Income Taxes

12 Months Ended

Apr. 28, 2023

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

Income before income taxes is as follows (in millions):

	Year Ended
	April 28, 2023		April 29, 2022		April 30, 2021
Domestic	$	420	$	546	$	433
Foreign		646		549		529
Total	$	1,066	$	1,095	$	962

The (benefit) provision for income taxes consists of the following (in millions):

	Year Ended
	April 28, 2023			April 29, 2022			April 30, 2021
Current:
Federal	$	209		$	187		$	82
State		39			55			22
Foreign		150			60			134
Total current		398			302			238
Deferred:
Federal		(44	)		(125	)		6
State		(3	)		(27	)		2
Foreign		(559	)		8			(14	)
Total deferred		(606	)		(144	)		(6	)
(Benefit) provision for income taxes	$	(208	)	$	158		$	232

During the second quarter of fiscal 2023, we completed an intra-entity asset transfer of certain IP to our international headquarters (the “IP Transfer”). The transaction resulted in a step-up of tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets, which resulted in the recognition of a discrete tax benefit and related deferred tax asset of $524 million during the second quarter of fiscal 2023. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. With the assistance of third-party valuation specialists, the fair value of the IP was determined principally based on the present value of projected cash flows related to the IP which reflects management’s assumptions regarding projected revenues, earnings before interest and taxes, and a discount rate. The tax-deductible amortization related to the transferred IP rights will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely. The deferred tax asset and the tax benefit were measured based on the enacted tax rates expected to apply in the years the asset is expected to be realized. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset quarterly. Any Organisation for Economic Co-operation and Development’s (“OECD”) actions adopted internationally could impact our financial results in future periods.

In September 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 by our Danish subsidiary were subject to Danish at-source dividend withholding tax. We did not believe that our Danish subsidiary was liable for such withholding tax and filed an appeal with the Danish Tax Tribunal. In December 2011, the Danish Tax Tribunal issued a ruling in favor of NetApp. The Danish tax examination agency appealed this decision at the Danish High Court (DHC) in March 2012. In February 2016, the DHC requested a preliminary ruling from the Court of Justice of the European Union (CJEU). In March 2018, the Advocate General issued an opinion which was largely in favor of NetApp. The CJEU was not bound by the opinion of the Advocate General and issued its preliminary ruling in February 2019. On May 3, 2021, the DHC reached a decision resulting in NetApp prevailing on the predominate distribution made in 2005. The smaller distribution made in 2006 was ruled in favor of the Danish Tax Authorities. On May 28, 2021, the Danish Tax Authorities appealed the DHC decision to the Danish Supreme Court. On January 9, 2023, the Danish Supreme Court reversed the lower court's decision and ruled the 2005 dividend was subject to withholding tax while the smaller 2006 distribution would not be subject to withholding tax. The Danish Supreme Court ruling on the distributions declared in 2005 and 2006 is non-appealable. During the third quarter of fiscal 2023, we recorded $69 million of discrete tax expense, which includes $23 million of withholding tax and $46 million of interest, associated with the Danish Supreme Court ruling.

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows (in millions):

	Year Ended
	April 28, 2023			April 29, 2022			April 30, 2021
Tax computed at federal statutory rate	$	224		$	230		$	202
State income taxes, net of federal benefit		24			15			23
Foreign earnings in lower tax jurisdictions		(43	)		(46	)		(26	)
Stock-based compensation		25			(8	)		6
Research and development credits		(24	)		(18	)		(13	)
Benefit for foreign derived intangible income		—			(49	)		(2	)
Global minimum tax on intangible income		61			1			19
Transition tax and related reserves		—			1			1
Tax (benefits) charges from integration of acquired companies		(27	)		23			35
Tax benefit due to IP Transfer		(524	)		—			—
Resolution of income tax matters (1)		71			(3	)		(6	)
Other		5			12			(7	)
(Benefit) provision for income taxes	$	(208	)	$	158		$	232

(1)During fiscal 2023, we recognized tax expense related to a Danish Supreme Court decision related to withholding tax on a 2005 distribution as well as tax expense related to the currently in progress IRS audit of our fiscal 2018 and 2019 U.S. tax returns. During fiscal 2022, we recognized a tax benefit related to the lapse of statute of limitations for certain issues in our fiscal 2012 and 2013 state income tax returns. During fiscal 2021, we recognized a tax benefit related to the lapse of statutes of limitations for certain issues on our fiscal 2016 and 2017 federal income tax returns.

