Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.21.4
Income Taxes
12 Months Ended
Dec. 25, 2021
Income Tax Disclosure [Abstract]  
Income Taxes [Text Block]
Note 8 : Income Taxes
Income Tax Provision
Years Ended (In Millions) Dec 25, 2021 Dec 26, 2020 Dec 28, 2019
Income before taxes:
US $ 9,361  $ 15,452  $ 13,729 
Non-US 12,342  9,626  10,329 
Total income before taxes 21,703  25,078  24,058 
Provision for taxes:
Current:
Federal 1,304  1,120  1,391 
State 75  46  37 
Non-US 1,198  1,244  1,060 
Total current provision for taxes 2,577  2,410  2,488 
Deferred:
Federal (863) 1,369  597 
State (25) 25 
Non-US 146  375  (76)
Total deferred provision for taxes (742) 1,769  522 
Total provision for taxes $ 1,835  $ 4,179  $ 3,010 
Effective tax rate 8.5  % 16.7  % 12.5  %
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 25, 2021 Dec 26, 2020 Dec 28, 2019
Statutory federal income tax rate 21.0  % 21.0  % 21.0  %
Increase (reduction) in rate resulting from:
Non-US income taxed at different rates (5.9) (3.7) (3.7)
Research and development tax credits (2.4) (2.1) (2.3)
Restructuring of certain non-U.S. subsidiaries (3.4) —  — 
Foreign derived intangible income benefit (2.2) (1.9) (3.2)
Change in permanent reinvestment assertion —  1.6  — 
Other 1.4  1.8  0.7 
Effective tax rate 8.5  % 16.7  % 12.5  %
Our effective tax rate decreased in 2021 compared to 2020, primarily driven by one-time tax benefits due to the restructuring of certain non-US subsidiaries as well as a higher proportion of our income in non-US jurisdictions. As a result of the restructuring, we established deferred tax assets and released the valuation allowances of certain foreign deferred tax assets. The majority of these deferred tax assets established in 2021 fully offset the deferred tax liabilities recognized in 2020 driven by a change in our permanent reinvestment assertion with respect to undistributed earnings in China, as a result of the planned divestiture of our NAND memory business.
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 the planned divestiture of our NAND memory business. It also increased due to the reduction in our foreign derived intangible income benefit in 2020.
We derive the effective tax rate benefit attributed to non-US income taxed at different rates primarily from our operations in Hong Kong, Ireland, Israel, and Malaysia. The statutory tax rates in these jurisdictions range from 12.5% to 24.0%. We are subject to reduced tax rates in Israel and Malaysia as long as we conduct certain eligible activities and make certain capital investments. We have conditional reduced tax rates that expire at various dates through 2056 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 25, 2021 Dec 26, 2020
Deferred tax assets:
Accrued compensation and other benefits $ 1,019  $ 865 
Share-based compensation 477  324 
Litigation charge 467  — 
Inventory 914  835 
R&D expenditures capitalization 519  — 
State credits and net operating losses 2,010  1,829 
Other, net 819  617 
Gross deferred tax assets 6,225  4,470 
Valuation allowance (2,259) (1,963)
Total deferred tax assets 3,966  2,507 
Deferred tax liabilities:
Property, plant and equipment (4,213) (3,109)
Licenses and intangibles (486) (725)
Unrealized gains on investments and derivatives (819) (735)
Unremitted earnings of non-US subsidiaries —  (403)
Other, net (241) (146)
Total deferred tax liabilities (5,759) (5,118)
Net deferred tax assets (liabilities) $ (1,793) $ (2,611)
Reported as:
Deferred tax assets 874  1,232 
Deferred tax liabilities (2,667) (3,843)
Net deferred tax assets (liabilities) $ (1,793) $ (2,611)
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 25, 2021 $ 1,963  $ 442  $ (146) $ 2,259 
December 26, 2020 $ 1,534  $ 378  $ 51  $ 1,963 
December 28, 2019 $ 1,302  $ 239  $ (7) $ 1,534 
Deferred tax assets are included within other long-term assets on the Consolidated Balance Sheets.
The valuation allowance as of December 25, 2021 included allowances primarily related to unrealized state credit carryforwards of $2.0 billion.
As of December 25, 2021, our federal and non-US net operating loss carryforwards for income tax purposes were $644 million and $1.1 billion, respectively. Most of the non-US net operating loss carryforwards have no expiration date. The remaining non-US and US federal net operating loss carryforwards expire at various dates through 2040. A significant amount of the net operating loss carryforwards in the US relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. The federal and non-US net operating loss carryforwards include $357 million and $860 million, respectively, that is not likely to be recovered and has been reduced by a valuation allowance.
At December 25, 2021, we have undistributed earnings of certain foreign subsidiaries of approximately $18.9 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 $23 million as of December 25, 2021 ($131 million as of December 26, 2020) are included in other current assets. Current income taxes payable of $1.1 billion as of December 25, 2021 ($756 million as of December 26, 2020) are included in other accrued liabilities.
Long-term income taxes payable of $4.3 billion as of December 25, 2021 ($4.6 billion as of December 26, 2020) 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-US tax credits.
Uncertain Tax Positions
(In Millions) Dec 25, 2021 Dec 26, 2020 Dec 28, 2019
Beginning gross unrecognized tax benefits $ 828  $ 548  $ 283 
Settlements and effective settlements with tax authorities (25) (142) (4)
Changes in balances related to tax position taken during prior periods (26) 165 122 
Changes in balances related to tax position taken during current period 243 257 147
Ending gross unrecognized tax benefits $ 1,020  $ 828  $ 548 
If the remaining balance of unrecognized tax benefits were recognized in a future period, it would result in a tax benefit of $721 million as of December 25, 2021 ($550 million as of December 26, 2020) 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 regularly engage in discussions and negotiations with tax authorities regarding tax matters in the various jurisdictions in which we conduct business. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain US federal and non-US 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 25, 2021 could decrease by as much as $327 million in the next 12 months.
We file federal, state, and non-US tax returns. Excluding pre-acquisition Altera tax years, we are no longer subject to US federal and non-US tax examinations for years prior to 2013. For US state tax returns, we are no longer subject to tax examination for years prior to 2014.