Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.2.2
Income Taxes
 12 Months Ended
Sep. 25, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax provision from continuing operations were as follows (in millions):
2022 2021 2020
Current provision:      
Federal $ 1,114  $ 942  $ 210 
State 1  8  1 
Foreign (1) 906  518  526 
2,021  1,468  737 
Deferred (benefit) provision:      
Federal (34) (251) (192)
State 15  2  2 
Foreign (1) 10  12  (26)
(9) (237) (216)
$ 2,012  $ 1,231  $ 521 
(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):
2022 2021 2020
United States $ 12,537  $ 8,781  $ 5,004 
Foreign 2,461  1,493  715 
$ 14,998  $ 10,274  $ 5,719 
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). Substantially all of our income from continuing operations is in the U.S., of which a significant portion qualifies for preferential treatment as FDII at a 13% effective tax rate.
2022 2021 2020
Expected income tax provision at federal statutory tax rate $ 3,150  $ 2,158  $ 1,201 
Benefit from FDII deduction (753) (550) (381)
Excess tax benefit associated with share-based awards (257) (265) (83)
Foreign currency losses (gains) related to Korean withholding tax receivable 243  12  (37)
Nontaxable reversal of 2018 EC fine (224) —  — 
Benefit related to research and development tax credits (224) (195) (125)
Other 77  71  (54)
$ 2,012  $ 1,231  $ 521 
Effective tax rate 13  % 12  % 9  %
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, $1.7 billion and $1.9 billion was recorded as a noncurrent income taxes receivable (recorded in other assets) at September 25, 2022 and September 26, 2021, respectively, and $2.1 billion and $1.9 billion was recorded as a noncurrent liability for uncertain tax benefits (recorded in other liabilities) at September 25, 2022 and September 26, 2021, respectively.
At September 25, 2022, we estimated remaining future payments of $1.7 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 four years. At September 25, 2022, $207 million was recorded in other current liabilities, reflecting the next installment due in January 2023, with the remaining noncurrent portion presented as income taxes payable on our balance sheet.
We continue to assert that certain of our foreign earnings are not indefinitely reinvested. At September 25, 2022, we had not recorded a deferred tax liability of approximately $70 million related to foreign withholding taxes on approximately $851 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 declined as a result of restructuring our operations in 2018, we were required to meet (and did meet) certain incentive requirements through March 2022. Failure to meet such requirements could have required 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 25,
2022		 September 26,
2021
Unused tax credits $ 1,624  $ 1,504 
Unused net operating losses 887  663 
Customer incentives 807  762 
Accrued liabilities and reserves 264  483 
Share-based compensation 225  175 
Operating lease liabilities 202  188 
Unrealized losses on other investments and marketable securities 197  106 
Unearned revenues 100  181 
Other 335  165 
Total gross deferred tax assets 4,641  4,227 
Valuation allowance (2,223) (1,926)
Total net deferred tax assets 2,418  2,301 
Intangible assets (315) (198)
Operating lease assets (184) (174)
Property, plant and equipment (101) (111)
Unrealized gains on other investments and marketable securities (84) (215)
Accrued withholding taxes (62) (42)
Other (36) (34)
Total deferred tax liabilities (782) (774)
Net deferred tax assets $ 1,636  $ 1,527 
Reported as:    
Non-current deferred tax assets $ 1,803  $ 1,591 
        Non-current deferred tax liabilities (1) (167) (64)
$ 1,636  $ 1,527 
(1) Non-current deferred tax liabilities were included in other liabilities in the consolidated balance sheets.
At September 25, 2022, we had unused federal net operating loss carryforwards of $808 million, of which $134 million expire from 2023 through 2037 and $674 million may be carried forward indefinitely, unused state net operating loss carryforwards of $896 million expiring from 2023 through 2037 and unused foreign net operating loss carryforwards of $2.6 billion, of which substantially all may be carried forward indefinitely. At September 25, 2022, we had unused state tax credits of $1.5 billion, of which substantially all may be carried forward indefinitely, unused federal tax credits of $135 million expiring from 2028 through 2041 and unused tax credits of $54 million in foreign jurisdictions expiring from 2034 through 2042. We do not expect our federal net operating loss carryforwards to expire unused.
At September 25, 2022, we have provided a valuation allowance on certain state tax credits, foreign deferred tax assets, state net operating losses and federal tax credits of $1.5 billion, $673 million, $42 million and $4 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 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 2022, 2021 and 2020 follows (in millions):
2022 2021 2020
Beginning balance of unrecognized tax benefits $ 2,136  $ 1,901  $ 1,705 
Additions based on prior year tax positions 58  56  20 
Reductions for prior year tax positions and lapse in statute of limitations (136) (13) (2)
Additions for current year tax positions 184  213  192 
Settlements with taxing authorities (51) (21) (14)
Ending balance of unrecognized tax benefits $ 2,191  $ 2,136  $ 1,901 
Of the $2.2 billion of unrecognized tax benefits, $2.0 billion has been recorded to other liabilities. We believe that it is reasonably possible that certain unrecognized tax benefits recorded at September 25, 2022 may result in a cash payment in fiscal 2023. Unrecognized tax benefits at September 25, 2022 included $135 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 25, 2022 will increase in fiscal 2023 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 25, 2022, total interest and penalties related to unrecognized tax benefits accrued in other current liabilities and other liabilities was $168 million, with a corresponding noncurrent income taxes receivable of $108 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. For tax years prior to fiscal 2021, we are 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 25, 2022, 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 $2.1 billion, $1.5 billion and $0.8 billion for fiscal 2022, 2021 and 2020, respectively.