Income Taxes

The components of pretax income for the years ended December 31, 2015, 2014 and 2013 are as follows:



	Year Ended December 31,
	2015		2014		2013
	(In millions)
United States	$	396	$	510	$	768
International	2,010		2,005		1,803
	$	2,406	$	2,515	$	2,571

The provision for income taxes is comprised of the following:



	Year Ended December 31,
	2015			2014		2013
	(In millions)
Current:
Federal	$	363		$	489	$	408
State and local	22			20		(5		)
Foreign	106			127		134
	$	491		$	636	$	537
Deferred:
Federal	$	(53	)	$	2,091	$	(15	)
State and local	(2		)	21		(7		)
Foreign	23			632		(11		)
	(32		)	2,744		(33		)
	$	459		$	3,380	$	504

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate of 35% for 2015, 2014 and 2013 to income before income taxes:



	Year Ended December 31,
	2015			2014			2013
	(In millions)
Provision at statutory rate	$	843		$	881		$	900
Permanent differences:
Prior year foreign earnings no longer considered indefinitely reinvested	—			2,991			—
Foreign income taxed at different rates	(399		)	(432		)	(403		)
Change in valuation allowance	1			(142		)	—
Stock-based compensation	23			22			18
State taxes, net of federal benefit	20			42			(12		)
Research and other tax credits	(27		)	(14		)	(26		)
Divested business	—			—			21
Other	(2		)	32			6
	$	459		$	3,380		$	504

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:



	December 31,
	2015			2014
	(In millions)
Deferred tax assets:
Net operating loss, capital loss and credits	$	206		$	61
Accruals and allowances	209			208
Stock-based compensation	65			88
Net unrealized losses	8			—
Net deferred tax assets	488			357
Valuation allowance	(41		)	(25		)
	$	447		$	332
Deferred tax liabilities:
Unremitted foreign earnings	$	(1,656	)	$	(2,109	)
Acquisition-related intangibles	(19		)	(11		)
Depreciation and amortization	(190		)	(212		)
Available-for-sale securities	(251		)	(286		)
Other	—			(17		)
	(2,116		)	(2,635		)
	$	(1,669	)	$	(2,303	)

As of December 31, 2015, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $29 million, $64 million and $116 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal and state net operating loss carryforwards will both begin to expire in 2018. The carryforward periods on our foreign net operating loss carryforwards are as follows: $38 million do not expire and $78 million are subject to valuation allowance and begin to expire in 2017. As of December 31, 2015, state tax credit carryforwards for income tax purposes were approximately $58 million. Most of the state tax credits carry forward indefinitely.

As of December 31, 2015 and 2014, our federal capital loss carryover amounted to $336 million and $45 million, respectively. The increase in the capital loss carryover of $291 million is due to the sale of Enterprise in 2015 and will expire in 2021. The remaining capital loss carryover of $45 million will expire in 2018.

At December 31, 2015 and 2014, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain states and various non-U.S. jurisdictions that we believe are not likely to be realized.

During the first quarter of 2014, we altered our capital allocation strategy. As a result, we provided for U.S. income and applicable foreign withholding taxes on $9.0 billion of undistributed foreign earnings for 2013 and prior years, and recorded a deferred tax liability of approximately $3.0 billion. This deferred tax liability included PayPal related balances presented in discontinued operations as of December 31, 2014. Based on December 31, 2014 foreign exchange rates and excluding PayPal balances, the deferred tax liability for unremitted foreign earnings amounted to $2.1 billion and was included in accrued expenses and other current liabilities on our consolidated balance sheet as of December 31, 2014. The deferred tax liability for unremitted foreign earnings was $1.7 billion as of December 31, 2015 and was included in deferred and other tax liabilities, net due to the adoption of FASB guidance discussed in "Note 1 - The Company and Summary of Significant Accounting Policies" to the consolidated financial statements included in this report.

We have not provided for U.S. federal or foreign income taxes, including withholding taxes on $6.0 billion of our non-U.S. subsidiaries' undistributed earnings as of December 31, 2015. We intend to indefinitely reinvest the $6.0 billion of our non-U.S. subsidiaries’ undistributed earnings in our international operations. Accordingly, we currently have no plans to repatriate those funds. As such, we do not know the time or manner in which we would repatriate those funds. Because the time or manner of repatriation is uncertain, we cannot determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability. In cases where we intend to repatriate a portion of our foreign subsidiaries’ undistributed earnings, we provide U.S. and applicable foreign taxes on such earnings and such taxes are included in our deferred taxes or tax payable liabilities depending upon the planned timing and manner of such repatriation.

On a regular basis, we develop cash forecasts to estimate our cash needs internationally and domestically. We consider projected cash needs for, among other things, investments in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. We estimate the amount of cash available or needed in the jurisdictions where these investments are expected, as well as our ability to generate cash in those jurisdictions and our access to capital markets. This analysis enables us to conclude whether or not we will indefinitely reinvest the current period’s foreign earnings.

We benefit from tax rulings concluded in several different jurisdictions, most significantly Switzerland and Luxembourg. These rulings provide for significantly lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. These rulings resulted in a tax savings of $319 million and $339 million in 2015 and 2014, respectively, which increased earnings per share (diluted) by approximately $0.26 and $0.27 in 2015 and 2014, respectively. These tax rulings are currently in effect and expire over periods ranging from 2017 to the duration of business operations in the respective jurisdictions. We evaluate compliance with our tax ruling agreements annually.

The following table reflects changes in unrecognized tax benefits for the years ended December, 31 2015, 2014 and 2013:



	2015			2014			2013
	(In millions)
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	367		$	304		$	314
Increases related to prior period tax positions	36			35			98
Decreases related to prior period tax positions	(8		)	(18		)	(139		)
Increases related to current period tax positions	51			59			35
Settlements	(6		)	(13		)	(4		)
Gross amounts of unrecognized tax benefits as of the end of the period	$	440		$	367		$	304

During 2015 we increased our reserves by $73 million for various issues that related to tax examination risks assessed during the year. Included within our gross amounts of unrecognized tax benefits of $440 million as of December 31, 2015 is $151 million of unrecognized tax benefits indemnified by PayPal. If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $372 million. Of this amount, approximately $140 million of unrecognized tax benefit is indemnified by PayPal and a corresponding receivable would be reduced upon a future realization. As of December 31, 2015, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities and deferred and other tax liabilities, net.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2015, $2 million was included in tax expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2015 and 2014 was approximately $61 million and $55 million, respectively.

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2012 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2002 include, among others, the U.S. (Federal and California), Germany, Korea, Israel, Switzerland, United Kingdom and Canada.

Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

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. 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 or obligations, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any benefit or expense as of December 31, 2015 related to this matter. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.