INCOME TAXES
In 2013, 2012, and 2011, we recorded net tax provisions of $161 million, $428 million, and $291 million. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. Accelerated depreciation deductions on qualifying property were a result of U.S. legislation that expired in December 2013. As such, cash taxes paid, net of refunds, were $169 million, $112 million, and $33 million for 2013, 2012, and 2011.
The components of the provision for income taxes, net are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Current taxes: | | | | | |
U.S. and state | $ | 144 |
| | $ | 562 |
| | $ | 103 |
|
International | 173 |
| | 131 |
| | 52 |
|
Current taxes | 317 |
| | 693 |
| | 155 |
|
Deferred taxes: | | | | | |
U.S. and state | (133 | ) | | (156 | ) | | 157 |
|
International | (23 | ) | | (109 | ) | | (21 | ) |
Deferred taxes | (156 | ) | | (265 | ) | | 136 |
|
Provision for income taxes, net | $ | 161 |
| | $ | 428 |
| | $ | 291 |
|
U.S. and international components of income before income taxes are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
U.S. | $ | 704 |
| | $ | 882 |
| | $ | 658 |
|
International | (198 | ) | | (338 | ) | | 276 |
|
Income before income taxes | $ | 506 |
| | $ | 544 |
| | $ | 934 |
|
The items accounting for differences between income taxes computed at the federal statutory rate and the provision recorded for income taxes are as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | | | | | |
Impact of foreign tax differential | (8.1 | ) | | 31.5 |
| | (8.4 | ) |
State taxes, net of federal benefits | 2.7 |
| | 0.2 |
| | 1.5 |
|
Tax credits | (16.6 | ) | | (4.4 | ) | | (3.2 | ) |
Nondeductible compensation | 16.9 |
| | 13.3 |
| | 4.9 |
|
Domestic production activities deduction | (2.1 | ) | | — |
| | — |
|
Other, net | 4.0 |
| | 3.0 |
| | 1.4 |
|
Total | 31.8 | % | | 78.6 | % | | 31.2 | % |
Our effective tax rate in 2013 was lower than the 35% U.S. federal statutory rate and our effective tax rate in 2012 primarily due to the favorable impact of earnings in lower tax rate jurisdictions, a decline in the proportion of our losses for which we may not realize a related tax benefit, and the retroactive extension of the U.S. federal research and development credit, which expired in December 2013. The favorable impact of earnings in lower tax rate jurisdictions primarily relates to our European operations, which are headquartered in Luxembourg. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. In 2013, we recognized tax benefits for a greater proportion of these losses as compared to 2012. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit.
In 2012, our effective tax rate was higher than the 35% U.S. federal statutory rate and our effective tax rate in 2011 primarily due to the adverse impact of foreign jurisdiction losses of subsidiaries primarily located outside of Europe for which we may not realize a tax benefit. The adverse impact of these losses was partially offset by the favorable impact of earnings in lower tax rate jurisdictions primarily related to our European operations. Additionally, our effective tax rate in 2012 was more volatile as compared to 2011 due to the lower level of pre-tax income generated during the year, relative to our tax expense. Our effective tax rate in 2012 was also adversely impacted by acquisitions (including integrations), audit developments, nondeductible expenses, and changes in tax law such as the expiration of the U.S. federal research and development credit at the end of 2011.
In 2011, the favorable impact of earnings in lower tax rate jurisdictions offset the adverse impact of foreign jurisdiction losses and as a result, the effective tax rate was lower than the 35% U.S. federal statutory rate.
