Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.3.1.900
Income Taxes
 12 Months Ended
Dec. 26, 2015
Income Tax Disclosure [Abstract]  
Income Taxes [Text Block]
Note 23: Income Taxes
Income Tax Provision
Income before taxes and the provision for taxes consisted of the following:
Years Ended
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Income before taxes:
 
 
 
 
 
 
U.S.
 
$
8,800

 
$
11,565

 
$
9,374

Non-U.S.
 
5,412

 
4,236

 
3,237

Total income before taxes
 
14,212

 
15,801

 
12,611

Provision for taxes:
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Federal
 
2,828

 
3,374

 
2,730

State
 
40

 
38

 
68

Non-U.S.
 
842

 
969

 
716

Total current provision for taxes
 
3,710

 
4,381

 
3,514

Deferred:
 
 
 
 
 
 
Federal
 
(862
)
 
(263
)
 
(412
)
Other
 
(56
)
 
(21
)
 
(111
)
Total deferred provision for taxes
 
(918
)
 
(284
)
 
(523
)
Total provision for taxes
 
$
2,792

 
$
4,097

 
$
2,991

Effective tax rate
 
19.6
%
 
25.9
%
 
23.7
%

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
(In Millions)
 
Dec 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
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
 
(7.9
)
 
(6.1
)
 
(5.8
)
Settlements, effective settlements, and related remeasurements
 
(2.9
)
 
—

 
—

Domestic manufacturing deduction benefit
 
(2.0
)
 
(2.1
)
 
(2.1
)
Research and development tax credits
 
(1.7
)
 
(1.7
)
 
(3.5
)
Other
 
(0.9
)
 
0.8

 
0.1

Effective tax rate
 
19.6
 %
 
25.9
 %
 
23.7
 %

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 taxed jurisdictions, and our decision to indefinitely reinvest certain prior years’ non-U.S. earnings positively impacted our effective income tax rate.
A substantial majority of the increase in our effective tax rate between 2014 and 2013 was driven by the reenacted U.S. R&D tax credit in 2013 containing two years' worth of R&D tax credits. The U.S. R&D tax credit was reenacted in the fourth quarter of 2014 retroactive for the full year. It was also reenacted in the first quarter of 2013 retroactive to the beginning of 2012.
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 2015, the tax benefit attributable to tax holidays was $85 million ($166 million for 2014 and $213 million for 2013) with a $0.02 impact on diluted earnings per share ($0.03 for 2014 and $0.04 for 2013).
During 2015, net income tax benefits attributable to equity-based compensation transactions that were allocated to stockholders’ equity totaled $172 million (net benefits of $103 million in 2014 and net benefits of $3 million in 2013).
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,
2015
 
Dec 27,
2014
Deferred tax assets:
 
 
 
 
Accrued compensation and other benefits
 
$
931

 
$
982

Share-based compensation
 
424

 
438

Deferred income
 
694

 
691

Inventory
 
598

 
339

State credits and net operating losses
 
613

 
519

Other, net
 
760

 
715

Gross deferred tax assets
 
4,020

 
3,684

Valuation allowance
 
(701
)
 
(595
)
Total deferred tax assets
 
3,319

 
3,089

Deferred tax liabilities:
 
 
 
 
Property, plant and equipment
 
(505
)
 
(1,171
)
Licenses and intangibles
 
(563
)
 
(576
)
Convertible debt
 
(1,042
)
 
(977
)
Unrealized gains on investments and derivatives
 
(717
)
 
(1,017
)
Investment in non-U.S. subsidiaries
 
(37
)
 
(252
)
Other, net
 
(358
)
 
(291
)
Total deferred tax liabilities
 
(3,222
)
 
(4,284
)
Net deferred tax assets (liabilities)
 
97

 
(1,195
)
 
 
 
 
 
Reported as:
 
 
 
 
Current deferred tax assets
 
2,036

 
1,958

Non-current deferred tax assets
 
600

 
622

Non-current deferred tax liabilities
 
(2,539
)
 
(3,775
)
Net deferred tax assets (liabilities)
 
$
97

 
$
(1,195
)

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 26, 2015 included allowances related to unrealized state credit carryforwards of $607 million and matters related to our non-U.S. subsidiaries of $94 million.
As of December 26, 2015, our federal, state, and non-U.S. net operating loss carryforwards for income tax purposes were $171 million, $101 million, and $384 million, respectively. A 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 2035. 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 $218 million that is not likely to be recovered and has been reduced by a valuation allowance.
As of December 26, 2015, we had not recognized U.S. deferred income taxes on a cumulative total of $26.9 billion of undistributed earnings for certain non-U.S. subsidiaries and $1.8 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 $468 million as of December 26, 2015 ($79 million as of December 27, 2014) is included in other current assets. Current income taxes payable of $272 million as of December 26, 2015 ($443 million as of December 27, 2014) is included in other accrued liabilities.
Long-term income taxes payable of $114 million as of December 26, 2015 ($262 million as of December 27, 2014) 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 26,
2015
 
Dec 27,
2014
 
Dec 28,
2013
Beginning gross unrecognized tax benefits
 
$
577

 
$
207

 
$
189

Settlements and effective settlements with tax authorities and related remeasurements
 
(452
)
 
(220
)
 
(2
)
Increases in balances related to tax positions taken during prior periods
 
4

 
173

 
21

Decreases in balances related to tax positions taken during prior periods
 
(34
)
 
(1
)
 
(9
)
Increases in balances related to tax positions taken during current period
 
6

 
418

 
8

Ending gross unrecognized tax benefits
 
$
101

 
$
577

 
$
207


The related tax benefit for settlements, effective settlements, and remeasurements is $419 million for 2015 (insignificant in 2014 and 2013).
If the remaining balance of $101 million of unrecognized tax benefits as of December 26, 2015 ($577 million as of December 27, 2014) were recognized in a future period, it would result in a tax benefit of $32 million ($485 million as of December 27, 2014) and a reduction in the effective tax rate.
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 2015 ($21 million in 2014 and insignificant in 2013). As of December 26, 2015, we had $34 million of accrued interest and penalties related to unrecognized tax benefits ($44 million as of December 27, 2014).
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 state and non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2002. For federal tax returns, we are no longer subject to tax examination for years prior to 2009.