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Income Taxes
12 Months Ended
Jan. 29, 2017
Notes to financial statements [Abstract]  
Income Taxes
Income Taxes
 
The income tax expense applicable to income before income taxes consists of the following:
 
Year Ended
 
January 29,
2017
 
January 31,
2016
 
January 25,
2015
 
(In millions)
Current income taxes:
 
 
 
 
 
Federal
$
7

 
$
(43
)
 
$
8

State
1

 
1

 
1

Foreign
34

 
25

 
17

Total current
42

 
(17
)
 
26

Deferred taxes:
 
 
 
 
 
Federal
199

 
134

 
84

State

 

 

Foreign
(2
)
 

 
(1
)
Total deferred
197

 
134

 
83

Charge in lieu of taxes attributable to employer stock option plans

 
12

 
15

Income tax expense
$
239

 
$
129

 
$
124


 
Income before income tax consists of the following:
 
Year Ended
 
January 29,
2017
 
January 31,
2016
 
January 25,
2015
 
(In millions)
Domestic
$
600

 
$
129

 
$
174

Foreign
1,305

 
614

 
581

Income before income tax
$
1,905

 
$
743

 
$
755


 
The income tax expense differs from the amount computed by applying the federal statutory income tax rate of 35% to income before income taxes as follows:
 
Year Ended
 
January 29,
2017
 
January 31,
2016
 
January 25,
2015
 
(In millions)
Tax expense computed at federal statutory rate
$
667

 
$
260

 
$
264

Tax expense related to intercompany transaction
10

 
10

 
10

State income taxes, net of federal tax effect
4

 
1

 
1

Foreign tax rate differential
(315
)
 
(95
)
 
(120
)
Stock-based compensation (1)
(70
)
 
13

 
4

U.S. federal R&D tax credit
(52
)
 
(38
)
 
(34
)
Restructuring and expiration of statute of limitations

 
(21
)
 

Other
(5
)
 
(1
)
 
(1
)
Income tax expense
$
239

 
$
129

 
$
124


(1)
We adopted an accounting standard related to stock-based compensation effective February 1, 2016, which required the excess tax benefit to be reflected in our provision for income taxes rather than in additional paid-in-capital. The total related excess tax benefit recognized for fiscal year 2017 was $82 million. Please refer to Note 1 of these Notes to the Consolidated Financial Statements for additional information.
The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:  
 
January 29,
2017
 
January 31,
2016
 
(In millions)
Deferred tax assets:
 
Net operating loss carryforwards (1)
$
199

 
$
57

Accruals and reserves, not currently deductible for tax purposes
40

 
58

Property, equipment and intangible assets
50

 
50

Research and other tax credit carryforwards (1)
728

 
404

Stock-based compensation
34

 
29

Convertible debt
6

 
9

Gross deferred tax assets
1,057

 
607

Less valuation allowance (1)
(353
)
 
(272
)
Total deferred tax assets
704

 
335

Deferred tax liabilities:
 
 
 
Acquired intangibles
(11
)
 
(17
)
Unremitted earnings of foreign subsidiaries
(827
)
 
(615
)
Gross deferred tax liabilities
(838
)
 
(632
)
Net deferred tax liability
$
(134
)
 
$
(297
)


(1)
Balances as of January 29, 2017 reflect the adoption of an accounting standard related to stock-based compensation. Please refer to Note 1 of these Notes to the Consolidated Financial Statements for additional information.
We recognized income tax expense of $239 million, $129 million, and $124 million for fiscal years 2017, 2016, and 2015, respectively. Our annual effective tax rate was 12.5%, 17.3%, and 16.5% for fiscal years 2017, 2016, and 2015, respectively. The decrease in the effective tax rate in fiscal year 2017 as compared to fiscal years 2016 and 2015 was primarily due to the recognition of excess tax benefits from our adoption of a new accounting standard related to the simplification of certain aspects of stock-based compensation accounting. The higher effective tax rate in fiscal year 2016 as compared to fiscal years 2017 and 2015 was due to an additional amount of earnings subject to United States tax in fiscal year 2016, partially offset by a net income tax benefit related to the Icera modem restructuring in fiscal year 2016.

