Income Taxes



	2014		2013		2012
Income Before Income Taxes
Domestic (including U.S. exports)	$	11,376	$	8,972	$	8,105
Foreign subsidiaries	870		648		1,155
	$	12,246	$	9,620	$	9,260



Income Tax Expense/(Benefit)
Current
Federal	$	2,932	$	2,354		$	1,975
State	206		98			227
Foreign ⁽¹⁾	600		474			422
	3,738		2,926			2,624
Deferred
Federal	409		29			465
State	81		61			(2		)
Foreign	14		(32		)	—
	504		58			463
	$	4,242	$	2,984		$	3,087

⁽¹⁾ Includes foreign withholding taxes



	September 27, 2014			September 28, 2013
Components of Deferred Tax Assets and Liabilities
Deferred tax assets
Accrued liabilities	$	(2,281	)	$	(2,019	)
Foreign subsidiaries	(755		)	(795		)
Noncontrolling interest net operating losses	(657		)	(632		)
Other	(535		)	(482		)
Total deferred tax assets	(4,228		)	(3,928		)
Deferred tax liabilities
Depreciable, amortizable and other property	6,183			5,987
Licensing revenues	351			325
Other	223			139
Total deferred tax liabilities	6,757			6,451
Net deferred tax liability before valuation allowance	2,529			2,523
Valuation allowance	1,045			1,042
Net deferred tax liability	$	3,574		$	3,565

The valuation allowance primarily relates to a $657 million noncontrolling interest share of deferred tax assets due to International Theme Parks’ net operating losses, which have an indefinite carryforward period in France and Hong Kong and a five-year carryforward period in China. The ultimate recognition of the noncontrolling interest share of the net operating losses would not have an impact on net income attributable to Disney as any income tax benefit would be offset by a charge to noncontrolling interests in the income statement.

The Company has recognized deferred income tax assets on the difference between its tax basis in the investment and the financial statement carrying value of the International Theme Parks. Disneyland Paris and the Company have proposed a €1.0 billion recapitalization plan (see Note 6 for further discussion of the transaction). If the proposed recapitalization plan is finalized in fiscal 2015, the Company would likely be required to write-off its deferred tax asset related to Disneyland Paris of approximately $360 million. In addition, the Company would then account for the deferred taxes based on the underlying tax attributes of Disneyland Paris. As Disneyland Paris has had a history of tax losses, the Company may be required to record a valuation allowance on any deferred tax assets.

As of September 27, 2014, the Company had undistributed earnings of foreign subsidiaries of approximately $1.9 billion for which deferred taxes have not been provided. The Company intends to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Assuming the permanently reinvested foreign earnings were repatriated under laws and rates applicable at 2014 fiscal year end, the incremental federal tax applicable to the earnings would be approximately $377 million.

A reconciliation of the effective income tax rate to the federal rate is as follows:



	2014		2013		2012
Federal income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	2.0		1.8		2.0
Domestic production activity deduction	(2.1	)	(2.5	)	(2.5	)
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate	(0.7	)	(1.9	)	(0.5	)
Other, including tax reserves and related interest	0.4		(1.4	)	(0.7	)
	34.6	%	31.0	%	33.3	%

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding the related accrual for interest, is as follows:



	2014			2013			2012
Balance at the beginning of the year	$	1,120		$	668		$	718
Increases for current year tax positions	51			222			85
Increases for prior year tax positions	133			365			26
Decreases in prior year tax positions	(487		)	(9		)	(68		)
Settlements with taxing authorities	(14		)	(126		)	(93		)
Balance at the end of the year	$	803		$	1,120		$	668

The fiscal year-end 2014, 2013 and 2012 balances include $453 million, $449 million and $452 million, respectively, that if recognized, would reduce our income tax expense and effective tax rate. These amounts are net of the offsetting benefits from other tax jurisdictions.

As of the end of fiscal 2014, 2013 and 2012, the Company had $216 million, $211 million and $209 million, respectively, in accrued interest and penalties related to unrecognized tax benefits. During fiscal years 2014, 2013 and 2012, the Company accrued additional interest of $25 million, $42 million and $25 million, respectively, and recorded reductions in accrued interest of $21 million, $55 million and $12 million, respectively, as a result of audit settlements and other prior-year adjustments. The Company’s policy is to report interest and penalties as a component of income tax expense.

The Company is no longer subject to U.S. federal examination for years prior to 2010 and is no longer subject to examination in any of its major state or foreign tax jurisdictions for years prior to 2004.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the resolution of certain tax matters, which could include payments on those tax matters. These resolutions and payments could reduce our unrecognized tax benefits by $44 million.

In fiscal years 2014, 2013 and 2012, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. Accordingly, $255 million, $204 million and $120 million were credited to shareholders’ equity, respectively in these years.