Income Taxes

12 Months Ended

Jan. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year Ended
	January 30, 2022		January 31, 2021		January 26, 2020
	(In millions)
Current income taxes:
Federal	$	482	$	197	$	65
State	42		1		4
Foreign	71		161		87
Total current	595		359		156
Deferred taxes:
Federal	(420)		(246)		2
Foreign	14		(36)		16
Total deferred	(406)		(282)		18
Income tax expense	$	189	$	77	$	174

Income before income tax consists of the following:

	Year Ended
	January 30, 2022		January 31, 2021		January 26, 2020
	(In millions)
Domestic (1)	$	8,446	$	1,437	$	620
Foreign	1,495		2,972		2,350
Income before income tax	$	9,941	$	4,409	$	2,970

(1)Fiscal year 2022 domestic income before income tax increased as compared to fiscal years 2021 and 2020 due to the Domestication in the second quarter of fiscal year 2022.

The income tax expense (benefit) differs from the amount computed by applying the U.S. federal statutory rate of 21% to income before income taxes as follows:

	Year Ended
	January 30, 2022		January 31, 2021		January 26, 2020
	(In millions)
Tax expense computed at federal statutory rate	$	2,088	$	926	$	624
Expense (benefit) resulting from:
State income taxes, net of federal tax effect	42		10		12
Foreign-derived intangible income	(520)		—		—
Foreign tax rate differential	(497)		(561)		(301)
Stock-based compensation	(337)		(136)		(60)
U.S. federal R&D tax credit	(289)		(173)		(110)
IP domestication	(244)		—		—
Other	(54)		11		9
Income tax expense	$	189	$	77	$	174

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

	January 30, 2022		January 31, 2021
	(In millions)
Deferred tax assets:
Research and other tax credit carryforwards	$	798	$	650
Property, equipment and intangible assets	530		32
GILTI deferred tax assets	378		709
Accruals and reserves, not currently deductible for tax purposes	258		59
Operating lease liabilities	125		120
Net operating loss carryforwards	118		100
Stock-based compensation	86		36
Other deferred tax assets	22		—
Gross deferred tax assets	2,315		1,706
Less valuation allowance	(907)		(728)
Total deferred tax assets	1,408		978
Deferred tax liabilities:
Acquired intangibles	(169)		(191)
Unremitted earnings of foreign subsidiaries	(150)		(111)
Operating lease assets	(113)		(111)
Gross deferred tax liabilities	(432)		(413)
Net deferred tax asset (1)	$	976	$	565

(1) Net deferred tax asset includes long-term deferred tax assets of $1.22 billion and $806 million and long-term deferred tax liabilities of $245 million and $241 million for fiscal years 2022 and 2021, respectively. Long-term deferred tax liabilities are included in other long-term liabilities on our Consolidated Balance Sheets.

We recognized income tax expense of $189 million, $77 million, and $174 million for fiscal years 2022, 2021, and 2020 respectively. Our annual effective tax rate was 1.9%, 1.7%, and 5.9% for fiscal years 2022, 2021, and 2020, respectively. The increase in our effective tax rate in fiscal year 2022 as compared to fiscal year 2021 was primarily due to an

increase in the amount of earnings subject to U.S. tax, and a decreased impact of tax benefits from the U.S. federal research tax credit, partially offset by the benefit of the foreign-derived intangible income deduction and the discrete benefit of the Domestication. The decrease in our effective tax rate in fiscal year 2021 as compared to fiscal year 2020 was primarily due to a decrease in the proportional amount of earnings subject to United States tax and an increase of tax benefits from stock-based compensation.

On June 28, 2021, we simplified our corporate structure by repatriating the economic rights of certain non-U.S. IP to the United States via domestication of a foreign subsidiary, or the Domestication. The Domestication more closely aligns our corporate structure to our operating structure in accordance with the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting conclusions and changes to U.S. and European tax laws. The impact of the Domestication, which is regarded as a change in tax status, resulted in a discrete benefit primarily from re-valuing certain deferred tax assets, net of deferred tax liabilities, of $244 million in fiscal year 2022.

