Income Taxes (Notes)
|9 Months Ended|
Jun. 28, 2020
|Income Tax Disclosure [Abstract]|
Note 3. Income Taxes
As of the third quarter of fiscal 2020, we estimated our annual effective income tax rate to be 9% for fiscal 2020, which excluded the effects of the agreements with Huawei signed in July 2020 (Note 10) and the U.S. Treasury Regulations that were issued in July 2020 as described below. Such estimated annual effective tax rate was lower than the U.S. federal statutory rate, primarily due to a significant portion of our income qualifying for preferential treatment as foreign-derived intangible income (FDII) at a 13% effective tax rate, benefits from our research and development tax credit and benefits from certain releases of our valuation allowance on capital losses. The effective tax rate of 3% for the third quarter of fiscal 2020 was lower than the estimated annual effective tax rate of 9% primarily due to benefits recorded in the third quarter of fiscal 2020, principally related to certain releases of our valuation allowance on capital losses, higher FDII deduction and foreign tax credit utilization. The effective tax rate for the third quarter of fiscal 2019 included a $2.5 billion tax expense due to the derecognition of a deferred tax asset as a result of an agreement with the Internal Revenue Service under which we forwent the federal tax basis step-up in certain distributed intellectual property.
In the fourth quarter of fiscal 2020, the United States Treasury Department issued final regulations on deductions for FDII. While we continue to evaluate the impact of these new regulations and the agreements reached with Huawei in July 2020, we currently expect our annual effective tax rate to increase from 9% to 11% for fiscal 2020. The United States Treasury Department is expected to finalize additional provisions of the 2017 Tax Cuts and Jobs Act, including certain foreign tax credit regulations, in the next several months. When finalized, these regulations may adversely affect our provision for income taxes, results of operations and/or cash flows.
Unrecognized tax benefits were $1.9 billion and $1.7 billion at June 28, 2020 and September 29, 2019, respectively, and primarily related to our refund claim of Korean withholding tax. If successful, the refund will result in a corresponding reduction in U.S. foreign tax credits. We expect that the total amount of unrecognized tax benefits at June 28, 2020 will increase in the next 12 months 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.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef