Income Taxes

12 Months Ended

Jan. 26, 2020

The income tax expense (benefit) applicable to income before income taxes consists of the following:



	Year Ended
	January 26, 2020		January 27, 2019			January 28, 2018
	(In millions)
Current income taxes:
Federal	$	65	$	1		$	464
State	4		—			1
Foreign	87		69			43
Total current	156		70			508
Deferred taxes:
Federal	2		(315		)	(376		)
State	—		—			—
Foreign	16		—			17
Total deferred	18		(315		)	(359		)
Income tax expense (benefit)	$	174	$	(245	)	$	149

Income before income tax consists of the following:



	Year Ended
	January 26, 2020		January 27, 2019		January 28, 2018
	(In millions)
Domestic	$	620	$	1,843	$	1,600
Foreign	2,350		2,053		1,596
Income before income tax	$	2,970	$	3,896	$	3,196

The income tax expense (benefit) differs from the amount computed by applying the U.S. federal statutory rate of 21%, 21%, and 33.9% for fiscal years 2020, 2019, and 2018, respectively, to income before income taxes as follows:



	Year Ended
	January 26, 2020			January 27, 2019			January 28, 2018
	(In millions)
Tax expense computed at federal statutory rate	$	624		$	818		$	1,084
Expense (benefit) resulting from:
State income taxes, net of federal tax effect	12			23			10
Foreign tax rate differential	(301		)	(412		)	(545		)
Stock-based compensation	(60		)	(191		)	(181		)
Tax Cuts and Jobs Act of 2017	—			(368		)	(133		)
U.S. federal R&D tax credit	(110		)	(141		)	(87		)
Other	9			26			1
Income tax expense (benefit)	$	174		$	(245	)	$	149

The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:



	January 26, 2020			January 27, 2019
	(In millions)
Deferred tax assets:
Net operating loss carryforwards	$	62		$	70
Accruals and reserves, not currently deductible for tax purposes	39			41
Property, equipment and intangible assets	12			2
Operating lease liabilities	114			—
Research and other tax credit carryforwards	605			626
Stock-based compensation	28			25
GILTI deferred tax assets	428			376
Gross deferred tax assets	1,288			1,140
Less valuation allowance	(621		)	(562		)
Total deferred tax assets	667			578
Deferred tax liabilities:
Acquired intangibles	(1		)	(2		)
Unremitted earnings of foreign subsidiaries	(40		)	(35		)
Operating lease assets	(107		)	—
Gross deferred tax liabilities	(148		)	(37		)
Net deferred tax asset (1)	$	519		$	541

(1) Net deferred tax asset includes long-term deferred tax assets of $548 million and $560 million and long-term deferred tax liabilities of $29 million and $19 million for fiscal years 2020 and 2019, respectively. Long-term deferred tax assets are included in Other assets and long-term deferred tax liabilities are included in Other long-term liabilities on our Consolidated Balance Sheets.

We recognized an income tax expense of $174 million and $149 million for fiscal years 2020 and 2018, respectively, and income tax benefit of $245 million for fiscal year 2019. Our annual effective tax rate was 5.9%, (6.3)%, and 4.7% for fiscal years 2020, 2019, and 2018, respectively. The increase in our effective tax rate in fiscal year 2020 as compared to fiscal years 2019 and 2018 was primarily due to a decrease of tax benefits from stock-based compensation and an absence of tax benefits related to the enactment of the TCJA.

The decrease in our effective tax rate in fiscal year 2019 as compared to fiscal year 2018 was primarily due to a decrease in the U.S. statutory tax rate from 33.9% to 21%, the finalization of the enactment-date income tax effects of the TCJA, higher U.S federal research tax credits and excess tax benefits related to stock-based compensation in fiscal year 2019.

Our effective tax rate for fiscal years 2020 and 2019 was lower than the U.S. federal statutory rate of 21% due primarily to income earned in jurisdictions, including the British Virgin Islands and Hong Kong, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition of U.S. federal research tax credits, excess tax benefits related to stock-based compensation, and the finalization of the enactment-date income tax effects of the TCJA in 2019.

Our effective tax rate for fiscal year 2018 was lower than the blended U.S. federal statutory rate of 33.9% due primarily to income earned in jurisdictions, including the British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition of U.S. federal research tax credits, the provisional impact of the tax law changes, and excess tax benefits related to stock-based compensation.

As of January 26, 2020 and January 27, 2019, we had a valuation allowance of $621 million and $562 million, respectively, related to state and certain foreign deferred tax assets that management determined not likely to be realized due, in part, to jurisdictional 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 26, 2020, we had federal, state and foreign net operating loss carryforwards of $70 million, $153 million and $295 million, respectively. The federal and state carryforwards will begin to expire in fiscal year 2023 and 2021, respectively. The foreign net operating loss carryforwards of $295 million may be carried forward indefinitely. As of January 26, 2020, we had federal research tax credit carryforwards of $314 million that will begin to expire in fiscal year 2039. We have state research tax credit carryforwards of $814 million, of which $774 million is attributable to the State of California and may be carried over indefinitely, and $40 million is attributable to various other states and will begin to expire in fiscal year 2021. 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 26, 2020, we had $583 million of gross unrecognized tax benefits, of which $464 million would affect our effective tax rate if recognized. However, $104 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 $464 million of unrecognized tax benefits as of January 26, 2020 consisted of $180 million recorded in non-current income taxes payable and $284 million reflected as a reduction to the related deferred tax assets.

A reconciliation of gross unrecognized tax benefits is as follows:



	January 26, 2020			January 27, 2019			January 28, 2018
	(In millions)
Balance at beginning of period	$	477		$	447		$	224
Increases in tax positions for prior years	7			52			7
Decreases in tax positions for prior years	—			(141		)	(1		)
Increases in tax positions for current year	104			129			222
Lapse in statute of limitations	(5		)	(10		)	(5		)
Balance at end of period	$	583		$	477		$	447

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 26, 2020, January 27, 2019, and January 28, 2018, we had accrued $31 million, $21 million, and $15 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 26, 2020, unrecognized tax benefits of $180 million and the related interest and penalties of $31 million are included in non-current income taxes payable.

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 26, 2020, 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 taxing authorities both in the United States and other countries. As of January 26, 2020, 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 2019. As of January 26, 2020, the significant tax jurisdictions for which we are currently under examination include India, China, and United Kingdom for fiscal years 2003 through 2019.