Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.6.0.2
Income Taxes
 12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes [Text Block]
Note 8: Income Taxes
Income Tax Provision
Income before taxes and the provision for taxes consisted of the following:
Years Ended
(In Millions)
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Income before taxes:
 
 
 
 
 
 
U.S.
 
$
6,957

 
$
8,800

 
$
11,565

Non-U.S.
 
5,979

 
5,412

 
4,236

Total income before taxes
 
12,936

 
14,212

 
15,801

Provision for taxes:
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Federal
 
1,319

 
2,828

 
3,374

State
 
13

 
40

 
38

Non-U.S.
 
756

 
842

 
969

Total current provision for taxes
 
2,088

 
3,710

 
4,381

Deferred:
 
 
 
 
 
 
Federal
 
658

 
(862
)
 
(263
)
Other
 
(126
)
 
(56
)
 
(21
)
Total deferred provision for taxes
 
532

 
(918
)
 
(284
)
Total provision for taxes
 
$
2,620

 
$
2,792

 
$
4,097

Effective tax rate
 
20.3
%
 
19.6
%
 
25.9
%

The difference between the tax provision at the statutory federal income tax rate and the tax provision as a percentage of income before income taxes (effective tax rate) for each period was as follows:
Years Ended
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Statutory federal income tax rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (reduction) in rate resulting from:
 
 
 
 
 
 
Non-U.S. income taxed at different rates
 
(11.7
)
 
(7.9
)
 
(6.1
)
Research and development tax credits
 
(2.3
)
 
(1.7
)
 
(1.7
)
Domestic manufacturing deduction benefit
 
(1.4
)
 
(2.0
)
 
(2.1
)
Settlements, effective settlements, and related remeasurements
 
(0.1
)
 
(2.9
)
 
—

Other
 
0.8

 
(0.9
)
 
0.8

Effective tax rate
 
20.3
 %
 
19.6
 %
 
25.9
 %

The majority of the increase in our effective tax rate in 2016 compared to 2015 was driven by one-time items and our 2015 decision to indefinitely reinvest some of our prior years' non-U.S. earnings, partially offset by higher proportion of our income in lower tax jurisdictions.
Most of the decrease in our effective tax rate in 2015 compared to 2014 was driven by one-time items, a higher proportion of our income from lower tax jurisdictions, and our decision to indefinitely reinvest certain prior years' non-U.S. earnings, which positively impacted our effective income tax rate.
Income in certain non-U.S. countries is fully exempt from income taxes for a limited period of time due to eligible activities and certain capital investment actions. These full tax exemptions expire at various dates through 2023; however, the exemptions in certain countries are eligible for renewal.
In 2016, the tax benefit attributable to tax holidays was $77 million ($85 million for 2015 and $166 million for 2014) with a $0.02 impact on diluted earnings per share ($0.02 for 2015 and $0.03 for 2014).
During 2016, net income tax benefits attributable to equity-based compensation transactions that were allocated to stockholders’ equity totaled $154 million (net benefits of $172 million in 2015 and net benefits of $103 million in 2014).
Deferred and Current Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities at the end of each period were as follows:
(In Millions)
 
Dec 31,
2016
 
Dec 26,
2015
Deferred tax assets:
 
 
 
 
Accrued compensation and other benefits
 
$
1,182

 
$
931

Share-based compensation
 
373

 
424

Deferred income
 
596

 
694

Inventory
 
1,044

 
598

State credits and net operating losses
 
846

 
613

Other, net
 
1,187

 
760

Gross deferred tax assets
 
5,228

 
4,020

Valuation allowance
 
(953
)
 
(701
)
Total deferred tax assets
 
4,275

 
3,319

Deferred tax liabilities:
 
 
 
 
Property, plant and equipment
 
(1,574
)
 
(505
)
Licenses and intangibles
 
(1,036
)
 
(563
)
Convertible debt
 
(1,098
)
 
(1,042
)
Unrealized gains on investments and derivatives
 
(940
)
 
