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.
