Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.3
Income Taxes
 12 Months Ended
Sep. 24, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax provision from continuing operations were as follows (in millions):
2023 2022 2021
Current provision:      
Federal $ 1,229  $ 1,114  $ 942 
State 10  1  8 
Foreign (1) 491  906  518 
1,730  2,021  1,468 
Deferred (benefit) provision:      
Federal (1,475) (34) (251)
State (8) 15  2 
Foreign (1) (143) 10  12 
(1,626) (9) (237)
$ 104  $ 2,012  $ 1,231 
(1) The foreign component of the income tax provision included foreign withholding taxes on royalty revenues included in U.S. earnings.
The components of income from continuing operations before income taxes by U.S. and foreign jurisdictions were as follows (in millions):
2023 2022 2021
United States $ 6,400  $ 12,537  $ 8,781 
Foreign 1,043  2,461  1,493 
$ 7,443  $ 14,998  $ 10,274 
The following is a reconciliation of the expected statutory federal income tax provision to our actual income tax provision from continuing operations (in millions, except percentages). A significant portion of our U.S. income qualifies for preferential treatment as FDII (foreign-derived intangible income) at a 13% effective tax rate.
2023 2022 2021
Expected income tax provision at federal statutory tax rate $ 1,563  $ 3,150  $ 2,158 
Benefit from FDII deduction related to capitalizing research and development expenditures (598) —  — 
Benefit from FDII deduction, excluding the impact of capitalizing research and development expenditures (447) (753) (550)
Benefit related to research and development tax credits (235) (224) (195)
Benefit from fiscal 2021 and 2022 FDII deductions related to a change in sourcing of research and development expenditures (126) —  — 
Benefit from releasing valuation allowance on unutilized foreign loss carryforwards (114) —  — 
Foreign currency (gains) losses related to Korean withholding tax receivable (66) 243  12 
Shortfall (excess) tax benefit associated with share-based awards 3  (257) (265)
Nontaxable reversal of 2018 EC fine —  (224) — 
Other 124  77  71 
$ 104  $ 2,012  $ 1,231 
Effective tax rate 1  % 13  % 12  %
Beginning in fiscal 2023, for federal income tax purposes, we are required to capitalize and amortize domestic research and development expenditures over five years and foreign research and development expenditures over fifteen years (such expenditures were previously deducted as incurred). Our cash flows from operations will be adversely affected due to significantly higher cash tax payments. However, since the resulting deferred tax asset is established at the statutory rate of 21% (rather than the current effective tax rate of 13% to 16% after considering the FDII deduction), capitalization favorably affects our total provision for income taxes and results of operations. The adverse cash flow impact and favorable tax provision impact will diminish in future years as capitalized research and development expenditures continue to amortize.
Beginning in fiscal 2019, as a result of certain court rulings in Korea, among other factors, we decided to apply for a partial refund claim for taxes previously withheld from licensees in Korea on payments due under their license agreements to which we have claimed a foreign tax credit in the United States. As a result, $2.0 billion and $1.7 billion was recorded as a noncurrent income taxes receivable (recorded in other assets) at September 24, 2023 and September 25, 2022, respectively, and $2.3 billion and $2.1 billion was recorded as a noncurrent liability for uncertain tax benefits (recorded in other liabilities) at September 24, 2023 and September 25, 2022, respectively.
Income taxes payable (recorded in other current liabilities) were $1.7 billion and $634 million at September 24, 2023 and September 25, 2022, respectively. This increase was primarily due to announcements by the Internal Revenue Service (IRS), which postponed our remaining current year U.S. federal income tax-payments from fiscal 2023, which were paid in October 2023.
At September 24, 2023, we estimated remaining future payments of $1.5 billion for a one-time repatriation tax accrued in fiscal 2018, after application of certain tax credits, which is payable in installments over the next three years. At September 24, 2023, $391 million was recorded in other current liabilities, reflecting the next installment due in January 2024, with the remaining noncurrent portion presented as income taxes payable on our balance sheet.
