Income Taxes
Income from continuing operations before income taxes included income from domestic operations of $4,693 million, $5,311 million, and $5,828 million for the years ended December 31, 2011, 2012, and 2013, and income from foreign operations of $7,633 million, $8,075 million, and $8,668 million for the years ended December 31, 2011, 2012, and 2013.
The provision for income taxes consists of the following (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2012 | | 2013 |
Current: | | | | | |
Federal | $ | 1,724 |
| | $ | 2,342 |
| | $ | 1,853 |
|
State | 274 |
| | 171 |
| | 111 |
|
Foreign | 248 |
| | 358 |
| | 771 |
|
Total | 2,246 |
| | 2,871 |
| | 2,735 |
|
Deferred: | | | | | |
Federal | 452 |
| | (328 | ) | | (439 | ) |
State | (109 | ) | | (19 | ) | | 14 |
|
Foreign | 0 | | 74 |
| | (28 | ) |
Total | 343 |
| | (273 | ) | | (453 | ) |
Provision for income taxes | $ | 2,589 |
| | $ | 2,598 |
| | $ | 2,282 |
|
The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows (in millions):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2011 | | 2012 | | 2013 |
Expected provision at federal statutory tax rate (35%) | $ | 4,314 |
| | $ | 4,685 |
| | $ | 5,076 |
|
State taxes, net of federal benefit | 122 |
| | 99 |
| | 89 |
|
Change in valuation allowance | 27 |
| | 1,921 |
| | (598 | ) |
Foreign rate differential | (2,001 | ) | | (2,200 | ) | | (2,494 | ) |
Federal research credit | (140 | ) | | 0 | | (453 | ) |
Basis difference in investment of Arris | 0 | | (1,960 | ) | | 644 |
|
Other adjustments | 267 |
| | 53 |
| | 18 |
|
Provision for income taxes | $ | 2,589 |
| | $ | 2,598 |
| | $ | 2,282 |
|
A retroactive extension of the 2012 federal research and development credit was signed into law on January 2, 2013 in accordance with The American Taxpayer Act of 2012. The benefit of $189 million related to the 2012 federal research and development credit is included in the year ended December 31, 2013.
We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2013 because we intend to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2013, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $38.9 billion. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
Deferred Tax Assets
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in millions):
|
| | | | | | | |
| As of December 31, |
| 2012 | | 2013 |
Deferred tax assets: | | | |
Stock-based compensation expense | $ | 311 |
| | $ | 283 |
|
State taxes | 184 |
| | 204 |
|
Capital loss carryforward | 236 |
| | 215 |
|
Settlement with the Authors Guild and AAP | 28 |
| | 45 |
|
Vacation accruals | 67 |
| | 94 |
|
Deferred rent | 50 |
| | 59 |
|
Accrued employee benefits | 323 | | 383 |
|
Accruals and reserves not currently deductible | 365 |
| | 390 |
|
Unrealized gain/loss on investments and others | 0 | | 57 |
|
Net operating losses | 505 |
| | 279 |
|
Tax credit | 274 |
| | 394 |
|
Basis difference in investment of Arris | 2,043 |
| | 1,372 |
|
Inventory write down | 0 | | 63 |
|
Other | 128 |
| | 128 |
|
Total deferred tax assets | 4,514 |
| | 3,966 |
|
Valuation allowance | (2,629 | ) | | (1,899 | ) |
Total deferred tax assets net of valuation allowance | 1,885 |
| | 2,067 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (761 | ) | | (537 | ) |
Identified intangibles | (1,496 | ) | | (1,479 | ) |
Unrealized gains on investments and other | (105 | ) | | 0 |
Other prepaids | (118 | ) | | (125 | ) |
Other | (133 | ) | | (283 | ) |
Total deferred tax liabilities | (2,613 | ) | | (2,424 | ) |
Net deferred tax liabilities | $ | (728 | ) | | $ | (357 | ) |
As of December 31, 2013, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $440 million, $1,247 million and $824 million. If not utilized, the federal net operating loss carryforwards will begin to expire in 2019 and the state net operating loss carryforwards will begin to expire in 2014. The foreign net operating loss can be carried forward indefinitely, however it is more likely than not that it will not be realized, therefore we have recorded a valuation allowance against all material foreign net operation losses. The net operating loss carryforwards are subject to various annual limitations under the tax laws of the different jurisdictions.
