ANNUAL REPORT 2004 - Luxottica Group

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2004, the Italian statutory tax rate was reduced to
37.25%. As a consequence, deferred tax assets and
liabilities have been recomputed in line with the new
tax rate. The immaterial result of the change in the
Italian tax rate has been included in deferred tax
expense.
Italian companies taxes are subject to review pursuant
to Italian law. As of December 31, 2004, tax years
from 1998 through the most recent year were open
for such review. Certain Luxottica Group companies
are subject to tax reviews for previous years.
Management believes no significant unaccrued
liabilities will arise from the related tax reviews.
As of December 31, 2004, the taxes that would be
due on the distribution of retained earnings to the
related parent company, including net earnings for the
year, of subsidiaries for 2004 and prior years would
approximate Euro 19.1 million. Luxottica Group has not
provided an accrual for taxes on such distributions,
nor has it provided an accrual for taxes on its
investments in such subsidiaries, as the likelihood of
distribution is remote and such earnings and
investments are deemed to be permanently
reinvested. In connection with the 2004 earnings of
certain subsidiaries, the Company has provided for an
accrual for Italian income taxes related to declared
dividends of earnings.
In connection with various capital contributions,
certain Italian subsidiaries, which file tax returns on a
separate company basis, have incurred net
124
operating losses, which expire in five years from the
period in which the tax loss was incurred. Since it is
management’s belief that such net operating losses
are not more likely than not to be realized in the future
period, valuation allowances have been recorded in
the Company’s consolidated financial statements.
Management continues to evaluate the likelihood of
realizing such deferred tax assets and reverses the
related valuation allowance when the realization of
the deferred tax assets becomes more likely than
not.
At December 31, 2004, a U.S. subsidiary had
restricted U.S. Federal net operating loss
carryforwards of approximately Euro 84.9 million (US$
115.0 million), which begin expiring in 2019.
Additionally, with the acquisition of Cole, the
Company acquired approximately Euro 27.1 million
(US$ 36.7 million) of restricted U.S. Federal net
operating loss carryforwards. These loss
carryforwards are limited due to the change in
ownership or previous limitations placed thereon.
Parts of the Cole net operating loss carryforwards will
expire each year going forward.
As of December 31, 2003 and 2004, the Company
has recorded an aggregate valuation allowance of
Euro 36.4 million and Euro 22.8 million, respectively,
against deferred tax assets recorded in connection
with net operating loss carryforwards because it is
more likely than not that the above deferred income
tax assets will not be fully utilized in future periods.