(717
)
Investment in non-U.S. subsidiaries
 
—

 
(37
)
Other, net
 
(450
)
 
(358
)
Total deferred tax liabilities
 
(5,098
)
 
(3,222
)
Net deferred tax assets (liabilities)
 
(823
)
 
97

 
 
 
 
 
Reported as:
 
 
 
 
Deferred tax assets
 
907

 
1,051

Deferred tax liabilities
 
(1,730
)
 
(954
)
Net deferred tax assets (liabilities)
 
$
(823
)
 
$
97


Deferred tax assets are included within other long-term assets on the consolidated balance sheets.
The valuation allowance as of December 31, 2016 included allowances related to unrealized state credit carryforwards of $839 million and matters related to our non-U.S. subsidiaries of $114 million.
As of December 31, 2016, our federal, state, and non-U.S. net operating loss carryforwards for income tax purposes were $321 million, $116 million, and $378 million, respectively. The majority of the non-U.S. net operating loss carryforwards have no expiration date. The remaining non-U.S., as well as the U.S. federal and state net operating loss carryforwards, expire at various dates through 2037. A significant amount of the net operating loss carryforwards in the U.S. relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. The non-U.S. net operating loss carryforwards include $215 million that is not likely to be recovered and has been reduced by a valuation allowance.
As of December 31, 2016, we had not recognized U.S. deferred income taxes on a cumulative total of $46.4 billion of undistributed earnings and other basis differences for certain non-U.S. subsidiaries which includes the impact of the Altera acquisition. Determining the unrecognized deferred tax liability in these non-U.S. subsidiaries that are indefinitely reinvested is not practicable. We currently intend to indefinitely reinvest those earnings and other basis differences in operations outside the U.S.
Current income taxes receivable of $86 million as of December 31, 2016 ($468 million as of December 26, 2015) is included in other current assets. Current income taxes payable of $329 million as of December 31, 2016 ($272 million as of December 26, 2015) is included in other accrued liabilities.
Long-term income taxes payable of $125 million as of December 31, 2016 ($114 million as of December 26, 2015) is included in other long-term liabilities, which includes uncertain tax positions, reduced by the associated federal deduction for state taxes and non-U.S. tax credits, and may also include other long-term tax liabilities that are not uncertain but have not yet been paid.
Uncertain Tax Positions
The aggregate changes in the balance of gross unrecognized tax benefits for each period were as follows:
Years Ended
(In Millions)
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Beginning gross unrecognized tax benefits
 
$
101

 
$
577

 
$
207

Settlements and effective settlements with tax authorities
and related remeasurements
 
(11
)
 
(452
)
 
(220
)
Lapse of statute of limitations
 
(16
)
 
—

 
—

Increases in balances related to tax positions taken during prior periods
 
81

 
4

 
173

Decreases in balances related to tax positions taken during prior periods
 
(11
)
 
(34
)
 
(1
)
Increases in balances related to tax positions taken during current period
 
10

 
6

 
418

Ending gross unrecognized tax benefits
 
$
154

 
$
101

 
$
577


The related tax benefit for settlements, effective settlements, and remeasurements is insignificant for 2016 ($419 million in 2015 and insignificant in 2014).
If the remaining balance of $154 million of unrecognized tax benefits as of December 31, 2016 ($101 million as of December 26, 2015) were recognized in a future period, it would result in a tax benefit of $87 million (insignificant as of December 26, 2015) and a reduction in the effective tax rate. Interest, penalties and accrued interest related to unrecognized tax benefits were insignificant in periods presented
Our tax policy is to comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. However, the estimated impact of income tax expense and net income is not expected to be significant.
We file federal, state, and non-U.S. tax returns. For non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2002. For federal and state tax returns, we are no longer subject to tax examination for years prior to 2004. We have filed petitions before the U.S. Tax Court relating to the treatment of stock-based compensation expense in an inter-company cost-sharing transaction for certain pre-acquisition Altera tax years; the outcome of those appeals is pending in the U.S. Court of Appeals for the Ninth Circuit.