Crocs Inc. disclosed in its latest 10K filing that it is being investigated by federal authorities in the United States and Mexico for possibly underpaying taxes by as much as $36.3 million.
We are currently subject to an audit by U.S. Customs & Border Protection (CBP) in respect of the period from 2006 to 2010, reads the companys filing.
CBP has provided us with preliminary projections and a draft audit report that reflect unpaid duties totaling approximately $14.3 million during the period under review. We have responded that these projections are erroneous and provided arguments that demonstrate the amount due in connection with this matter is considerably less than the preliminary projection. CBP is currently reviewing this response.
Crocs has filed comments and objections to the initial audit with CBP, which it expects will issue its final report (and notice of a formal claim) sometime in mid-2013. It is not possible at this time to predict whether our arguments will be successful in eliminating or reducing the amount in dispute, according to the companys 10K. Likewise, it is not possible to predict whether CBP may seek to assert a claim for penalties in addition to any loss of revenue claim.
In Mexico, Crocs is currently subject to an audit by the Federal Tax Authority (SAT) for the period from January 2006 to July 2011. There are two phases to the audit, the first for capital equipment and finished goods and the second for raw materials. The first phase is complete and no major discrepancies were noted by the SAT. On Jan. 9, 2013, Crocs received a notice for the second phase in which the SAT proposed a tax assessment (taxes and penalties) of roughly 280 million pesos (approximately $22.0 million) based on the value of all of Crocs imported raw materials during the audit period.
We believe that the proposed penalty amount is unfounded and without merit, the company states in its filing. Crocs said that local counsel it retained to handle the matter will argue that the amount due, if any, is substantially less than that proposed by the SAT. It said it could take between two and three years to resolve the dispute in the Mexican courts.