The components of our deferred tax assets and liabilities are as follows (in millions):

	April 28, 2023			April 29, 2022
Deferred tax assets:
Reserves and accruals	$	189		$	267
Net operating loss and credit carryforwards		124			121
Stock-based compensation		23			23
Deferred revenue and financed unearned services revenue		264			235
Acquired intangibles		523			—
Capitalized research and development (1)		111			—
Other		10			6
Gross deferred tax assets		1,244			652
Valuation allowance		(113	)		(111	)
Deferred tax assets, net of valuation allowance		1,131			541
Deferred tax liabilities:
Prepaids and accruals		94			108
Acquired intangibles		66			48
Property and equipment		50			39
Other		2			7
Total deferred tax liabilities		212			202
Deferred tax assets, net of valuation allowance and deferred tax liabilities	$	919		$	339

(1)As required under the Tax Cuts and Jobs Act of 2017, research and development expenditures are capitalized and amortized beginning in our fiscal 2023.

The valuation allowance increased by $2 million in fiscal 2023. The increase is mainly attributable to corresponding changes in deferred tax assets, primarily certain state tax credit carryforwards.

As of April 28, 2023, we have federal net operating loss carryforwards of approximately $17 million. In addition, we have gross state net operating loss and tax credit carryforwards of $13 million and $135 million, respectively. The majority of the state credit carryforwards are California research credits which are offset by a valuation allowance as we believe it is more likely than not that these credits will not be utilized. We also have $8 million of foreign net operating losses and $30 million of foreign tax credit carryforwards of which the majority were generated by our Dutch subsidiary and are fully offset by a valuation allowance. Certain acquired net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be realized with the exception of those which have a valuation allowance. The state and foreign net operating loss

carryforwards and credits will expire in various years from fiscal 2024 through 2042. The federal net operating loss carryforwards, the California research credit, and the Dutch foreign tax credit carryforwards do not expire.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

	Year Ended
	April 28, 2023			April 29, 2022			April 30, 2021
Balance at beginning of period	$	220		$	221		$	211
Additions based on tax positions related to the current year		9			11			7
Additions for tax positions of prior years		1			—			11
Decreases for tax positions of prior years		(5	)		(2	)		—
Settlements		(3	)		(10	)		(8	)
Balance at end of period	$	222		$	220		$	221

As of April 28, 2023, we had $222 million of gross unrecognized tax benefits, of which $144 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $144 million, including penalties, interest and indirect benefits, would affect our provision for income taxes if recognized.

We recognized expense for increases to accrued interest and penalties related to unrecognized tax benefits in the income tax provision of approximately $7 million, $4 million and $1 million, respectively, in fiscal 2023, fiscal 2022 and fiscal 2021. Accrued interest and penalties of $22 million and $15 million were recorded in the consolidated balance sheets as of April 28, 2023 and April 29, 2022, respectively.

The tax years that remain subject to examination for our major tax jurisdictions are shown below:

Fiscal Years Subject to Examination for Major Tax Jurisdictions at April 28, 2023

2016 — 2023	United States — federal income tax
2018 — 2023	United States — state and local income tax
2020 — 2023	Australia
2018 — 2023	Germany
2007 — 2023	India
2017 — 2023	The Netherlands
2016 — 2023	Canada

We are currently undergoing various income tax audits in the U.S. and several foreign tax jurisdictions. Transfer pricing calculations are key topics under these audits and are often subject to dispute and appeals. We are effectively subject to federal tax examination adjustments for tax years ended on or after fiscal 2001, in that we have carryforward attributes from these years that could be subject to adjustment in the tax years of utilization.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. We engage in continuous discussion and negotiation with taxing authorities regarding tax matters in multiple jurisdictions. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude, certain statutes of limitations will lapse, or both. As a result of uncertainties regarding tax audits and their possible outcomes, an estimate of the range of possible impacts to unrecognized tax benefits in the next twelve months cannot be made at this time.

As of April 28, 2023, we continue to record a deferred tax liability related to state taxes on unremitted earnings of certain foreign entities. We estimate the unrecognized deferred tax liability related to the earnings we expect to be indefinitely reinvested to be immaterial. We will continue to monitor our plans to indefinitely reinvest undistributed earnings of foreign subsidiaries and will assess the related unrecognized deferred tax liability considering our ongoing projected global cash requirements, tax consequences associated with repatriation and any U.S. or foreign government programs designed to influence remittances.