QUALCOMM Incorporated Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Sep. 24, 2017

The components of the income tax provision were as follows (in millions):



	2017			2016			2015
Current provision (benefit):
Federal	$	72		$	4		$	(67	)
State	3			4			4
Foreign	1,256			1,411			1,307
	1,331			1,419			1,244
Deferred (benefit) provision:
Federal	(586		)	(184		)	(9		)
State	4			6			1
Foreign	(194		)	(110		)	(17		)
	(776		)	(288		)	(25		)
	$	555		$	1,131		$	1,219

The foreign component of the income tax provision consisted primarily of foreign withholding taxes on royalty fees included in United States earnings.

The components of income before income taxes by United States and foreign jurisdictions were as follows (in millions):



	2017			2016		2015
United States	$	(762	)	$	3,032	$	2,993
Foreign	3,782			3,801		3,494
	$	3,020		$	6,833	$	6,487

The foreign component of income before income taxes in foreign jurisdictions consists primarily of income earned in Singapore.

The following is a reconciliation of the expected statutory federal income tax provision to the Company’s actual income tax provision (in millions):



	2017			2016			2015
Expected income tax provision at federal statutory tax rate	$	1,057		$	2,392		$	2,270
State income tax provision, net of federal benefit	8			19			18
Foreign income taxed at other than U.S. rates	(963		)	(1,068		)	(937		)
Research and development tax credits	(81		)	(143		)	(148		)
Worthless stock deduction of domestic subsidiary	—			(101		)	—
Nondeductible charges related to the KFTC and TFTC investigations	363			—			—
Impact of changes in tax reserves and audit settlements for prior year tax positions	111			—			(61		)
Other	60			32			77
	$	555		$	1,131		$	1,219

During fiscal 2017, the Company recorded charges of $927 million and $778 million related to the fines imposed by the KFTC and the TFTC, respectively (Note 7), which are not deductible for tax purposes and are attributable to both the United States and a foreign jurisdiction.

During fiscal 2016, the Company recorded a tax benefit of $101 million from a worthless stock deduction on a domestic subsidiary of one of the Company’s former display businesses. Also, during fiscal 2016, the United States government permanently reinstated the federal research and development tax credit retroactively to January 1, 2015. As a result of the reinstatement, the Company recorded a tax benefit of $79 million in fiscal 2016 related to fiscal 2015. During fiscal 2015, the NDRC imposed a fine of $975 million (Note 2), which was not deductible for tax purposes and was substantially attributable to a foreign jurisdiction. Additionally, during fiscal 2015, the Company recorded a tax benefit of $101 million related to fiscal 2014 resulting from the United States government reinstating the federal research and development tax credit retroactively to January 1, 2014 through December 31, 2014. The effective tax rate for fiscal 2015 also reflected the United States federal research and development tax credit generated through December 31, 2014, the date on which the credit expired, and a $61 million tax benefit as a result of a favorable tax audit settlement with the Internal Revenue Service (IRS) related to Qualcomm Atheros, Inc.’s pre-acquisition 2010 and 2011 tax returns.

The Company’s QCT segment’s non-United States headquarters is located in Singapore. The Company has obtained tax incentives in Singapore that commenced in March 2012, which are effective through March 2027, that result in a tax exemption for the first five years provided that the Company meets specified employment and investment criteria. As a result of the expiration of certain of these incentives, the Company’s Singapore tax rate increased in fiscal 2017 and will increase again in fiscal 2027 upon the expiration of the remaining incentives. Had the Company established QCT’s non-United States headquarters in Singapore without these tax incentives, the Company’s income tax expense would have been higher and impacted earnings per share attributable to Qualcomm as follows (in millions, except per share amounts):



	2017		2016		2015
Additional income tax expense	$	493	$	487	$	656
Reduction to diluted earnings per share	$	0.33	$	0.32	$	0.40

The Company considers the operating earnings of certain non-United States subsidiaries to be indefinitely reinvested outside the United States based on the Company’s plans for use and/or investment outside the United States and the Company’s belief that its sources of cash and liquidity in the United States will be sufficient to meet future domestic cash needs. The Company has not recorded a deferred tax liability of approximately $13.7 billion related to the United States federal and state income taxes and foreign withholding taxes on approximately $39.0 billion of undistributed earnings of certain non-United States subsidiaries indefinitely reinvested outside the United States. Should the Company decide to no longer indefinitely reinvest such earnings outside the United States, the Company would have to adjust the income tax provision in the period management makes such determination.

