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. 25, 2016

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



	2016			2015			2014
Current provision (benefit):
Federal	$	4		$	(67	)	$	172
State	4			4			10
Foreign	1,411			1,307			1,116
	1,419			1,244			1,298
Deferred (benefit) provision:
Federal	(184		)	(9		)	(30		)
State	6			1			(10		)
Foreign	(110		)	(17		)	(14		)
	(288		)	(25		)	(54		)
	$	1,131		$	1,219		$	1,244

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

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



	2016		2015		2014
United States	$	3,032	$	2,993	$	3,213
Foreign	3,801		3,494		5,565
	$	6,833	$	6,487	$	8,778

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



	2016			2015			2014
Expected income tax provision at federal statutory tax rate	$	2,392		$	2,270		$	3,072
State income tax provision, net of federal benefit	19			18			24
Foreign income taxed at other than U.S. rates	(1,068		)	(937		)	(1,750		)
Research and development tax credits	(143		)	(148		)	(61		)
Worthless stock deduction of domestic subsidiary	(101		)	—			—
Other	32			16			(41		)
	$	1,131		$	1,219		$	1,244

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. The Company’s Singapore tax rate will increase in fiscal 2017 and again in fiscal 2027 as a result of the expiration of these 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):



	2016		2015		2014
Additional income tax expense	$	487	$	656	$	690
Reduction to diluted earnings per share	$	0.32	$	0.40	$	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 $11.5 billion related to the United States federal and state income taxes and foreign withholding taxes on approximately $32.5 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 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 2014 and issued a no change letter in December 2015, 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 income taxes in other taxing jurisdictions in the United States and around the world, many of which are open to tax examinations for periods after fiscal 2000. The outcome of any state or foreign income tax examination is not expected to be material to the Company’s consolidated financial statements.

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



	September 25, 2016			September 27, 2015
Unused tax credits	$	1,256		$	897
Unearned revenues	920			1,029
Unrealized losses on marketable securities	493			441
Accrued liabilities and reserves	409			317
Share-based compensation	277			331
Unused net operating losses	218			265
Other	107			95
Total gross deferred tax assets	3,680			3,375
Valuation allowance	(754		)	(635		)
Total net deferred tax assets	2,926			2,740
Intangible assets	(502		)	(548		)
Unrealized gains on marketable securities	(430		)	(273		)
Other	(133		)	(105		)
Total deferred tax liabilities	(1,065		)	(926		)
Net deferred tax assets	$	1,861		$	1,814
Reported as:
Current deferred tax assets	$	—		$	635
Non-current deferred tax assets	2,030			1,453
Current deferred tax liabilities (1)	—			(4		)
Non-current deferred tax liabilities (1)	(169		)	(270		)
	$	1,861		$	1,814


(1)	Current deferred tax liabilities and non-current deferred tax liabilities were included in other current liabilities and other liabilities, respectively, in the consolidated balance sheets.

At September 25, 2016, the Company had unused federal net operating loss carryforwards of $267 million expiring from 2021 through 2034, unused state net operating loss carryforwards of $892 million expiring from 2017 through 2036 and unused foreign net operating loss carryforwards of $287 million expiring from 2019 through 2025. At September 25, 2016, the Company had unused state tax credits of $637 million, of which substantially all may be carried forward indefinitely, unused federal tax credits of $595 million expiring from 2025 through 2036 and unused tax credits of $24 million in foreign jurisdictions expiring from 2033 through 2036. The Company does not expect its federal net operating loss carryforwards to expire unused.

The Company believes, more likely than not, that it will have sufficient taxable income after deductions related to share-based awards to utilize the majority of its deferred tax assets. At September 25, 2016, the Company has provided a valuation allowance on certain state tax credits, foreign deferred tax assets and state net operating losses of $627 million, $94 million and $33 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.

A summary of the changes in the amount of unrecognized tax benefits for fiscal 2016, 2015 and 2014 follows (in millions):



	2016			2015			2014
Beginning balance of unrecognized tax benefits	$	40		$	87		$	221
Additions based on prior year tax positions	20			31			1
Reductions for prior year tax positions and lapse in statute of limitations	(6		)	(70		)	(67		)
Additions for current year tax positions	218			5			5
Settlements with taxing authorities	(1		)	(13		)	(73		)
Ending balance of unrecognized tax benefits	$	271		$	40		$	87

The Company does not expect any unrecognized tax benefits recorded at September 25, 2016 to result in a significant cash payment in fiscal 2017. Unrecognized tax benefits at September 25, 2016 included $191 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 2016 was primarily due to tax positions related to classification of income. The decrease in unrecognized tax benefits in fiscal 2015 primarily resulted from a favorable tax audit settlement with the IRS related to Qualcomm Atheros, Inc.’s pre-acquisition 2010 and 2011 tax returns, which was partially offset by an increase related to the CSR acquisition (Note 9). The decrease in unrecognized tax benefits in fiscal 2014 was primarily due to an agreement reached with the IRS on components of the Company’s fiscal 2013 tax returns. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits at September 25, 2016 may increase or decrease in fiscal 2017.

Cash amounts paid for income taxes, net of refunds received, were $1.3 billion, $1.2 billion and $1.2 billion for fiscal 2016, 2015 and 2014, respectively.