Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
12 Months Ended
Dec. 26, 2020
Income Tax Disclosure [Abstract]  
Income Taxes [Text Block]
Note 8 : Income Taxes
Income Tax Provision
Years Ended (In Millions) Dec 26, 2020 Dec 28, 2019 Dec 29, 2018
Income before taxes:
U.S. $ 15,452  $ 13,729  $ 14,753 
Non-U.S. 9,626  10,329  8,564 
Total income before taxes 25,078  24,058  23,317 
Provision for taxes:
Current:
Federal 1,120  1,391  2,786 
State 46  37  (11)
Non-U.S. 1,244  1,060  1,097 
Total current provision for taxes 2,410  2,488  3,872 
Deferred:
Federal 1,369  597  (1,389)
State 25  11 
Non-U.S. 375  (76) (230)
Total deferred provision for taxes 1,769  522  (1,608)
Total provision for taxes $ 4,179  $ 3,010  $ 2,264 
Effective tax rate 16.7  % 12.5  % 9.7  %
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 26, 2020 Dec 28, 2019 Dec 29, 2018
Statutory federal income tax rate 21.0  % 21.0  % 21.0  %
Increase (reduction) in rate resulting from:
Non-U.S. income taxed at different rates (3.7) (3.7) (3.6)
Research and development tax credits (2.1) (2.3) (2.7)
Foreign derived intangible income benefit (1.9) (3.2) (3.7)
Change in permanent reinvestment assertion 1.6  —  0.2 
Tax Reform —  —  (1.3)
Other 1.8  0.7  (0.2)
Effective tax rate 16.7  % 12.5  % 9.7  %
Our effective tax rate increased in 2020 compared to 2019, primarily driven by a change in our permanent reinvestment assertion with respect to undistributed earnings in China, as a result of our planned divestiture of the NAND memory business. It also increased due to the reduction in our foreign derived intangible income benefit in 2020.
Our effective tax rate increased in 2019 compared to 2018, primarily driven by one-time benefits that occurred in 2018.
We derive the effective tax rate benefit attributed to non-U.S. income taxed at different rates primarily from our operations in China, Hong Kong, Ireland, and Israel. The statutory tax rates in these jurisdictions range from 12.5% to 25.0%. In addition, we are subject to reduced tax rates in China and Israel as long as we conduct certain eligible activities and make certain capital investments. These conditional reduced tax rates expire at various dates through 2035 and we expect to apply for renewals upon expiration.
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 26, 2020 Dec 28, 2019
Deferred tax assets:
Accrued compensation and other benefits $ 865  $ 740 
Share-based compensation 324  294 
Inventory 835  760 
State credits and net operating losses 1,829  1,511 
Other, net 617  515 
Gross deferred tax assets 4,470  3,820 
Valuation allowance (1,963) (1,534)
Total deferred tax assets 2,507  2,286 
Deferred tax liabilities:
Property, plant and equipment (3,109) (1,807)
Licenses and intangibles (725) (720)
Convertible debt —  (88)
Unrealized gains on investments and derivatives (735) (292)
Unremitted earnings of non-U.S. subsidiaries (403) (28)
Other, net (146) (186)
Total deferred tax liabilities (5,118) (3,121)
Net deferred tax assets (liabilities) $ (2,611) $ (835)
Reported as:
Deferred tax assets 1,232  1,209 
Deferred tax liabilities (3,843) (2,044)
Net deferred tax assets (liabilities) $ (2,611) $ (835)
Change in valuation allowance for deferred tax assets were as follows:
Years Ended (In Millions)
Balance at Beginning of Year
Additions Charged to Expenses/
Other Accounts
Net
(Deductions)
Recoveries
Balance at
End of Year
Valuation allowance for deferred tax assets
December 26, 2020 $ 1,534  $ 378  $ 51  $ 1,963 
December 28, 2019 $ 1,302  $ 239  $ (7) $ 1,534 
December 29, 2018 $ 1,171  $ 185  $ (54) $ 1,302 
Deferred tax assets are included within other long-term assets on the Consolidated Balance Sheets.
The valuation allowance as of December 26, 2020 included allowances primarily related to unrealized state credit carryforwards of $1.8 billion.
As of December 26, 2020, our federal and non-U.S. net operating loss carryforwards for income tax purposes were $345 million and $826 million, respectively. Most of the non-U.S. net operating loss carryforwards have no expiration date. The remaining non-U.S. and U.S. federal net operating loss carryforwards expire at various dates through 2040. 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 $772 million that is not likely to be recovered and has been reduced by a valuation allowance.
At December 26, 2020, we have undistributed earnings of certain foreign subsidiaries of approximately $19.0 billion that we have indefinitely invested, and on which we have not recognized deferred taxes. Estimating the amount of potential tax is not practicable because of the complexity and variety of assumptions necessary to compute the tax.
Current income taxes receivable of $131 million as of December 26, 2020 ($76 million as of December 28, 2019) are included in other current assets. Current income taxes payable of $756 million as of December 26, 2020 ($575 million as of December 28, 2019) are included in other accrued liabilities.
Long-term income taxes payable of $4.6 billion as of December 26, 2020 ($4.9 billion as of December 28, 2019) is primarily comprised of the transition tax from Tax Reform, which is payable over eight years beginning in 2018, as well as amounts for uncertain tax positions, reduced by the associated deduction for state taxes and non-U.S. tax credits.
Uncertain Tax Positions
(In Millions) Dec 26, 2020 Dec 28, 2019 Dec 29, 2018
Beginning gross unrecognized tax benefits $ 548  $ 283  $ 211 
Settlements and effective settlements with tax authorities (142) (4) (7)
Changes in balances related to tax position taken during prior periods 165 122 (11)
Changes in balances related to tax position taken during current period 257 147 90
Ending gross unrecognized tax benefits $ 828  $ 548  $ 283 
If the remaining balance of unrecognized tax benefits were recognized in a future period, it would result in a tax benefit of $550 million as of December 26, 2020 ($454 million as of December 28, 2019) and a reduction in the effective tax rate. Interest, penalties, and accrued interest related to unrecognized tax benefits were insignificant in the periods presented.
We comply with the tax 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 increase or decrease the balance of our gross unrecognized tax benefits. We estimate that the unrecognized tax benefits as of December 26, 2020 could decrease by as much as $430 million in the next 12 months.
We file federal, state, and non-U.S. tax returns. Excluding pre-acquisition Altera tax years, we are no longer subject to U.S. federal and non-U.S. tax examinations for years prior to 2010. For U.S. state tax returns, we are no longer subject to tax examination for years prior to 2012.