The Company had deferred tax assets and deferred tax liabilities as follows (in millions):



	September 24, 2017			September 25, 2016
Unused tax credits	$	1,798		$	1,256
Accrued liabilities and reserves	888			409
Unearned revenues	886			920
Share-based compensation	241			277
Unused net operating losses	208			218
Unrealized losses on other investments and marketable securities	151			254
Other	21			55
Total gross deferred tax assets	4,193			3,389
Valuation allowance	(863		)	(754		)
Total net deferred tax assets	3,330			2,635
Intangible assets	(535		)	(502		)
Unrealized gains on other investments and marketable securities	(33		)	(194		)
Other	(95		)	(78		)
Total deferred tax liabilities	(663		)	(774		)
Net deferred tax assets	$	2,667		$	1,861
Reported as:
Non-current deferred tax assets	2,900			2,030
Non-current deferred tax liabilities (1)	(233		)	(169		)
	$	2,667		$	1,861


(1)	Non-current deferred tax liabilities were included in other liabilities in the consolidated balance sheets.

At September 24, 2017, the Company had unused federal net operating loss carryforwards of $245 million expiring from 2021 through 2035, unused state net operating loss carryforwards of $858 million expiring from 2018 through 2037 and unused foreign net operating loss carryforwards of $215 million, of which substantially all may be carried forward indefinitely. At September 24, 2017, the Company had unused state tax credits of $763 million, of which substantially all may be carried forward indefinitely, unused federal tax credits of $1.0 billion expiring from 2025 through 2037 and unused tax credits of $28 million in foreign jurisdictions expiring from 2033 through 2037. The Company does not expect its federal net operating loss carryforwards to expire unused.

At September 24, 2017, the Company has provided a valuation allowance on certain state tax credits, foreign deferred tax assets and state net operating losses of $752 million, $69 million and $42 million, respectively. The valuation allowances reflect the uncertainties surrounding the Company’s ability to generate sufficient future taxable income in certain foreign and state tax jurisdictions to utilize its net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses. The Company believes, more likely than not, that it will have sufficient taxable income after deductions related to share-based awards to utilize its remaining deferred tax assets.

A summary of the changes in the amount of unrecognized tax benefits for fiscal 2017, 2016 and 2015 follows (in millions):



	2017			2016			2015
Beginning balance of unrecognized tax benefits	$	271		$	40		$	87
Additions based on prior year tax positions	92			20			31
Reductions for prior year tax positions and lapse in statute of limitations	(11		)	(6		)	(70		)
Additions for current year tax positions	23			218			5
Settlements with taxing authorities	(3		)	(1		)	(13		)
Ending balance of unrecognized tax benefits	$	372		$	271		$	40

The Company believes that it is reasonably possible that certain unrecognized tax benefits recorded at September 24, 2017 may result in a significant cash payment in fiscal 2018. Unrecognized tax benefits at September 24, 2017 included $289 million for tax positions that, if recognized, would impact the effective tax rate. The unrecognized tax benefits differ from the amount that would affect the Company’s effective tax rate primarily because the unrecognized tax benefits were included on a gross basis and did not reflect secondary impacts such as the federal deduction for state taxes, adjustments to deferred tax assets and the valuation allowance that might be required if the Company’s tax positions are sustained. The increase in unrecognized tax benefits in fiscal 2017 was primarily due to tax positions related to transfer pricing. The increase in unrecognized tax benefits in fiscal 2016 was primarily due to tax positions related to classification of income. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits at September 24, 2017 may increase or decrease in fiscal 2018.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. The Company is currently a participant in the IRS Compliance Assurance Process, whereby the IRS and the Company endeavor to agree on the treatment of all tax issues prior to the tax return being filed. The IRS completed its examination of the Company’s tax return for fiscal 2015 and issued a no change letter in February 2017, resulting in no change to the income tax provision. The Company is no longer subject to United States federal income tax examinations for years prior to fiscal 2014. The Company is subject to examination by the California Franchise Tax Board for fiscal years after 2011. The Company is also subject to examination in other taxing jurisdictions in the United States and numerous foreign jurisdictions, most notably in countries where the Company earns a routine return and tax authorities believe substantial value-add activities are performed. These examinations are at various stages with respect to assessments, claims, deficiencies and refunds, many of which are open for periods after fiscal 2000. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts give rise to a revision become known. As of September 24, 2017, the Company believes that adequate amounts have been reserved for based on facts known. However, the final determination of tax audits and any related legal proceedings could materially differ from amounts reflected in the Company’s income tax provision and the related accruals.

Cash amounts paid for income taxes, net of refunds received, were $1.0 billion, $1.3 billion and $1.2 billion for fiscal 2017, 2016 and 2015, respectively.