adidas Group Online Annual Report 2007

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Gross Group deferred tax assets and liabilities before valuation allowances and appropriate offsettings are attributable to the items detailed in the table below:

Deferred Taxes

€ in millions

	Dec. 31 2007	Dec. 31 2006

Non-current assets	75	58
Current assets	112	117
Accrued liabilities and provisions	143	136
Accumulated tax loss carry-forwards	203	156
	533	467
Valuation allowances	(71)	(67)
Deferred tax assets	462	400
Non-current assets	420	500
Current assets	47	37
Accrued liabilities and provisions	130	53
Deferred tax liabilities	597	590
Deferred tax assets, net	(135)	(190)

As a result of the acquisition of Reebok International Ltd. (USA) and its subsidiaries in 2006 that was accounted for under the purchase method see Note 4, deferred tax liabilities were recorded as the difference between the carrying amount and the tax basis of acquired assets.

Group deferred tax assets recognized for actual existing and unused accumulated tax loss carry-forwards amounted to € 203 million for the year ending December 31, 2007 and mainly relate to the US tax group.

Deferred tax assets are recognized only to the extent that the realization of the related benefit is probable. Valuation allowances are established where this criterion is not met, based on the past performance and the prospects of the respective business for the foreseeable future.

Valuation allowances, which relate to deferred tax assets of companies whose realization of the related tax benefits is not probable, increased on a currency-neutral basis by € 4 million to € 71 million for the year ending December 31, 2007. These amounts mainly relate to unused foreign tax credits of the US tax group, which expire in a relatively short period and cannot be carried forward indefinitely. Remaining valuation allowances relate to deferred tax assets of companies operating in certain emerging markets, since the realization of the related benefit is not considered probable.

The Group does not recognize deferred tax liabilities for unremitted earnings of non-German subsidiaries to the extent that they are expected to be permanently invested in international operations. These earnings, the amount of which cannot be practicably computed, could become subject to additional tax if they were remitted as dividends or if the Group were to sell its shareholdings in the subsidiaries.

Tax Expenses
Tax expenses are split as follows:

Income Tax Expenses

€ in millions

	2007	Year ending Dec. 31 2006

Current tax expenses	286	213
Deferred tax expenses / (income)	(26)	14
Income tax expenses	260	227

The effective tax rate of the Group differs from an assumed tax rate of 40 % as follows:

Tax Rate Reconciliation

		Year ending Dec. 31 2007		Year ending Dec. 31 2006
	€ in millions	in %	€ in millions	in %

Expected income tax expenses	326	40,0	289	40,0
Tax rate differentials	(122)	(15.0)	(109)	(15.1)
Other non-deductible expenses	57	7,0	24	3.3
Losses for which benefits were not recognizable and changes in valuation allowances	8	1,0	15	2.0
Changes in tax rates	(19)	(2.4)	—	—
Other, net	2	0.2	2	0.3
	252	30.8	221	30.5
Withholding tax expenses	8	1.0	6	0.9
Income tax expenses	260	31.8	227	31.4

For 2006, other non-deductible expenses include a tax benefit of € 21 million related to the favorable resolution of international tax disputes for prior years.

In 2007, tax rate changes reflect changes enacted in German and non-German tax rates which were utilized for the calculation of the deferred tax assets and liabilities. The total change relates mainly to a UK tax rate reduction effective in 2008.

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