Note 8: Income Taxes

Tax Reform was enacted in December 2017 and reduced the U.S. federal corporate tax rate from 35.0% to 21.0% starting in 2018, assessed a one-time transition tax on earnings of non-U.S. subsidiaries that have not been taxed previously in the U.S., and created new taxes on certain future foreign sourced earnings. We recorded a provisional income tax expense of $5.4 billion, net within our 2017 results related to Tax Reform. Our provisional estimates will be refined throughout 2018 from our ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law. The components of the provisional income tax expense are as follows:

•

Recognition of the transition tax imposed on undistributed earnings from non-U.S. subsidiaries. We have previously asserted an intent to indefinitely reinvest our earnings and other basis differences in operations outside the U.S., and have not recognized U.S. deferred income taxes. Tax Reform imposes a one-time transition tax on all of our previously untaxed historical non-U.S. earnings and profits at various tax rates. We recognized a provisional tax expense of $6.1 billion in the fourth quarter of 2017. The move to a participation exemption system allows us to make distributions of non-U.S. earnings to the U.S. without incurring additional U.S. tax, however these distributions may be subject to applicable non-U.S. taxation.


•	Remeasurement of deferred income taxes using the newly enacted statutory tax rate of 21.0%. The new statutory U.S. federal income tax rate is effective for the 2018 tax year. We remeasured our deferred tax assets and liabilities, including associated valuation allowances, with the new tax rate. We have recognized a provisional tax benefit of $676 million in the fourth quarter of 2017.

INCOME TAX PROVISION

Income before taxes and the provision for taxes consisted of the following:



Years Ended (In Millions)	Dec 30, 2017			Dec 31, 2016			Dec 26, 2015
Income before taxes:
U.S.	$	11,141		$	6,957		$	8,800
Non-U.S.	9,211			5,979			5,412
Total income before taxes	20,352			12,936			14,212
Provision for taxes:
Current:
Federal	10,207			1,319			2,828
State	27			13			40
Non-U.S.	899			756			842
Total current provision for taxes	11,133			2,088			3,710
Deferred:
Federal	(220		)	658			(862		)
Other	(162		)	(126		)	(56		)
Total deferred provision for taxes	(382		)	532			(918		)
Total provision for taxes	$	10,751		$	2,620		$	2,792
Effective tax rate	52.8		%	20.3		%	19.6		%

The difference between the tax provision at the statutory federal income tax rate and the tax provision as a percentage of income before income taxes (effective tax rate) for each period was as follows:



Years Ended	Dec 30, 2017		Dec 31, 2016		Dec 26, 2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Increase (reduction) in rate resulting from:
Non-U.S. income taxed at different rates	(7.6	)	(11.7	)	(7.9	)
Research and development tax credits	(2.3	)	(2.3	)	(1.7	)
Domestic manufacturing deduction benefit	(1.3	)	(1.4	)	(2.0	)
Settlements, effective settlements, and related remeasurements	—		(0.1	)	(2.9	)
Tax Reform	26.8		—		—
ISecG divestiture	3.3		—		—
Other	(1.1	)	0.8		(0.9	)
Effective tax rate	52.8	%	20.3	%	19.6	%

Substantially all of the increase in our effective tax rate in 2017 compared to 2016 was driven by the one-time provisional impacts from the Tax Reform enacted on December 22, 2017, the 2017 ISecG divestiture, and a higher proportion of our income in higher tax rate jurisdictions.

The majority of the increase in our effective tax rate in 2016 compared to 2015 was driven by one-time items and our 2015 decision to indefinitely reinvest some of our prior years' non-U.S. earnings, partially offset by a higher proportion of our income in lower tax jurisdictions.

We derive the effective tax rate benefit attributed to non-U.S. income taxed at different rates primarily from our operations in China, Hong Kong, Ireland, and Israel. The statutory tax rates in these jurisdictions range from 12.5% to 25.0%. In addition, we are subject to reduced tax rates in China and Israel as long as we conduct certain eligible activities and make certain capital investments. These conditional reduced tax rates expire at various dates through 2026 and we expect to apply for renewals upon expiration.

