Note 26: Income Taxes

Income Tax Provision

Income before taxes and the provision for taxes consisted of the following:

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) was as follows:

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 2012, the tax benefit attributable to tax holidays was $252 million with a $0.05 impact on diluted earnings per share. The tax holiday benefits for 2011 and 2010 were $554 million ($0.10 per diluted share) and $256 million ($0.04 per diluted share), respectively.

During 2012, net income tax benefits attributable to equity-based compensation transactions that were allocated to stockholders' equity totaled $137 million (net deficiencies of $18 million in 2011 and net benefits of $40 million in 2010).

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 year-ends were as follows:

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 29, 2012 included allowances related to unrealized state credit carryforwards of $284 million and matters related to our non-U.S. subsidiaries of $105 million.

As of December 29, 2012, our federal, state, and non-U.S. net operating loss carryforwards for income tax purposes were approximately $271 million, $365 million, and $635 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 2032. 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 $412 million that is not likely to be recovered and has been reduced by a valuation allowance.

As of December 29, 2012, we had not recognized U.S. deferred income taxes on a cumulative total of $17.5 billion of undistributed earnings for certain non-U.S. subsidiaries and $2.6 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 $866 million as of December 29, 2012 ($191 million as of December 31, 2011) is included in other current assets. Current income taxes payable of $711 million as of December 29, 2012 ($335 million as of December 31, 2011) is included in other accrued liabilities.

Long-term income taxes payable of $177 million as of December 29, 2012 ($165 million as of December 31, 2011), 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 were as follows:

During 2012, we settled and effectively settled matters with the Internal Revenue Service, certain non-U.S., and state tax authorities relating to tax positions taken during prior periods. The result of the settlements, effective settlements, and resulting remeasurements was a reduction of $81 million in the balance of our gross unrecognized tax benefits ($63 million in 2011 and $73 million in 2010), $7 million of which resulted in a tax benefit for 2012 ($61 million for 2011 and $48 million for 2010).

If the remaining balance of $189 million of unrecognized tax benefits as of December 29, 2012 ($212 million as of December 31, 2011) were realized in a future period, it would result in a tax benefit of $66 million and a reduction in the effective tax rate ($92 million as of December 31, 2011).

Interest and penalties related to unrecognized tax benefits were insignificant in 2012 ($24 million in 2011 and insignificant in 2010). As of December 29, 2012, we had $66 million of accrued interest and penalties related to unrecognized tax benefits ($90 million as of December 31, 2011).

Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

We file U.S. federal, U.S. state, and non-U.S. tax returns. For U.S. state and non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2001. For U.S. federal tax returns, we are no longer subject to tax examination for years prior to 2008.