12. Income Taxes

Our effective tax rates for the periods presented were as follows:

Three Months Ended

July 31,

2015

July 25,

2014

Effective tax rates

(36.4

44.6

Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. In addition, our effective tax rates for the three months ended July 31, 2015 and July 25, 2014 were impacted by adjustments related to income tax audits as discussed below.

In June 2015, the Internal Revenue Service (IRS) signed a closing agreement on transfer pricing arrangements for our fiscal 2008 to 2010 income tax returns. During the three months ended July 31, 2015, we recorded a discrete expense of $13 million attributable to the transfer pricing audit adjustments and related re-measurement of uncertain tax positions for tax years subject to future audits.

In July 2014, the IRS completed the examination of our fiscal 2005 to 2007 income tax returns upon approval by the Joint Committee of Taxation. During the three months ended July 25, 2014, we recorded a discrete expense of $47 million attributable to the audit settlement and related re-measurement of uncertain tax positions for tax years subject to future audits.

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

	Three Months Ended
	July 31, 2015			July 25, 2014
Balance at beginning of period	$	272		$	236
Additions based on tax positions related to the current year		4			7
Additions for tax positions of prior years		19			99
Decreases for tax positions of prior years		(5	)		(19	)
Settlements		(47	)		(46	)
Balance at end of period	$	243		$	277

As of July 31, 2015, we had $243 million of gross unrecognized tax benefits, of which $193 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $148 million, including penalties, interest and indirect benefits, would affect our provision for income taxes if recognized.

We are currently undergoing federal income tax audits in the United States (U.S.) and several foreign tax jurisdictions. Transfer pricing calculations are key issues under audits in various jurisdictions, and are often subject to dispute and appeals. The IRS is currently auditing our fiscal 2008 to 2010 income tax returns. In June 2015, the IRS signed a closing agreement on transfer pricing arrangements for the audit period. We expect the IRS examination team to complete their field audit of remaining issues within the next twelve months. However, final resolution may occur beyond the next twelve months should we choose to appeal the IRS examination team’s audit findings. We expect the IRS field exam team to issue a formal Notice of Proposed Audit Adjustment on one issue under dispute in the second quarter of our fiscal year 2016. While we believe our tax returns reflect the correct tax treatment of the issue under dispute, no assurance can be given that the final tax outcome will not differ from our position. Such differences could potentially result in additional tax expense of up to $10 million.

On September 17, 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 from our Danish subsidiary were subject to Danish at-source dividend withholding tax. We do not believe that our Danish subsidiary is liable for withholding tax and filed an appeal with the Danish Tax Tribunal to that effect. On December 19, 2011, the Danish Tax Tribunal issued a ruling that our Danish subsidiary was not liable for Danish withholding tax. The Danish tax examination agency appealed to the Danish High Court in March 2012. The Danish High Court hearing has not yet occurred.

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 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. Given the uncertainties involved in all tax audits, we estimate a potential decrease in our unrecognized tax benefit balance of up to $47 million may occur within the next 12 months associated with the potential settlements and statute lapses.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision has yet to be issued by the Tax Court due to other outstanding issues related to the case. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any benefit as of July 31, 2015. We will continue to monitor ongoing developments and potential impacts to our financial statements.