 December 2017		4,493
Afterwards		64,821

	$	296,987

The Company adopted the provisions of ASC 740-10-25 “Income taxes.” ASC 740-10-25 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10-25 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

The following table summarizes the changes in the accrual for unrecognized income tax benefits and related interest and penalties for the years ended December 31, 2012, 2011 and 2010:


	2012						2011					2010
	Unrecognized income tax benefits			Interest and penalties			Unrecognized income tax benefits			Interest and penalties		Unrecognized income tax benefits		Interest and penalties
Balance, beginning of the period	$	5,044		$	2,093		$	3,000		$	0	$	0	$	0
Additions based on tax positions related to the current year		5,606			457			0			0		0		0
Additions of tax positions of prior years		8,474			806			5,044			2,093		3,000		0
Reductions of tax positions of prior year		(1,415	)		(20	)		(3,000	)		0		0		0
Reductions of tax positions relating to settlements with taxing authorities		(1,831	)		(977	)		0			0		0		0
Foreign currency translation adjustment		574			117			0			0		0		0

Balance, end of period	$	16,452		$	2,476		$	5,044		$	2,093	$	3,000	$	0

The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expenses.

The Company files income tax returns in the U.S., Poland, Hungary, Russia and Ukraine, as well as in various other countries throughout the world in which we conduct our business. The major tax jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2007 in the U.S., Poland and Hungary and 2009 in Russia and Ukraine.

Tax liabilities (including corporate income tax, Value Added Tax (VAT), social security and other taxes) of the Company’s subsidiaries may be subject to examinations by the tax authorities for up to certain period from the end of the year the tax is payable, as follows:


Poland			5 years
Hungary			5 years
Russia			3 years

CEDC’s state and federal income tax returns are also subject to examination by the U.S. tax authorities. The IRS is in the process of auditing the Company’s 2009, 2010 and 2011 federal income tax returns. The tax examinations were also carried in 2012 in Russia, Poland and Cyprus. As the application of tax laws and regulations, and transactions are susceptible to varying interpretations, amounts reported in the consolidated financial statements could be changed at a later date upon final determination by the tax authorities. Due to uncertainties about the timing of existing tax examinations being settled and about potential tax examinations being started, it is impossible to project the amount of liability that will reverse in the upcoming 12 months.