Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.2
Income Taxes
 12 Months Ended
Sep. 27, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax provision were as follows (in millions):
2020 2019 2018
Current provision (benefit):      
Federal $ 210  $ 1,563  $ 2,559 
State 1  2  (1)
Foreign 526  (407) 777 
737  1,158  3,335 
Deferred provision (benefit):      
Federal (192) 2,037  1,846 
State 2  17  1 
Foreign (26) (117) 174 
(216) 1,937  2,021 
$ 521  $ 3,095  $ 5,356 
The foreign component of the income tax provision (benefit) included foreign withholding taxes on royalty revenues included in U.S. earnings.
The components of income before income taxes by U.S. and foreign jurisdictions were as follows (in millions):
2020 2019 2018
United States $ 5,004  $ 7,042  $ (1,834)
Foreign 715  439  2,226 
$ 5,719  $ 7,481  $ 392 
In fiscal 2018, the foreign component of income before income taxes in foreign jurisdictions primarily consisted of income earned in Singapore.
The following is a reconciliation of the expected statutory federal income tax provision to our actual income tax provision (in millions, except percentages):
2020 2019 2018
Expected income tax provision at federal statutory tax rate $ 1,201  $ 1,571  $ 97 
State income tax provision, net of federal benefit 7  10  2 
Benefit from foreign-derived intangible income (FDII) deduction (381) (419) — 
Benefit related to research and development tax credits (125) (110) (136)
Excess tax benefit associated with share-based awards (83) (27) (20)
Benefit from foreign income taxed at other than U.S. rates (11) (54) (834)
Derecognition of deferred tax asset on distributed intellectual property —  2,472  — 
Benefit from establishing new U.S. net deferred tax assets —  (570) — 
Nondeductible charges (reversals) related to the EC, KFTC and TFTC investigations —  51  (119)
Toll Charge from U.S. tax reform —  —  5,236 
Valuation allowance on deferred tax assets related to the NXP termination fee —  —  494 
Remeasurement of deferred taxes due to changes in the statutory rate due to U.S. tax reform —  —  443 
Other (87) 171  193 
$ 521  $ 3,095  $ 5,356 
Effective tax rate 9  % 41  % N/M
N/M - Not meaningful
The 2017 Tax Cuts and Jobs Act (the Tax Legislation) was enacted in fiscal 2018, which, among other things, lowered the corporate income tax rate to 21%, and as a fiscal-year taxpayer, certain provisions of the Tax Legislation became effective for us at the beginning of fiscal 2019, including FDII (foreign-derived intangible income). In response to the Tax Legislation and to better align our profits with our activities, we implemented certain tax restructuring in fiscal 2018 and 2019. As a result, beginning in fiscal 2019, substantially all of our income is in the U.S., of which a significant portion qualifies for preferential treatment as FDII at a 13% effective tax rate. Our annual effective tax rate for fiscal 2018 reflected a blended federal statutory rate of approximately 25%.
In the fourth quarter of fiscal 2020, the United States Treasury Department issued final regulations on deductions for FDII, which are retroactive to fiscal 2019. As a result of these regulations, our fiscal 2020 annual effective tax rate increased by approximately 1%. In the first quarter of fiscal 2021, the United States Treasury Department issued final regulations on the foreign tax credit, which we anticipate will adversely affect our effective tax rate. The impact of these regulations, which are retroactive to fiscal 2019, has not been included in our fiscal 2020 effective tax rate. While we continue to evaluate these new regulations, we currently do not expect the adverse impact to fiscal 2019 and 2020 to be significant.