Our effective tax rate for each of the fiscal years was lower than the U.S. federal statutory rate of 35% due primarily to income earned in jurisdictions, including British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate is lower than the United States federal statutory tax rate of 35%, favorable recognition in these fiscal years of the U.S. federal research tax credit and favorable discrete events primarily attributable to the tax benefit recognized upon the expiration of the applicable statutes of limitations, and adoption of an accounting standard related to stock-based compensation during fiscal year 2017.

As of January 29, 2017 and January 31, 2016, we had a valuation allowance of $353 million and $272 million, respectively, related to state and certain foreign deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period.

As of January 29, 2017, we had federal, state and foreign net operating loss carryforwards of $448 million, $446 million and $219 million, respectively. The federal and state carryforwards will expire beginning in fiscal year 2022 and 2018, respectively. The foreign net operating loss carryforwards of $219 million may be carried forward indefinitely. As of January 29, 2017, we had federal research tax credit carryforwards of $541 million that will begin to expire in fiscal year 2018. We have state research tax credit carryforwards of $476 million, of which $457 million is attributable to the State of California and may be carried over indefinitely, and $19 million is attributable to various other states and will expire beginning in fiscal year 2018. Our tax attributes, net operating loss and tax credit carryforwards, remain subject to audit and may be adjusted for changes or modification in tax laws, other authoritative interpretations thereof, or other facts and circumstances. Utilization of federal, state, and foreign net operating losses and tax credit carryforwards may also be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state and foreign tax provisions. If any such limitations apply, the federal, states, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before utilization.

As of January 29, 2017, U.S. federal and state income taxes have not been provided on approximately $3.13 billion of undistributed earnings of non-United States subsidiaries as such earnings are considered to be indefinitely reinvested. We have not provided the amount of unrecognized deferred tax liabilities for temporary differences related to investments in our foreign subsidiaries as the determination of such amount is not practicable.

As of January 29, 2017, we had $224 million of gross unrecognized tax benefits, of which $209 million would affect our effective tax rate if recognized. However, approximately $27 million of the unrecognized tax benefits were related to state income tax positions taken, that, if recognized, would be in the form of a carryforward deferred tax asset that would likely attract a full valuation allowance. The $209 million of unrecognized tax benefits as of January 29, 2017 consisted of $83 million recorded in non-current income taxes payable and $126 million reflected as a reduction to the related deferred tax assets.

A reconciliation of gross unrecognized tax benefits is as follows:
 
January 29,
2017
 
January 31,
2016
 
January 25,
2015
 
(In millions)
Balance at beginning of period
$
230

 
$
254

 
$
238

Increases in tax positions for prior years
3

 

 

Decreases in tax positions for prior years

 
(1
)
 
(1
)
Increases in tax positions for current year
46

 
28

 
23

Settlements
(48
)
 

 

Lapse in statute of limitations
(7
)
 
(51
)
 
(6
)
Balance at end of period
$
224

 
$
230

 
$
254



We classify an unrecognized tax benefit as a current liability, or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year. The amount is classified as a long-term liability, or reduction of long-term deferred tax assets or amount refundable, if we anticipate payment or receipt of cash for income taxes during a period beyond a year.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 29, 2017, January 31, 2016, and January 25, 2015, we had accrued $13 million, $11 million, and $14 million, respectively, for the payment of interest and penalties related to unrecognized tax benefits, which is not included as a component of our unrecognized tax benefits. As of January 29, 2017, non-current income taxes payable of $96 million consisted of unrecognized tax benefits of $83 million and the related interest and penalties of $13 million.

While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 29, 2017, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of January 29, 2017, the significant tax jurisdictions that may be subject to examination include the United States, Hong Kong, Taiwan, China, United Kingdom, Germany, and India for fiscal years 2003 through 2016. As of January 29, 2017, the significant tax jurisdictions for which we are currently under examination include India, Taiwan, and Germany for fiscal years 2003 through 2016.