XML 51 R28.htm IDEA: XBRL DOCUMENT v3.22.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
19. Income Taxes

Domestic and foreign income (loss) before income taxes and details of the income tax expense (benefit) are as follows (amounts in millions):

 For the Years Ended December 31,
 202120202019
Income before income tax expense:   
Domestic$1,451 $1,160 $328 
Foreign1,713 1,456 1,305 
$3,164 $2,616 $1,633 
Income tax expense (benefit):
Current:
Federal$189 $206 $136 
State35 92 24 
Foreign229 218 323 
Total current453 516 483 
Deferred:
Federal73 (84)781 
State12 (10)(16)
Foreign(73)(3)(1,118)
Total deferred12 (97)(353)
Income tax expense$465 $419 $130 

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax expense (benefit) at the effective tax rate for each of the years are as follows (amounts in millions):

 For the Years Ended December 31,
 202120202019
Federal income tax provision at statutory rate
$664 21 %$549 21 %$343 21 %
State taxes, net of federal benefit
67 2 43 2 21 1 
Research and development credits
(81)(2)(70)(3)(38)(2)
Foreign earnings taxed at different rates(120)(4)(93)(4)(118)(7)
Foreign-derived intangible income (50)(1)(40)(2)(1)— 
Change in tax reserves43 1 60 2 96 6 
Audit settlements
— — — — 54 3 
Change in Tax Legislation(53)(2)(23)(1)— — 
Change in valuation allowance11 — 35 2 11 — 
Intra-entity IP Transfer— — (31)(1)(230)(14)
Other(16)— (11)— (8)— 
Income tax expense$465 15 %$419 16 %$130 8 %

The Company’s tax rate is affected by the tax rates in the jurisdictions in which the Company operates, some of which have a statutory tax rate less than the U.S. rate and the relative amount of income earned in each jurisdiction.
In October 2019, we completed an intra-entity transfer of certain intellectual property rights to one of our subsidiaries in the U.K., aligning the ownership of these rights with our evolving business. The transfer did not result in a taxable gain; however, our U.K. subsidiary received a step-up in tax basis based on the fair value of the transferred intellectual property rights. Such fair value was determined based on our expectations of future cash flows, long-term growth rates, and discount rates. We recorded a one-time benefit of $230 million in the quarter ended December 31, 2019 for the recognition of a $1.1 billion deferred tax asset in the U.K. related to the amortizable tax basis in the transferred intellectual property, net of uncertain tax positions and a valuation allowance, partially offset by a related $920 million deferred tax liability for U.S. taxes on foreign earnings. The U.K. amortizable tax basis will be recovered over a period of three years to 25 years and the related deferred tax asset was measured using the enacted U.K. corporate tax rates for the years in which the amortization will be realized. We recorded a valuation allowance of $110 million in 2019 for the portion of the deferred tax asset for which it is more-likely-than-not that a benefit will not be realized. During the year ended December 31, 2021, we recognized a one-time net benefit of $53 million from remeasuring this deferred tax asset due to the enactment of a change in the UK corporate tax rate. We will update the measurement and realizability analysis going forward and record the impact from any change in determination in the period of the change.

During the year ended December 31, 2020, we completed an intra-entity transfer of certain intellectual property rights to the U.S. to better align the profits related to these rights with our evolving business activities. As a result, a significant portion of these earnings began qualifying for preferential treatment as foreign-derived intangible income during 2020. The transfer resulted in a one-time benefit of $31 million in connection with the remeasurement of a U.S. deferred tax asset related to foreign earnings.

Income tax expense for 2021 reflects the impact of certain tax elections and comparable changes the Company intends to include in its 2021 income tax returns and related statutory filings. To take these actions, the Merger Agreement requires Microsoft’s approval (which may not be unreasonably withheld, conditioned, or delayed), subject to certain exceptions. Failure to obtain this approval could have an adverse effect on our income tax expense.

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax assets (liabilities) are as follows (amounts in millions):

 As of December 31,
 20212020
Deferred tax assets:  
Deferred revenue$210 $274 
Tax attributes carryforwards143 123 
Share-based compensation46 51 
Intangibles1,458 1,287 
Capitalized software development expenses— 21 
Other141 160 
Deferred tax assets1,998 1,916 
Valuation allowance(278)(228)
Deferred tax assets, net of valuation allowance1,720 1,688 
Deferred tax liabilities:
Intangibles(158)(147)
Capitalized software development expenses(10)— 
U.S. deferred taxes on foreign earnings(603)(577)
Other(78)(63)
Deferred tax liabilities(849)(787)
Net deferred tax assets$871 $901 
As of December 31, 2021, we had gross tax credit carryforwards of $263 million for state purposes. The tax credit carryforwards are included in deferred tax assets net of unrealized tax benefits that would apply upon the realization of uncertain tax positions. In addition, we had foreign net operating loss carryforwards of $11 million at December 31, 2021, most of which carry forward indefinitely.

We evaluate deferred tax assets each period for recoverability. We record a valuation allowance for assets that do not meet the threshold of “more likely than not” to be realized in the future. To make that determination, we evaluate the likelihood of realization based on the weight of all positive and negative evidence available. As of December 31, 2021 and December 31, 2020, we maintained a valuation allowance related to our California research and development credit carryforwards of $118 million and $107 million, respectively. We will reassess this determination quarterly and record a tax benefit if and when future evidence allows for a partial or full release of this valuation allowance.

In addition, we remeasured the U.K. deferred tax asset related to previously transferred intellectual property rights and corresponding U.S. deferred tax liability due to the change in the U.K.'s corporate income tax rate during 2021. As of December 31, 2021, the U.K. deferred tax asset net of valuation allowance is $1.2 billion and the corresponding U.S. deferred tax liability is $989 million.

Activision Blizzard’s tax years after 2008 remain open to examination by certain major taxing jurisdictions to which we are subject. The Internal Revenue Service is currently examining our federal tax returns for the 2012 through 2019 tax years. In addition, King’s pre-acquisition tax returns remain open in various jurisdictions, primarily as a result of transfer pricing matters. We anticipate resolving King’s transfer pricing for both pre- and post-acquisition tax years through a collaborative multilateral process with the tax authorities in the relevant jurisdictions, which include the U.K. and Sweden. While the outcome of this process remains uncertain, it could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.

In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters are resolved and in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.

As of December 31, 2021, we had $1.3 billion of gross unrecognized tax benefits, $784 million of which would affect our effective tax rate, if recognized. A reconciliation of total gross unrecognized tax benefits is as follows (amounts in millions):

 For the Years Ended December 31,
 202120202019
Unrecognized tax benefits balance at January 1$1,166 $1,037 $926 
Gross increase for tax positions taken during a prior year98 97 151 
Gross decrease for tax positions taken during a prior year(18)(1)(168)
Gross increase for tax positions taken during the current year52 38 291 
Settlement with taxing authorities(6)(3)(163)
Lapse of statute of limitations(3)(2)— 
Unrecognized tax benefits balance at December 31$1,289 $1,166 $1,037 

As of December 31, 2021, 2020, and 2019, we had approximately $102 million, $93 million, and $72 million, respectively, of accrued interest and penalties related to uncertain tax positions. For the years ended December 31, 2021, 2020, and 2019, we recorded $11 million, $19 million, and $14 million, respectively, of interest expense related to uncertain tax positions.
The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted above.