INCOME TAX

3 Months Ended

Mar. 31, 2012

INCOME TAX

INCOME TAX

9. INCOME TAX

        The Company is subject to US (domestic), Russian and Kazakh income taxes, based on US legislation, Russian tax legislation, Kazakh legislation and the Double Tax Treaty of 1992 between the US and Russia (the "Treaty"). The Company's Russian- and Kazakh-based subsidiaries are subject to Russian and Kazakh income tax. The statutory income tax rate in Russia and Kazakhstan in 2011 and the three months ended March 31, 2012 was 20%. US taxable income or losses recorded are reported on CTC Media, Inc.'s US income tax return. CTC Media, Inc.'s taxable revenues consist predominantly of dividends and interest paid by its Russian subsidiaries. Dividends distributed to CTC Media, Inc. are subject to Russian withholding tax of 5% under the Treaty. Dividends distributed within Russia are subject to a withholding tax of 9% in case of ownership of less than 50%.

        The Company's effective income tax rate was 39% and 34% for the three months ended March 31, 2011 and 2012, respectively. The decrease in effective tax rate when comparing the three-month periods ended March 31, 2011 and 2012 was primarily due to decreases, as a percentage of consolidated income before tax, in stock-based compensation expense, and the recognition of certain foreign tax credits that will be deducted from US income tax.

        As of December 31, 2011 and March 31, 2012, the Company included accruals for unrecognized income tax benefits and related interest and penalties totaling $3,819 and $3,781, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $2,091 and $2,100, respectively. All of the unrecognized income tax benefits, if recognized, would affect the Company's effective tax rate.

        Although the Company believes it is more likely than not that all recognized income tax benefits would be sustained upon examination, the Company has recognized some income tax benefits that have a reasonable possibility of being successfully challenged by the tax authorities. These income tax positions could result in total unrecognized tax benefits increasing by up to $2,596 if the Company were to lose such a challenge by the tax authorities. However, the Company believes that it is reasonably possible that only $417 of the total $2,596 potential increase could occur within 12 months from March 31, 2012. This amount mainly represents certain recognized income tax benefits which may be challenged by the tax authorities during their current inspection of Kostafilm, one of the Company's production subsidiaries, and upcoming inspections of CTC Network and certain income tax penalties which may be imposed by US tax authorities as a result of CTC Media, Inc.'s late payment of estimated tax for 2007.

        The total amount of unrecognized tax benefit that could significantly change within 12 months due to a lapse of the statutory limitations period was $518 as of March 31, 2012.

        The tax years ended December 31, 2009, 2010 and 2011 remain subject to examination by the Russian and US tax authorities. The tax years ended December 31, 2007 through 2011 remain subject to examination by the Kazakh tax authorities.