Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 28, 2013
Income Tax Disclosure [Abstract]  
Taxes [Text Block]
Note 24: Income Taxes
Income Tax Provision
Income before taxes and the provision for taxes consisted of the following:
(Dollars in Millions)
 
2013
 
2012
 
2011
Income before taxes:
 
 
 
 
 
 
U.S.
 
$
9,374

 
$
10,042

 
$
14,659

Non-U.S.
 
3,237

 
4,831

 
3,122

Total income before taxes
 
$
12,611

 
$
14,873

 
$
17,781

Provision for taxes:
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Federal
 
$
2,730

 
$
2,539

 
$
3,212

State
 
68

 
52

 
104

Non-U.S.
 
716

 
1,135

 
374

Total current provision for taxes
 
$
3,514

 
$
3,726

 
$
3,690

Deferred:
 
 
 
 
 
 
Federal
 
$
(412
)
 
$
129

 
$
1,175

Other
 
(111
)
 
13

 
(26
)
Total deferred provision for taxes
 
$
(523
)
 
$
142

 
$
1,149

Total provision for taxes
 
$
2,991

 
$
3,868

 
$
4,839

Effective tax rate
 
23.7
%
 
26.0
%
 
27.2
%

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:
  
 
2013
 
2012
 
2011
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
 
(5.8
)
 
(7.3
)
 
(4.4
)
Research and development tax credits
 
(3.5
)
 

 
(1.0
)
Domestic manufacturing deduction benefit
 
(2.1
)
 
(2.1
)
 
(1.9
)
Other
 
0.1

 
0.4

 
(0.5
)
Effective tax rate
 
23.7
 %
 
26.0
 %
 
27.2
 %

The U.S. R&D tax credit was reenacted in January 2013 retroactive to the beginning of 2012. The full year 2012 impact of the U.S. R&D tax credit was recognized in the first quarter of 2013.
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 2020; however, the exemptions in certain countries are eligible for renewal. In 2013, the tax benefit attributable to tax holidays was $213 million ($252 million for 2012 and $554 million for 2011) with a $0.04 impact on diluted earnings per share ($0.05 for 2012 and $0.10 for 2011).
During 2013, net income tax benefits attributable to equity-based compensation transactions that were allocated to stockholders’ equity totaled $3 million (net benefits of $137 million in 2012 and net deficiencies of $18 million in 2011).
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 28,
2013
 
Dec 29,
2012
Deferred tax assets:
 
 
 
 
Accrued compensation and other benefits
 
$
1,047

 
$
1,125

Share-based compensation
 
564

 
638

Deferred income
 
672

 
637

Inventory
 
733

 
506

Unrealized losses on investments and derivatives
 

 
36

State credits and net operating losses
 
378

 
297

Other, net
 
654

 
654

Gross deferred tax assets
 
4,048

 
3,893

Valuation allowance
 
(456
)
 
(389
)
Total deferred tax assets
 
$
3,592

 
$
3,504

Deferred tax liabilities:
 
 
 
 
Property, plant and equipment
 
$
(2,023
)
 
$
(2,325
)
Licenses and intangibles
 
(687
)
 
(778
)
Convertible debt
 
(911
)
 
(856
)
Unrealized gains on investments and derivatives
 
(815
)
 

Investment in non-U.S. subsidiaries
 
(244
)
 
(213
)
Other, net
 
(281
)
 
(269
)
Total deferred tax liabilities
 
$
(4,961
)
 
$
(4,441
)
Net deferred tax assets (liabilities)
 
$
(1,369
)
 
$
(937
)
 
 
 
 
 
Reported as:
 
 
 
 
Current deferred tax assets
 
$
2,594

 
$
2,117

Non-current deferred tax assets
 
434

 
358

Non-current deferred tax liabilities
 
(4,397
)
 
(3,412
)
Net deferred tax assets (liabilities)
 
$
(1,369
)
 
$
(937
)

Non-current deferred tax assets are included within other long-term assets on the consolidated balance sheets.
The valuation allowance is based on our assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. The valuation allowance as of December 28, 2013, included allowances related to unrealized state credit carryforwards of $364 million and matters related to our non-U.S. subsidiaries of $92 million.
As of December 28, 2013, our federal, state, and non-U.S. net operating loss carryforwards for income tax purposes were $239 million, $353 million, and $647 million, respectively. Approximately half 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 2033. 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 $342 million that is not likely to be recovered and has been reduced by a valuation allowance.
As of December 28, 2013, we had not recognized U.S. deferred income taxes on a cumulative total of $20.0 billion of undistributed earnings for certain non-U.S. subsidiaries and $2.4 billion of other basis differences of our investments in certain non-U.S. subsidiaries primarily related to McAfee. Determining the unrecognized deferred tax liability related to investments 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 $65 million as of December 28, 2013, ($866 million as of December 29, 2012) is included in other current assets. Current income taxes payable of $542 million as of December 28, 2013, ($711 million as of December 29, 2012) is included in other accrued liabilities.
Long-term income taxes payable of $188 million as of December 28, 2013, ($177 million as of December 29, 2012) within other long-term liabilities, 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:
(In Millions)
 
2013
 
2012
 
2011
Beginning gross unrecognized tax benefits
 
$
189

 
$
212

 
$
216

Settlements and effective settlements with tax authorities and related remeasurements
 
(2
)
 
(81
)
 
(63
)
Lapse of statute of limitations
 

 
(5
)
 
(17
)
Increases in balances related to tax positions taken during prior periods
 
21

 
56

 
91

Decreases in balances related to tax positions taken during prior periods
 
(9
)
 
(6
)
 
(21
)
Increases in balances related to tax positions taken during current period
 
8

 
13

 
6

Ending gross unrecognized tax benefits
 
$
207

 
$
189

 
$
212


During 2013, we settled and effectively settled matters with certain state and non-U.S. tax authorities relating to tax positions taken during prior periods. The result of the settlements, effective settlements, and re-measurements resulted in an insignificant reduction in the balance of our gross unrecognized tax benefits in 2013 ($81 million in 2012 and $63 million in 2011). The related tax benefit for settlements, effective settlements, and re-measurements is insignificant for 2013 ($7 million for 2012 and $61 million for 2011).
If the remaining balance of $207 million of unrecognized tax benefits as of December 28, 2013, ($189 million as of December 29, 2012) were realized in a future period, it would result in a tax benefit of $81 million and a reduction in the effective tax rate ($66 million as of December 29, 2012).
During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of income. Interest and penalties related to unrecognized tax benefits were insignificant in 2013 (insignificant in 2012 and $24 million in 2011). As of December 28, 2013, we had $73 million of accrued interest and penalties related to unrecognized tax benefits ($66 million as of December 29, 2012).
Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain 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 to income tax expense and net income is not expected to be significant.
We file federal, state, and non-U.S. tax returns. For state and non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2001. For federal tax returns, we are no longer subject to tax examination for years prior to 2009.