As a result of the Tax Legislation, in fiscal 2019, several of our foreign subsidiaries made elections to be treated as U.S. branches for federal income tax purposes (commonly referred to as “check-the-box” elections) effective beginning in fiscal 2018 and 2019. Although beginning in fiscal 2019 the income of these entities is included in our consolidated U.S. tax return, we believe that by treating these foreign subsidiaries as U.S. branches for federal income taxes, rather than controlled foreign corporations, we will significantly reduce the risk of being subject to GILTI (global intangible low-taxed income) and BEAT (base-erosion and anti-abuse tax) taxes. As a result of making these check-the-box elections, we recorded a tax benefit of $570 million in the first quarter of fiscal 2019 due to establishing new U.S. net deferred tax assets resulting from the difference between the GAAP basis and the U.S. federal tax carryover basis of the existing assets and liabilities of those foreign subsidiaries, primarily related to customer incentive liabilities that have not been deducted for tax purposes. Additionally, during fiscal 2018, one of our foreign subsidiaries distributed certain intellectual property to a U.S. subsidiary resulting in a difference between the GAAP basis and the U.S. federal tax basis of the distributed intellectual property. Upon adoption of new accounting guidance in the first quarter of fiscal 2019, which changed the accounting for the income tax effects of intra-entity transfers of assets other than inventory, we recorded a deferred tax asset of approximately $2.6 billion primarily related to the distributed intellectual property, with an adjustment to opening retained earnings. During the third quarter of fiscal 2019, the United States Treasury Department issued new temporary regulations that resulted in a change to the deductibility of dividend income received by a U.S. stockholder from a foreign corporation. As a result of this change, pursuant to an agreement with the Internal Revenue Service, we relinquished the federal tax basis step-up of intellectual property that was distributed in fiscal 2018 by one of our foreign subsidiaries to a U.S. subsidiary. Therefore, the related deferred tax asset was derecognized, resulting in a $2.5 billion charge to income tax expense in fiscal 2019.
In fiscal 2019, as a result of recent 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, $1.6 billion and $1.4 billion was recorded as a noncurrent income taxes receivable (recorded in other assets) at September 27, 2020 and September 29, 2019, respectively, and $1.6 billion and $1.4 billion was recorded a noncurrent liability for uncertain tax benefits of (recorded in other liabilities) at September 27, 2020 and September 29, 2019, respectively.
In fiscal 2018, as a result of the Tax Legislation, we recorded a charge of $5.7 billion to income tax expense, comprised of $5.2 billion related to the estimated one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Toll Charge) and $438 million resulting from the remeasurement of U.S. deferred tax assets and liabilities that existed at the end of fiscal 2017 at a lower enacted corporate income tax rate, which included a $135 million tax benefit recorded in fiscal 2018 related to the remeasurement of a U.S. deferred tax liability that was established as a result of a change in one of our tax positions due to Tax Legislation. After application of certain tax credits, the total cash payment is $2.5 billion. At September 27, 2020, we estimated remaining future payments of $2.0 billion for the Toll Charge, after application of certain tax credits (including excess tax credits generated in fiscal 2019), which is payable in installments over the next six years. At September 27, 2020, $174 million was recorded in other current liabilities, reflecting the next installment due in January 2021.
Income tax expense for fiscal 2018 was also impacted by the charge recorded in fiscal 2018 related to the termination fee paid to NXP, which did not result in a tax benefit after the consideration of realizability of such loss. Fiscal 2018 income tax expense was impacted by the EC fine and settlement with the TFTC, which were not deductible for tax purposes (or taxable in the case of the settlement) and which were attributable to foreign jurisdictions and to the United States.
Certain of our tax incentives in Singapore expired in March 2017. In fiscal 2018, we entered into a new tax incentive agreement in Singapore that results in a reduced tax rate from March 2017 through March 2022, provided that we meet specified employment and investment criteria in Singapore. Our Singapore tax rate will increase in March 2022 as a result of expiration of these incentives and again in March 2027 upon the expiration of tax incentives under a prior agreement. During fiscal 2018, one of our Singapore subsidiaries distributed certain intellectual property to a U.S. subsidiary reducing the benefit of these tax incentives almost entirely going forward. Without these tax incentives, our income tax expense would have been higher in fiscal 2018 by $652 million and impacted earnings per share by $0.45 per share. The impact in fiscal 2019 and 2020 was not significant.
We continue to assert that certain of our foreign earnings are not indefinitely reinvested. At September 27, 2020, we had not recorded a deferred tax liability of approximately $66 million related to foreign withholding taxes on approximately $635 million of undistributed earnings of certain subsidiaries that we continue to consider to be indefinitely reinvested outside the United States. Should we decide to no longer indefinitely reinvest such earnings outside the United States, we would have to adjust the income tax provision in the period we make such determination.