Our effective tax rate for fiscal year 2022 was lower than the U.S. federal statutory rate of 21% due to tax benefits from the foreign-derived intangible income deduction, income earned in jurisdictions, including the British Virgin Islands and Israel, that are subject to taxes lower than the U.S. federal statutory tax rate, excess tax benefits related to stock-based compensation, recognition of U.S. federal research tax credits and the one-time benefits of the Domestication.

Our effective tax rates for fiscal years 2021 and 2020 were lower than the U.S. federal statutory rate of 21% due primarily to income earned in jurisdictions, including the British Virgin Islands, Israel and Hong Kong, where the tax rate was lower than the U.S. federal statutory tax rate, recognition of U.S. federal research tax credits, and excess tax benefits related to stock-based compensation.

During the second quarter of fiscal year 2021, we completed the acquisition of Mellanox. As a result of the acquisition, we recorded $256 million of net deferred tax liabilities primarily on the excess of book basis over the tax basis of the acquired intangible assets and undistributed earnings in certain foreign subsidiaries. We also recorded $153 million of long-term tax liabilities related to tax basis differences in Mellanox.

As of January 30, 2022, we intend to indefinitely reinvest approximately $1.05 billion and $232 million of cumulative undistributed earnings held by certain subsidiaries in Israel and the United Kingdom, respectively. We have not provided the amount of unrecognized deferred tax liabilities for temporary differences related to these investments as the determination of such amount is not practicable.

As of January 30, 2022 and January 31, 2021, we had a valuation allowance of $907 million and $728 million, respectively, related to state and certain other 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 assets as income tax benefits during the period.

As of January 30, 2022, we had federal, state and foreign net operating loss carryforwards of $397 million, $345 million and $341 million, respectively. The federal and state carryforwards will begin to expire in fiscal year 2023. The foreign net operating loss carryforwards of $341 million may be carried forward indefinitely. As of January 30, 2022, we had federal research tax credit carryforwards of $102 million that will begin to expire in fiscal year 2042. We have state research tax credit carryforwards of $1.24 billion, of which $1.18 billion is attributable to the State of California and may be carried over indefinitely, and $55 million is attributable to various other states and will begin to expire in fiscal year 2023. 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, state, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before utilization.

As of January 30, 2022, we had $1.01 billion of gross unrecognized tax benefits, of which $808 million would affect our effective tax rate if recognized. However, $181 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 $808 million of net unrecognized tax benefits as of January 30, 2022 consisted of $670 million recorded in non-current income taxes payable and $138 million reflected as a net reduction to the deferred tax assets.

A reconciliation of gross unrecognized tax benefits is as follows:

	January 30, 2022		January 31, 2021		January 26, 2020
	(In millions)
Balance at beginning of period	$	776	$	583	$	477
Increases in tax positions for current year	246		158		104
Increases in tax positions for prior years (1)	14		60		7
Decreases in tax positions for prior years	(4)		(11)		—
Settlements	(8)		(5)		—
Lapse in statute of limitations	(11)		(9)		(5)
Balance at end of period	$	1,013	$	776	$	583

(1) The fiscal year 2021 balance represents prior year gross unrecognized tax benefits recorded as a result of the Mellanox acquisition.

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.

We include interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 30, 2022, January 31, 2021, and January 26, 2020, we had accrued $59 million, $44 million, and $31 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 30, 2022, unrecognized tax benefits of $670 million and the related interest and penalties of $59 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 30, 2022, 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 30, 2022, the significant tax jurisdictions that may be subject to examination include China, Germany, Hong Kong, India, Israel, Taiwan, United Kingdom, and the United States for fiscal years 2005 through 2021. As of January 30, 2022, the significant tax jurisdictions for which we are currently under examination include Germany, India, Israel, and the United States for fiscal years 2005 through 2019.