Income Taxes
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(a) | Provision for Income Taxes |
The provision for income taxes consists of the following (in millions):
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| | | | | | | | | | | |
Years Ended | July 27, 2013 | | July 28, 2012 | | July 30, 2011 |
Federal: | | | | | |
Current | $ | 601 |
| | $ | 1,836 |
| | $ | 914 |
|
Deferred | 152 |
| | (270 | ) | | (168 | ) |
| 753 |
| | 1,566 |
| | 746 |
|
State: | | | | | |
Current | 81 |
| | 119 |
| | 49 |
|
Deferred | 48 |
| | (53 | ) | | 83 |
|
| 129 |
| | 66 |
| | 132 |
|
Foreign: | | | | | |
Current | 599 |
| | 477 |
| | 529 |
|
Deferred | (237 | ) | | 9 |
| | (72 | ) |
| 362 |
| | 486 |
| | 457 |
|
Total | $ | 1,244 |
| | $ | 2,118 |
| | $ | 1,335 |
|
Income before provision for income taxes consists of the following (in millions):
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| | | | | | | | | | | |
Years Ended | July 27, 2013 | | July 28, 2012 | | July 30, 2011 |
United States | $ | 3,716 |
| | $ | 3,235 |
| | $ | 1,214 |
|
International | 7,511 |
| | 6,924 |
| | 6,611 |
|
Total | $ | 11,227 |
| | $ | 10,159 |
| | $ | 7,825 |
|
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consist of the following:
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| | | | | | | | |
Years Ended | July 27, 2013 | | July 28, 2012 | | July 30, 2011 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | | | | | |
State taxes, net of federal tax benefit | 0.8 |
| | 0.4 |
| | 1.5 |
|
Foreign income at other than U.S. rates | (16.4 | ) | | (15.6 | ) | | (19.4 | ) |
Tax credits | (1.6 | ) | | (0.4 | ) | | (3.0 | ) |
Domestic manufacturing deduction | (1.0 | ) | | (1.1 | ) | | (0.3 | ) |
Nondeductible compensation | 1.3 |
| | 1.8 |
| | 2.5 |
|
Tax audit settlement | (7.1 | ) | | — |
| | — |
|
Other, net | 0.1 |
| | 0.7 |
| | 0.8 |
|
Total | 11.1 | % |
| 20.8 | % | | 17.1 | % |
During fiscal 2013, the Internal Revenue Service (IRS) and the Company settled all outstanding items related to the audit of the Company’s federal income tax returns for the fiscal years ended July 27, 2002 through July 28, 2007. As a result of the settlement, the Company recognized a net benefit to the provision for income taxes of $794 million. In addition, the American Taxpayer Relief Act reinstated the U.S. federal R&D credit through December 2013, retroactive to January 1, 2012. As a result, the tax provision in fiscal 2013 included a tax benefit of $184 million related to the U.S. federal R&D tax credit, of which $72 million was attributable to fiscal 2012.
During fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated the U.S. federal R&D tax credit through December 31, 2011, retroactive to January 1, 2010. As a result, the tax provision in fiscal 2011 included a tax benefit of $234 million related to the U.S. federal R&D tax credit, of which $65 million was attributable to fiscal 2010.
U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $48.0 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2013. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.
As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject to reduced tax rates and in some cases is wholly exempt from taxes. A portion of these tax incentives will expire during the second half of fiscal 2015, and the majority of the remaining balance will expire at the end of fiscal 2025. The gross income tax benefit attributable to tax incentives were estimated to be $1.4 billion ($0.26 per diluted share) in fiscal 2013, of which approximately $0.5 billion ($0.10 per diluted share) is based on tax incentives that will expire during the second half of fiscal 2015. As of the end of fiscal 2012 and fiscal 2011, the gross income tax benefits attributable to tax incentives were estimated to be $1.3 billion ($0.24 per diluted share) for each of the respective years. The gross income tax benefits were partially offset by accruals of U.S. income taxes on undistributed earnings.
