Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.21.2
Income Taxes
 12 Months Ended
Sep. 26, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax provision were as follows (in millions):
2021 2020 2019
Current provision (benefit):      
Federal $ 942  $ 210  $ 1,563 
State 8  1  2 
Foreign 518  526  (407)
1,468  737  1,158 
Deferred (benefit) provision:      
Federal (251) (192) 2,037 
State 2  2  17 
Foreign 12  (26) (117)
(237) (216) 1,937 
$ 1,231  $ 521  $ 3,095 
The foreign component of the income tax provision 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):
2021 2020 2019
United States $ 8,781  $ 5,004  $ 7,042 
Foreign 1,493  715  439 
$ 10,274  $ 5,719  $ 7,481 
The following is a reconciliation of the expected statutory federal income tax provision to our actual income tax provision (in millions, except percentages). 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.
2021 2020 2019
Expected income tax provision at federal statutory tax rate $ 2,158  $ 1,201  $ 1,571 
Benefit from FDII deduction (550) (381) (419)
Excess tax benefit associated with share-based awards (265) (83) (27)
Benefit related to research and development tax credits (195) (125) (110)
Derecognition of deferred tax asset on distributed intellectual property —  —  2,472 
Benefit from establishing new U.S. net deferred tax assets —  —  (570)
Other 83  (91) 178 
$ 1,231  $ 521  $ 3,095 
Effective tax rate 12  % 9  % 41  %
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. 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 IRS, 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 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, $1.9 billion and $1.6 billion was recorded as a noncurrent income taxes receivable (recorded in other assets) at September 26, 2021 and September 27, 2020, respectively, and $1.9 billion and $1.6 billion was recorded as a noncurrent liability for uncertain tax benefits (recorded in other liabilities) at September 26, 2021 and September 27, 2020, respectively.
At September 26, 2021, we estimated remaining future payments of $1.9 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 five years. At September 26, 2021, $196 million was recorded in other current liabilities, reflecting the next installment due in January 2022.
We continue to assert that certain of our foreign earnings are not indefinitely reinvested. At September 26, 2021, we had not recorded a deferred tax liability of approximately $63 million related to foreign withholding taxes on approximately $761 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 U.S., we would have to adjust the income tax provision in the period we make such determination.
We have tax incentives in Singapore that require we meet specified employment and other criteria. Although our profit in Singapore has declined as a result of our 2018 restructuring and such tax incentives were not significant for all periods presented, failure to meet these incentive requirements through March 2022 could require us to refund previously realized material tax benefits for 2017 and 2018.
We had deferred tax assets and deferred tax liabilities as follows (in millions):
September 26,
2021		 September 27,
2020
Unused tax credits $ 1,504  $ 1,311 
Customer incentives 762  537 
Unused net operating losses 663  576 
Accrued liabilities and reserves 483  275 
Operating lease liabilities 188  107 
Unearned revenues 181  262 
Share-based compensation 175  151 
Unrealized losses on other investments and marketable securities 106  235 
Other 165  141 
Total gross deferred tax assets 4,227  3,595 
Valuation allowance (1,926) (1,728)
Total net deferred tax assets 2,301  1,867 
Unrealized gains on other investments and marketable securities (215) (97)
Intangible assets (198) (181)
Operating lease assets (174) (100)
Property, plant and equipment (111) (162)
Other (76) (32)
Total deferred tax liabilities (774) (572)
Net deferred tax assets $ 1,527  $ 1,295 
Reported as:    
Non-current deferred tax assets $ 1,591  $ 1,351 
        Non-current deferred tax liabilities (1) (64) (56)
$ 1,527  $ 1,295 
(1) Non-current deferred tax liabilities were included in other liabilities in the consolidated balance sheets.
At September 26, 2021, we had unused federal net operating loss carryforwards of $214 million, of which $150 million expire from 2022 through 2035 and $64 million may be carried forward indefinitely, unused state net operating loss carryforwards of $474 million expiring from 2022 through 2040 and unused foreign net operating loss carryforwards of $2.3 billion, of which substantially all may be carried forward indefinitely. At September 26, 2021, we had unused state tax credits of $1.3 billion, of which substantially all may be carried forward indefinitely, unused federal tax credits of $215 million expiring from 2026 through 2031 and unused tax credits of $51 million in foreign jurisdictions expiring from 2033 through 2041. We do not expect our federal net operating loss carryforwards to expire unused.
At September 26, 2021, we have provided a valuation allowance on certain state tax credits, foreign deferred tax assets and state net operating losses of $1.3 billion, $607 million and $13 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. 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 2021, 2020 and 2019 follows (in millions):
2021 2020 2019
Beginning balance of unrecognized tax benefits $ 1,901  $ 1,705  $ 217 
Additions based on prior year tax positions 56  20  1,238 
Reductions for prior year tax positions and lapse in statute of limitations (13) (2) (3)
Additions for current year tax positions 213  192  253 
Settlements with taxing authorities (21) (14) — 
Ending balance of unrecognized tax benefits $ 2,136  $ 1,901  $ 1,705 
Of the $2.1 billion of unrecognized tax benefits, $1.9 billion has been recorded to other liabilities. We believe that it is reasonably possible that certain unrecognized tax benefits recorded at September 26, 2021 may result in a cash payment in fiscal 2022. Unrecognized tax benefits at September 26, 2021 included $146 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 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 26, 2021 will increase in fiscal 2022 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 26, 2021, total interest and penalties related to unrecognized tax benefits accrued in other current liabilities and other liabilities was $184 million, with a corresponding noncurrent income taxes receivable of $107 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 currently a participant in the IRS Compliance Assurance Process (CAP) Program, 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 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. 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 26, 2021, 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 $1.5 billion, $830 million and $1.1 billion for fiscal 2021, 2020 and 2019, respectively.