As of December 31, 2013, our California research and development credit carryforwards for income tax purposes were approximately $450 million that can be carried over indefinitely. We believe it is more likely than not that a portion of the state tax credit will not be realized. Therefore, we have recorded a full valuation allowance on the state tax credit carryforward. We will reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
As of December 31, 2013, our foreign tax credit carryforwards for income tax purposes were approximately $228 million that will start to expire in 2023. We believe it is more likely than not that all of the foreign tax credit will be realized. We will reassess the need for a valuation allowance on a quarterly basis and if future evidence supports a need to establish a valuation allowance, then a tax expense will be recorded accordingly.
As of December 31, 2013, our federal and state capital loss carryforwards for income tax purposes were approximately $349 million and $560 million. We also have deferred tax assets for impairment losses that, if recognized, will be capital in nature. We believe that it is more likely than not that our deferred tax assets for capital losses and impairment losses will not be realized. Therefore, we have recorded a valuation allowance on both our
federal and state deferred tax assets for these items. We will reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
In December 2012, we entered into an agreement with Arris Group Inc. (Arris) for the disposition of the Motorola Home segment. A deferred tax asset was established for the book to tax basis difference in our investment in the Motorola Home segment upon signing the agreement because the basis difference was going to be recognized in the foreseeable future. In April 2013, upon the disposition of the Home segment to Arris, our basis difference in the Home segment became a basis difference in Google’s investment in Arris shares received in the disposition and was adjusted by the amount of cash received as part of the transaction. Since any future losses to be recognized upon the disposition of Arris shares will be capital losses and we already have an excess capital loss carryforward, a full valuation allowance was recorded against this deferred tax asset. We will reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
Uncertain Tax Positions
The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2011 to December 31, 2013 (in millions):
|
| | | |
Balance as of January 1, 2011 | $ | 1,140 |
|
Increases related to prior year tax positions | 77 |
|
Decreases related to prior year tax positions | (9 | ) |
Decreases related to settlement with tax authorities | (5 | ) |
Increases related to current year tax positions | 361 |
|
Balance as of December 31, 2011 | 1,564 |
|
Increases related to prior year tax positions | 43 |
|
Decreases related to prior year tax positions | (40 | ) |
Decreases related to settlement with tax authorities | (62 | ) |
Increases related to acquisition | 17 |
|
Increases related to current year tax positions | 411 |
|
Balance as of December 31, 2012 | 1,933 |
|
Increases related to prior year tax positions | 158 |
|
Decreases related to prior year tax positions | (37 | ) |
Decreases related to settlement with tax authorities | (78 | ) |
Increases related to current year tax positions | 595 |
|
Balance as of December 31, 2013 | $ | 2,571 |
|
Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $1,350 million, $1,749 million, and $2,378 million as of December 31, 2011, 2012, and 2013.
As of December 31, 2012 and 2013, we had accrued $139 million and $181 million for payment of interest and penalties. Interest and penalties included in our provision for income taxes were not material in all the periods presented.
We and our subsidiaries are routinely examined by various taxing authorities. Although we file U.S. federal, U.S. state, and foreign tax returns, our two major tax jurisdictions are the U.S. and Ireland. During the quarter ended December 31, 2007, the IRS completed its examination of our 2003 and 2004 tax years. We have filed an appeal with the IRS for certain issues related to this audit and settlements were reached in 2012 on all but one issue which we plan to litigate in court. As a result we released the related reserves in the quarter ended December 31, 2012. The IRS is currently in examination of our 2007, 2008, and 2009 tax years. We expect the examination to be completed within the next 12 months, but we do not anticipate any significant impact to our unrecognized tax benefit balance as of December 31, 2013, related to our 2007, 2008, and 2009 tax years.
Our 2010, 2011, 2012 and 2013 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our 2006 through 2013 tax years remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are various other ongoing audits in various other jurisdictions that are not material to our financial statements.