DEFERRED AND CURRENT INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities at the end of each period were as follows:



(In Millions)	Dec 30, 2017			Dec 31, 2016
Deferred tax assets:
Accrued compensation and other benefits	$	711		$	1,182
Share-based compensation	241			373
Deferred income	211			596
Inventory	675			1,044
State credits and net operating losses	1,081			846
Other, net	887			1,187
Gross deferred tax assets	3,806			5,228
Valuation allowance	(1,171		)	(953		)
Total deferred tax assets	2,635			4,275
Deferred tax liabilities:
Property, plant and equipment	(943		)	(1,574		)
Licenses and intangibles	(881		)	(1,036		)
Convertible debt	(374		)	(1,098		)
Unrealized gains on investments and derivatives	(421		)	(940		)
Transition tax	(1,850		)	—
Other, net	(373		)	(450		)
Total deferred tax liabilities	(4,842		)	(5,098		)
Net deferred tax assets (liabilities)	(2,207		)	(823		)

Reported as:
Deferred tax assets	840			907
Deferred tax liabilities	(3,046		)	(1,730		)
Net deferred tax assets (liabilities)	$	(2,207	)	$	(823	)

Deferred tax assets are included within other long-term assets on the consolidated balance sheets.

The valuation allowance as of December 30, 2017 included allowances related to unrealized state credit carryforwards of $1.1 billion and matters related to our non-U.S. subsidiaries of $99 million.

As of December 30, 2017, our federal, state, and non-U.S. net operating loss carryforwards for income tax purposes were $264 million, $149 million, and $431 million, respectively. The majority of the non-U.S. net operating loss carryforwards have no expiration date. The remaining non-U.S. and U.S. federal and state net operating loss carryforwards expire at various dates through 2036. A significant amount of the net operating loss carryforwards in the U.S. relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. The non-U.S. net operating loss carryforwards include $249 million that is not likely to be recovered and has been reduced by a valuation allowance.

As of December 30, 2017, we have not recognized deferred income tax on certain outside basis differences in our subsidiaries, because we have the intent and ability to indefinitely reinvest these basis differences. Determining the unrecognized deferred tax liability for these outside basis differences is not practicable.

Current income taxes receivable of $71 million as of December 30, 2017 ($86 million as of December 31, 2016) are included in other current assets. Current income taxes payable of $1.4 billion as of December 30, 2017 ($329 million as of December 31, 2016) are included in other accrued liabilities.

Long-term income taxes payable of $4.1 billion as of December 30, 2017 ($125 million as of December 31, 2016) are included in other long-term liabilities, and include uncertain tax positions, reduced by the associated federal deduction for state taxes and non-U.S. tax credits, and may also include other long-term tax liabilities that are not uncertain but have not yet been paid, including the substantial majority of the transition tax from the Tax Reform, which is payable over the next eight years. The Tax Reform transition tax drove most of the increase in long-term income taxes payable from 2016.

UNCERTAIN TAX POSITIONS

Unrecognized tax benefits were $211 million as of December 30, 2017 ($154 million as of December 31, 2016 and $101 million as of December 26, 2015). If the remaining balance of unrecognized tax benefits were recognized in a future period, it would result in a tax benefit of $139 million as of December 30, 2017 ($87 million as of December 31, 2016) and a reduction in the effective tax rate. The related tax benefit for settlements, effective settlements, and remeasurements was insignificant for 2017 (insignificant in 2016 and $419 million in 2015). Interest, penalties, and accrued interest related to unrecognized tax benefits were insignificant in the periods presented.

We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. However, the estimated impact on income tax expense and net income is not expected to be significant.

We file federal, state, and non-U.S. tax returns. For non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2004. For U.S. federal and state tax returns, we are no longer subject to tax examination for years prior to 2004. We have filed petitions before the U.S. Tax Court relating to the treatment of stock-based compensation expense in an inter-company cost-sharing transaction for certain pre-acquisition Altera Corporation (Altera) tax years. The U.S. Tax Court ruled in favor of Altera and the U.S. Internal Revenue Service appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit. During 2017, the U.S. Court of Appeals heard oral arguments and the outcome of those appeals is pending.