Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Sep. 30, 2012
Notes to Financial Statements [Abstract]  
Note 4 - Income Taxes
Note 4. Income Taxes
The components of the income tax provision were as follows (in millions):
 
2012
 
2011
 
2010
Current provision:
 
 
 
 
 
Federal
$
140

 
$
179

 
$
1,514

State
1

 
57

 
242

Foreign
934

 
670

 
389

 
1,075

 
906

 
2,145

Deferred provision (benefit):
 
 
 
 
 
Federal
208

 
170

 
(1,139
)
State
(16
)
 
62

 
(26
)
Foreign
12

 
(6
)
 
(7
)
 
204

 
226

 
(1,172
)
 
$
1,279

 
$
1,132

 
$
973


The foreign component of the income tax provision consists primarily of foreign withholding taxes on royalty income 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):
 
2012
 
2011
 
2010
United States
$
3,525

 
$
2,984

 
$
2,195

Foreign
3,037

 
2,703

 
2,298

 
$
6,562

 
$
5,687

 
$
4,493


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):
 
2012
 
2011
 
2010
Expected income tax provision at federal statutory tax rate
$
2,297

 
$
1,991

 
$
1,573

State income tax provision, net of federal benefit
24

 
283

 
226

Foreign income taxed at other than U.S. rates
(1,045
)
 
(1,074
)
 
(897
)
Tax audit impacts, net
(11
)
 
1

 
3

Tax credits
(36
)
 
(151
)
 
(55
)
Valuation allowance
55

 
42

 
(40
)
Revaluation of deferred taxes
—

 
69

 
152

Other
(5
)
 
(29
)
 
11

 
$
1,279

 
$
1,132

 
$
973


The revaluation of deferred taxes represents the impact of paying current taxes at a higher state effective tax rate than the effective tax rate that will be in effect when the resulting deferred tax asset or liability is scheduled to reverse. The Company has not recorded a deferred tax liability of approximately $5.8 billion related to the United States federal and state income taxes and foreign withholding taxes on approximately $16.4 billion of undistributed earnings of certain non-United States subsidiaries indefinitely invested outside the United States. Should the Company decide to repatriate the foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the earnings will no longer be indefinitely invested outside the United States.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. Tax audit impacts, net reflects adjustments to the Company’s prior year estimates of uncertain tax positions as a result of various federal, state and foreign tax audits. The Company is currently a participant in the Internal Revenue Service (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 2010 and issued a full acceptance letter during the third quarter of fiscal 2011, 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 2011. In the fourth quarter of fiscal 2012, the California Franchise Tax Board completed its audit of fiscal 2005 through fiscal 2008, resulting in a decrease to the tax provision of $10 million. The Company is subject to examination by the California Franchise Tax Board for fiscal years after 2008. 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 Company had deferred tax assets and deferred tax liabilities as follows (in millions):
 
September 30, 2012
 
September 25, 2011
Unearned revenues
$
1,340

 
$
1,269

Share-based compensation
623

 
592

Unrealized losses on marketable securities
232

 
309

Accrued liabilities, reserves and other
131

 
205

Capital loss carryover
105

 
40

Capitalized start-up and organizational costs
78

 
91

Unused net operating losses
50

 
97

Tax credits
11

 
145

Unrealized losses on other investments
—

 
28

Other
91

 
30

Total gross deferred assets
2,661

 
2,806

Valuation allowance
(142
)
 
(98
)
Total net deferred assets
2,519

 
2,708

Unrealized gains on marketable securities
(552
)
 
(206
)
Purchased intangible assets
(132
)
 
(174
)
Property, plant and equipment
(115
)
 
(85
)
Other
(7
)
 
(7
)
Total deferred liabilities
(806
)
 
(472
)
Net deferred assets
$
1,713

 
$
2,236

Reported as:
 
 
 
Current deferred tax assets
$
309

 
$
537

Non-current deferred tax assets
1,412

 
1,703

Current deferred tax liabilities (1)
(1
)
 
(2
)
Non-current deferred tax liabilities (1)
(7
)
 
(2
)
 
$
1,713

 
$
2,236

(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 30, 2012, the Company had unused federal net operating loss carryforwards of $154 million expiring from 2021 through 2030, unused state net operating loss carryforwards of $591 million expiring from 2013 through 2032, and unused foreign net operating loss carryforwards of $41 million, which expire from 2014 through 2021. At September 30, 2012, the Company had unused tax credits of $25 million in foreign jurisdictions, which begin to expire in 2013. The Company does not expect its federal net operating loss carryforwards and its state income tax credits 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 30, 2012, the Company has provided a valuation allowance on certain foreign deferred tax assets, state net operating losses and net capital losses of $114 million, $16 million and $12 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 2012, 2011 and 2010 follows (in millions):
 
2012
 
2011
 
2010
Beginning balance of unrecognized tax benefits
$
96

 
$
353

 
$
84

Additions based on prior year tax positions
—

 
64

 
223

Reductions for prior year tax positions and lapse in statute of limitations
(18
)
 
(10
)
 
(58
)
Additions for current year tax positions
10

 
12

 
165

Settlements with taxing authorities
(2
)
 
(323
)
 
(61
)
Ending balance of unrecognized tax benefits
$
86

 
$
96

 
$
353


The Company does not expect any unrecognized tax benefits recorded at September 30, 2012 to result in cash payment in fiscal 2013. Unrecognized tax benefits at September 30, 2012 included $86 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 decrease in unrecognized tax benefits in fiscal 2012 was primarily due to settlement of the Company’s California tax examination for fiscal 2005 through fiscal 2008, which is partially offset by an increase in unrecognized tax benefits generated in the current year. The Company does not believe that it is reasonably possible that the total amounts of unrecognized tax benefits at September 30, 2012 will significantly increase or decrease in fiscal 2013. Interest expense related to uncertain tax positions was negligible in fiscal 2012, 2011 and 2010. The amount of accrued interest and penalties was negligible at September 30, 2012 and September 25, 2011.
Cash amounts paid for income taxes, net of refunds received, were $1.3 billion, $2.1 billion and $671 million for fiscal 2012, 2011 and 2010, respectively.
During fiscal 2012, the Company established its QCT segment’s non-United States headquarters in Singapore. The Company has obtained tax incentives in Singapore, 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 in Singapore. The Company’s Singapore tax rate will increase in fiscal 2017 and again in fiscal 2027 as a result of expiration of these incentives. The location of QCT’s headquarters in Singapore did not result in any change in foreign tax in fiscal 2012. 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 by $193 million in fiscal 2012, reducing both basic and diluted net income per share attributable to Qualcomm by $0.11.