Income Taxes



Income Before Income Taxes	2017		2016		2015
Income Before Income Taxes
Domestic (including U.S. exports)	$	12,611	$	14,018	$	12,825
Foreign subsidiaries	1,177		850		1,043
	$	13,788	$	14,868	$	13,868



Income Tax Expense/(Benefit)	2017			2016			2015
Income Tax Expense/(Benefit)
Current
Federal	$	3,229		$	3,146		$	4,182
State	360			154			333
Foreign ⁽¹⁾	489			533			525
	4,078			3,833			5,040
Deferred
Federal	370			1,172			82
State	5			100			(52		)
Foreign	(31		)	(27		)	(54		)
	344			1,245			(24		)
	$	4,422		$	5,078		$	5,016

⁽¹⁾ Includes foreign withholding taxes



Components of Deferred Tax Assets and Liabilities	September 30, 2017			October 1, 2016

Deferred tax assets
Accrued liabilities	$	(2,422	)	$	(2,736	)
Net operating losses and tax credit carryforwards	(1,705		)	(1,567		)
Other	(386		)	(566		)
Total deferred tax assets	(4,513		)	(4,869		)
Deferred tax liabilities
Depreciable, amortizable and other property	5,692			5,682
Foreign subsidiaries	518			348
Licensing revenues	476			480
Other	422			295
Total deferred tax liabilities	7,108			6,805
Net deferred tax liability before valuation allowance	2,595			1,936
Valuation allowance	1,716			1,602
Net deferred tax liability	$	4,311		$	3,538

At September 30, 2017 and October 1, 2016, the valuation allowance primarily relates to $1.3 billion and $1.2 billion, respectively, of deferred tax assets for International Theme Park net operating losses primarily in France and Hong Kong, and to a lesser extent, China. The noncontrolling interest share of the net operating losses were $0.2 billion and $0.4 billion at September 30, 2017 and October 1, 2016, respectively. The International Theme Park net operating losses have an indefinite carryforward period in France and Hong Kong and a five-year carryforward period in China.

As of September 30, 2017, the Company had undistributed earnings of foreign subsidiaries of approximately $4.7 billion for which deferred U.S. federal income taxes have not been provided. The Company intends to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Assuming these foreign earnings were repatriated under laws and rates applicable at year end fiscal 2017, the incremental federal tax applicable to the earnings would be approximately $1.2 billion.

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



	2017		2016		2015
Federal income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.7		1.8		1.9
Domestic production activity deduction	(2.1	)	(1.6	)	(1.9	)
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate	(1.6	)	(1.1	)	(1.5	)
Disneyland Paris recapitalization ⁽¹⁾	—		—		2.9
Other, including tax reserves and related interest ⁽²⁾	(0.9	)	0.1		(0.2	)
	32.1	%	34.2	%	36.2	%

⁽¹⁾

At the beginning of fiscal 2015, the Company had a $399 million deferred income tax asset on the difference between the Company’s tax basis in its investment in Disneyland Paris and the Company’s financial statement carrying value of Disneyland Paris. As a result of the Disneyland Paris recapitalization and the increase in the Company’s ownership interest (see Note 6 for further discussion of this transaction), the deferred tax asset was written off to income tax expense in fiscal 2015.


⁽²⁾	In fiscal 2017, the Company adopted new accounting guidance, which resulted in $125 million of tax benefits related to employee share-based awards being credited to “Income taxes” in the Consolidated Statement of Income (see Note 18).

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



	2017			2016			2015
Balance at the beginning of the year	$	844		$	912		$	803
Increases for current year tax positions	61			71			98
Increases for prior year tax positions	13			142			280
Decreases in prior year tax positions	(55		)	(158		)	(193		)
Settlements with taxing authorities	(31		)	(123		)	(76		)
Balance at the end of the year	$	832		$	844		$	912

The fiscal year-end 2017, 2016 and 2015 balances include $444 million, $469 million and $501 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 2017, 2016 and 2015, the Company had $234 million, $221 million and $231 million, respectively, in accrued interest and penalties related to unrecognized tax benefits. During fiscal years 2017, 2016 and 2015, the Company accrued additional interest and penalties of $43 million, $22 million and $68 million, respectively, and recorded reductions in accrued interest and penalties of $30 million, $32 million and $54 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 2013 and is no longer subject to examination in any of its major state or foreign tax jurisdictions for years prior to 2008.

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 $163 million.

In fiscal years 2017, 2016 and 2015, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. In fiscal year 2017, $125 million of income tax benefit was credited to “Income taxes” in the Consolidated Statement of Income and in fiscal years 2016 and 2015, $207 million and $313 million, respectively, were credited to shareholders’ equity (see Note 18 for further discussion of the impact of new accounting pronouncements in fiscal 2017).