Nu Skin 2010 Annual Report - Direct Selling News

NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
Understanding with the Company’s US subsidiary documenting the
same agency relationship. The Company believes that these legal
documents establish that the Company’s US subsidiary was acting
as an agent and not buyer and seller of the relevant products. The
additional assessment of duties by Yokohama Customs was based
on its re-characterization of the transaction as a sale between the
Company’s US subsidiary and the Company’s Japan subsidiary for
custom law purposes despite the legal form of the transaction. The
Company does not believe the legal documentation supports the
re-characterization of these transactions. Yokohama Customs has
raised several issues to support its re-characterization, including the
fact that the Company has treated the relevant transaction as a sale
between the Company’s US subsidiary and Japan subsidiary for income
tax purposes. However, the Company believes that the relevant
income tax and transfer pricing rules and regulations apply different
standards and are not relevant to the customs issue. Because
the Company believes that the legal documentation for these transactions
support the Company’s position, the Company filed a complaint
in the Tokyo District Court Civil Action Section in December
2006 to have the Ministry of Finance’s affirmation of the additional
assessments reversed. The final hearing on this matter was held on
February 1, 2011 and the court indicated it would issue a decision on
this case on March 25, 2011. Either party has the right to appeal this
decision. If the Company receives an adverse decision in this case,
the Company may be required to record an expense for the full
amount of the disputed assessments, or $33.2 million.
The second dispute relates to additional customs assessments
made by Yokohama Customs for the period of October 2006 through
November 2008 in connection with an audit in 2009, as well as the
disputed portion of the Company’s current import duty rate the
Company has been required to pay or hold in bond, and has paid under
protest, since October of 2009. The aggregate amount of these
additional assessments and disputed duties is 2.6 billion Japanese yen
as of December 31, 2010 (approximately $32.1 million), net of any recovery
of consumption taxes. The Company was also recently notified
that it will likely be assessed an additional 0.6 billion Japanese yen
(approximately $7.7 million), net of any recovery of consumption taxes
based on an audit of the period of November 2008 through September
2009. With this assessment, the Company has been required to
pay or hold in bond amounts for all periods from October 2006 to
present and the Company believes that additional assessments related
to any prior period would be barred by applicable statutes of limitations.
In July 2005, the Company changed the its operating structure
in Japan and believed that these changes would eliminate further
valuation disputes with Yokohama Customs as the new structure
eliminated the issues that were the basis of the litigation in the first
dispute (i.e., whether the Company’s US subsidiary was acting as an
agent for the Company’s Japan subsidiary or was acting as the seller).
However, in October 2009 the Company received notice from Yokohama
Customs authorities that they were assessing additional duties,
penalties and interest for the period of October 2006 through November
2008 based on their view that the Company was not utilizing
the proper valuation method. The basis for such additional assessment
is different from the issues that are being litigated in the first dispute.
The issue in this second case is whether a US entity utilizing a
commissionaire agent in Japan to import its products can use the
manufacturer’s invoice or must use another valuation method, and, if
an alternative method must be used, what the allowable deductions
would be in determining the proper valuation. Following the Company’s
review of the assessments and after consulting with the Company’s
legal and customs advisors, the Company believes that the additional
assessments are improper and are not supported by applicable
customs laws. The Company filed letters of protest with Yokohama
Customs, which were rejected. The Company has appealed the matter
to the Ministry of Finance in Japan. In addition, the Company is
currently being required to post a bond or make a deposit equal to the
difference between the Company’s declared duties and the amount
the customs authorities have determined the Company should be
paying on all current imports. Because the Company believes that the
higher rate determined by the customs authorities is an improper application
of the regulations, the Company is currently expensing the
portion of the duties the Company believes is supported under applicable
customs law, and recording the additional deposit or payment
as a receivable within long-term assets on its consolidated financial
statements. To the extent that the Company is unsuccessful in recovering
the amounts assessed and paid or held in bond, the Company
will likely be required to record an expense for the full amount of the
disputed assessments, or $32.1 million as of December 31, 2010.
In November 2008, the U.S. Internal Revenue Service began an
audit of the Company’s 2006 and 2007 tax years. The Company anticipates
this audit will be completed during 2011.
20. DIVIDENDS PER SHARE
Quarterly cash dividends for the years ended December 31, 2009
and 2010 totaled $29.0 million and $31.2 million or $0.115 and $0.125 per
share, respectively. The board of directors has declared a quarterly cash
dividend of $0.135 per share for all classes of common stock to be paid
on March 16, 2011 to stockholders of record on February 25, 2011.
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