We had deferred tax assets and deferred tax liabilities as follows (in millions):
September 27,
2020		 September 29,
2019
Unused tax credits $ 1,311  $ 1,137 
Accrued liabilities and reserves 812  648 
Unused net operating losses 576  619 
Unearned revenues 262  376 
Unrealized losses on other investments and marketable securities 235  164 
Share-based compensation 151  115 
Operating lease liabilities 107  — 
Other 141  144 
Total gross deferred tax assets 3,595  3,203 
Valuation allowance (1,728) (1,672)
Total net deferred tax assets 1,867  1,531 
Intangible assets (181) (216)
Property, plant and equipment (162) (102)
Operating lease assets (100) — 
Unrealized gains on other investments and marketable securities (97) (99)
Other (32) (21)
Total deferred tax liabilities (572) (438)
Net deferred tax assets $ 1,295  $ 1,093 
Reported as:    
Non-current deferred tax assets $ 1,351  $ 1,196 
        Non-current deferred tax liabilities (1) (56) (103)
$ 1,295  $ 1,093 
(1)Non-current deferred tax liabilities were included in other liabilities in the consolidated balance sheets.
At September 27, 2020, we had unused federal net operating loss carryforwards of $167 million expiring from 2021 through 2035, unused state net operating loss carryforwards of $579 million expiring from 2021 through 2040 and unused foreign net operating loss carryforwards of $2.2 billion, of which $2.0 billion expire in 2027. At September 27, 2020, we had unused state tax credits of $1.1 billion, of which substantially all may be carried forward indefinitely, unused federal tax credits of $187 million expiring from 2026 through 2031 and unused tax credits of $42 million in foreign jurisdictions expiring from 2033 through 2040. We do not expect our federal net operating loss carryforwards to expire unused.
At September 27, 2020, we have provided a valuation allowance on certain state tax credits, foreign deferred tax assets, federal capital losses, federal foreign tax credits and state net operating losses of $1.1 billion, $524 million, $29 million, $28 million and $14 million, respectively. The valuation allowance reflects the uncertainties surrounding our ability to generate sufficient future taxable income in certain foreign and state tax jurisdictions to utilize our net operating losses and our ability to generate sufficient capital gains to utilize all capital losses. We believe, more likely than not, that we will have sufficient taxable income after deductions related to share-based awards to utilize our remaining deferred tax assets.
A summary of the changes in the amount of unrecognized tax benefits for fiscal 2020, 2019 and 2018 follows (in millions):
2020 2019 2018
Beginning balance of unrecognized tax benefits $ 1,705  $ 217  $ 372 
Additions based on prior year tax positions 20  1,238  7 
Reductions for prior year tax positions and lapse in statute of limitations (2) (3) (11)
Additions for current year tax positions 192  253  18 
Settlements with taxing authorities (14) —  (169)
Ending balance of unrecognized tax benefits $ 1,901  $ 1,705  $ 217 
Of the $1.9 billion of unrecognized tax benefits, $1.8 billion has been recorded to other noncurrent liabilities. We believe that it is reasonably possible that certain unrecognized tax benefits recorded at September 27, 2020 may result in a cash payment in fiscal 2021. Unrecognized tax benefits at September 27, 2020 included $127 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 in fiscal 2020 and fiscal 2019 was primarily due to our decision in fiscal 2019 to request for a refund of Korean withholding tax (which 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 27, 2020 will increase in fiscal 2021 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.
We file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. We are currently a participant in the IRS Compliance Assurance Process, whereby we and the IRS endeavor to agree on the treatment of all tax issues prior to the tax return being filed. We are no longer subject to U.S. federal income tax examinations for years prior to fiscal 2015. We are subject to examination by the California Franchise Tax Board for fiscal years after 2014. We are also subject to examination in other taxing jurisdictions in the United States 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 2000. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts give rise to a revision become known. At September 27, 2020, we believe 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 our income tax provision and the related accruals.
Cash amounts paid for income taxes, net of refunds received, were $830 million, $1.1 billion and $877 million for fiscal 2020, 2019 and 2018, respectively.