Unrecognized Tax Benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):
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| | | | | | | | | | | |
Years Ended | July 27, 2013 | | July 28, 2012 | | July 30, 2011 |
Beginning balance | $ | 2,819 |
| | $ | 2,948 |
| | $ | 2,677 |
|
Additions based on tax positions related to the current year | 138 |
| | 155 |
| | 374 |
|
Additions for tax positions of prior years | 187 |
| | 54 |
| | 93 |
|
Reductions for tax positions of prior years | (1,027 | ) | | (226 | ) | | (60 | ) |
Settlements | (199 | ) | | (41 | ) | | (56 | ) |
Lapse of statute of limitations | (143 | ) | | (71 | ) | | (80 | ) |
Ending balance | $ | 1,775 |
| | $ | 2,819 |
| | $ | 2,948 |
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As a result of the IRS tax settlement related to the federal income tax returns for fiscal years ended July 27, 2002 through July 28, 2007, the amount of gross unrecognized tax benefits was reduced by approximately $1.0 billion. The Company also reduced the amount of accrued interest by $230 million.
As of July 27, 2013, $1.5 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2013, the Company recognized $115 million of net interest expense and $2 million of penalties. During fiscal 2012, the Company recognized $146 million of net interest expense and $21 million of penalties. During fiscal 2011, the Company recognized $38 million of net interest expense and $9 million of penalties. The Company’s total accrual for interest and penalties was $268 million, $381 million, and $214 million as of the end of fiscal 2013, 2012, and 2011, respectively. The Company is no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2007. With limited exceptions, the Company is no longer subject to foreign, state, or local income tax audits for returns covering tax years through fiscal 2001.
The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving transfer pricing and various other matters. The Company estimates that the unrecognized tax benefits at July 27, 2013 could be reduced by approximately $200 million in the next 12 months.
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(b) | Deferred Tax Assets and Liabilities |
The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):
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| | | | | | | |
| July 27, 2013 | | July 28, 2012 |
Deferred tax assets—current | $ | 2,616 |
| | $ | 2,294 |
|
Deferred tax liabilities—current | (114 | ) | | (123 | ) |
Deferred tax assets—noncurrent | 1,539 |
| | 2,270 |
|
Deferred tax liabilities—noncurrent | (399 | ) | | (133 | ) |
Total net deferred tax assets | $ | 3,642 |
| | $ | 4,308 |
|
The components of the deferred tax assets and liabilities are as follows (in millions):
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| | | | | | | |
| July 27, 2013 | | July 28, 2012 |
ASSETS | | | |
Allowance for doubtful accounts and returns | $ | 390 |
| | $ | 433 |
|
Sales-type and direct-financing leases | 167 |
| | 162 |
|
Inventory write-downs and capitalization | 216 |
| | 127 |
|
Investment provisions | 214 |
| | 261 |
|
IPR&D, goodwill, and purchased intangible assets | 123 |
| | 119 |
|
Deferred revenue | 1,624 |
| | 1,618 |
|
Credits and net operating loss carryforwards | 681 |
| | 721 |
|
Share-based compensation expense | 783 |
| | 1,059 |
|
Accrued compensation | 486 |
| | 481 |
|
Other | 560 |
| | 583 |
|
Gross deferred tax assets | 5,244 |
| | 5,564 |
|
Valuation allowance | (98 | ) | | (60 | ) |
Total deferred tax assets | 5,146 |
| | 5,504 |
|
LIABILITIES | | | |
Purchased intangible assets | (1,101 | ) | | (809 | ) |
Depreciation | (169 | ) | | (131 | ) |
Unrealized gains on investments | (211 | ) | | (222 | ) |
Other | (23 | ) | | (34 | ) |
Total deferred tax liabilities | (1,504 | ) | | (1,196 | ) |
Total net deferred tax assets | $ | 3,642 |
| | $ | 4,308 |
|
As of July 27, 2013, the Company’s federal, state, and foreign net operating loss carryforwards for income tax purposes were $259 million, $1.0 billion, and $357 million, respectively. A significant amount of the federal net operating loss carryforwards relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. If not utilized, the federal net operating loss will begin to expire in fiscal 2018, and the foreign and state net operating loss carryforwards will begin to expire in fiscal 2014. The Company has provided a valuation allowance of $79 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.
As of July 27, 2013, the Company’s federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $7 million, $640 million, and$13 million, respectively. The federal and foreign tax credit carryforwards will begin to expire in fiscal 2014 and 2027, respectively. The majority of state tax credits can be carried forward indefinitely; however, the Company has provided a valuation allowance of $19 million for deferred tax assets related to state tax credits that are not expected to be realized.