We had deferred tax assets and deferred tax liabilities as follows (in millions):
September 24,
2023		 September 25,
2022
Unused tax credits $ 1,819  $ 1,624 
Capitalized research and development expenditures
 1,490  — 
Customer incentives 659  807 
Accrued liabilities and reserves 401  264 
Unused net operating losses 364  887 
Share-based compensation 285  225 
Operating lease liabilities 216  202 
Unrealized losses on other investments and marketable securities 159  197 
Other 409  435 
Total gross deferred tax assets 5,802  4,641 
Valuation allowance (1,803) (2,223)
Total net deferred tax assets 3,999  2,418 
Intangible assets (335) (315)
Operating lease assets (194) (184)
Unrealized gains on other investments and marketable securities (101) (84)
Property, plant and equipment (52) (101)
Other (118) (98)
Total deferred tax liabilities (800) (782)
Net deferred tax assets $ 3,199  $ 1,636 
Reported as:    
Non-current deferred tax assets $ 3,310  $ 1,803 
        Non-current deferred tax liabilities (1) (111) (167)
$ 3,199  $ 1,636 
(1) Non-current deferred tax liabilities were included in other liabilities in the consolidated balance sheets.
At September 24, 2023, we had unused federal net operating loss carryforwards of $448 million, of which $118 million expire from 2024 through 2037 and $330 million may be carried forward indefinitely, unused state net operating loss carryforwards of $707 million expiring from 2024 through 2037 and unused foreign net operating loss carryforwards of $910 million, of which substantially all may be carried forward indefinitely. At September 24, 2023, we had unused state tax credits of $1.7 billion, of which substantially all may be carried forward indefinitely, unused federal tax credits of $134 million expiring from 2028 through 2041 and unused tax credits of $54 million in foreign jurisdictions expiring from 2034 through 2043. We do not expect our federal net operating loss carryforwards to expire unused.
At September 24, 2023, we have provided a valuation allowance on certain state tax credits, foreign deferred tax assets and state net operating losses of $1.7 billion, $77 million and $36 million respectively. The valuation allowance reflects the
uncertainties surrounding our ability to generate sufficient future taxable income in certain tax jurisdictions to utilize our net deferred tax assets. We believe, more likely than not, that we will have sufficient taxable income to utilize our remaining deferred tax assets. The valuation allowance decreased from $2.2 billion at September 25, 2022, primarily due to the write-off of certain deferred tax assets and the related valuation allowance resulting from the liquidation of a Dutch subsidiary in fiscal 2023.
A summary of the changes in the amount of unrecognized tax benefits for fiscal 2023, 2022 and 2021 follows (in millions):
2023 2022 2021
Beginning balance of unrecognized tax benefits $ 2,191  $ 2,136  $ 1,901 
Additions based on prior year tax positions 10  58  56 
Reductions for prior year tax positions and lapse in statute of limitations (63) (136) (13)
Additions for current year tax positions 158  184  213 
Settlements with taxing authorities —  (51) (21)
Ending balance of unrecognized tax benefits $ 2,296  $ 2,191  $ 2,136 
Of the $2.3 billion of unrecognized tax benefits, $2.1 billion has been recorded to other liabilities. We believe that it is reasonably possible that certain unrecognized tax benefits recorded at September 24, 2023 may result in a cash payment in fiscal 2024. Unrecognized tax benefits at September 24, 2023 included $92 million for tax positions that, if recognized, would impact the effective tax rate. The unrecognized tax benefits differ from the amount that would affect our effective tax rate primarily because the unrecognized tax benefits were included on a gross basis and did not reflect related receivables or secondary impacts, such as the federal deduction for state taxes, adjustments to deferred tax assets and the valuation allowance that might be required if our tax positions are sustained. The increase in unrecognized tax benefits for all periods presented was primarily due to expected refunds of Korean withholding tax previously paid (which such increase had an insignificant impact to our income tax provision). If successful, the refund will result in a corresponding reduction in U.S. foreign tax credits. We believe that it is likely that the total amount of unrecognized tax benefits at September 24, 2023 will increase in fiscal 2024 as licensees in Korea continue to withhold taxes on future payments due under their licensing agreements at a rate higher than we believe is owed; such increase is not expected to have a significant impact on our income tax provision. At September 24, 2023, total interest and penalties related to unrecognized tax benefits accrued in other current liabilities and other liabilities was $199 million, with a corresponding noncurrent income taxes receivable of $139 million recorded in other assets for expected refunds of certain tax benefits.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years prior to fiscal 2018. We are also subject to examination in other taxing jurisdictions in the U.S. and numerous foreign jurisdictions. These examinations are at various stages with respect to assessments, claims, deficiencies and refunds, many of which are open for periods after fiscal 2001.
Cash amounts paid for income taxes, net of refunds received, were $1.4 billion, $2.1 billion and $1.5 billion for fiscal 2023, 2022 and 2021, respectively.