Deferred income tax assets and liabilities are as follows (in millions):
|
| | | | | | | |
| December 31, |
| 2013 | | 2012 |
Deferred tax assets: | | | |
Net operating losses U.S. - Federal/States (1) | $ | 53 |
| | $ | 47 |
|
Net operating losses foreign (2) | 427 |
| | 289 |
|
Accrued liabilities, reserves, & other expenses | 590 |
| | 482 |
|
Stock-based compensation | 396 |
| | 281 |
|
Deferred revenue | 249 |
| | 129 |
|
Assets held for investment | 164 |
| | 129 |
|
Other items | 177 |
| | 133 |
|
Tax credits (3) | 107 |
| | 12 |
|
Total gross deferred tax assets | 2,163 |
| | 1,502 |
|
Less valuation allowance (4) | (698 | ) | | (415 | ) |
Deferred tax assets, net of valuation allowance | 1,465 |
| | 1,087 |
|
Deferred tax liabilities: | | | |
Depreciation & amortization | (1,021 | ) | | (698 | ) |
Acquisition related intangible assets | (201 | ) | | (274 | ) |
Other items | (16 | ) | | (29 | ) |
Net deferred tax assets, net of valuation allowance | $ | 227 |
| | $ | 86 |
|
___________________
| |
(1) | Excluding $81 million and $9 million of deferred tax assets as of December 31, 2013 and 2012, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. |
| |
(2) | Excluding $2 million and $2 million of deferred tax assets as of December 31, 2013 and 2012, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. |
| |
(3) | Excluding $227 million and $146 million of deferred tax assets as of December 31, 2013 and 2012, related to tax credits that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. |
| |
(4) | Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions and future capital gains. |
As of December 31, 2013, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $275 million, $1.6 billion, and $880 million. The federal and state net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and applicable state tax law. If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire in 2027, 2014, and 2014, respectively. As of December 31, 2013, our tax credit carryforwards for income tax purposes were approximately $334 million. If not utilized, a portion of the tax credit carryforwards will begin to expire in 2020.
The Company’s consolidated balance sheets reflect tax credit carryforwards excluding amounts resulting from excess stock-based compensation. Accordingly, such credits from excess stock-based compensation are accounted for as an increase to additional paid-in capital if and when realized through a reduction in income taxes payable.
Tax Contingencies
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The reconciliation of our tax contingencies is as follows (in millions):
|
| | | | | | | | | | | |
| December 31, |
| 2013 | | 2012 | | 2011 |
Gross tax contingencies – January 1 | $ | 294 |
| | $ | 229 |
| | $ | 213 |
|
Gross increases to tax positions in prior periods | 78 |
| | 91 |
| | 22 |
|
Gross decreases to tax positions in prior periods | (18 | ) | | (47 | ) | | (3 | ) |
Gross increases to current period tax positions | 54 |
| | 26 |
| | 4 |
|
Audit settlements paid | (1 | ) | | (4 | ) | | (1 | ) |
Lapse of statute of limitations | — |
| | (1 | ) | | (6 | ) |
Gross tax contingencies – December 31 (1) | $ | 407 |
| | $ | 294 |
| | $ | 229 |
|
___________________
| |
(1) | As of December 31, 2013, we had $407 million of tax contingencies, of which $346 million, if fully recognized, would decrease our effective tax rate. |
As of December 31, 2013 and 2012, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $33 million and $25 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2013, 2012, and 2011 was $8 million, $1 million, and $3 million.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses. As previously disclosed, we have received Notices of Proposed Adjustment from the IRS for the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax over a seven year period beginning in 2005, totaling approximately $1.5 billion, subject to interest. To date, we have not resolved this matter administratively and, in December 2012, we petitioned the U.S. Tax Court to resolve the matter. We continue to disagree with these IRS positions and intend to contest them vigorously.
Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by the French Tax Administration (“FTA”) for calendar year 2006 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. While we have not yet received a final assessment from the FTA, in September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. The notices propose additional French tax of approximately $250 million, including interest and penalties through the date of the assessment. We disagree with the proposed assessment and intend to contest it vigorously. We plan to pursue all available administrative remedies at the FTA, and if we are not able to resolve this matter with the FTA, we plan to pursue judicial remedies. We are also subject to taxation in various states and other foreign jurisdictions including China, Germany, India, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by these particular tax authorities for the calendar year 2003 and thereafter.
We expect the total amount of tax contingencies will grow in 2014. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings in years through 2013. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.
