Income Taxes



For the year ended	2017			2016			2015
Income (loss) before income taxes, net income (loss) attributable to noncontrolling interests, and equity in net income (loss) of equity method investees
Foreign	$	5,252		$	(353	)	$	2,431
U.S.	(56		)	72			178
	$	5,196		$	(281	)	$	2,609

Income tax (provision) benefit
Current
Foreign	$	(152	)	$	(27	)	$	(93	)
State	(1		)	(1		)	(1		)
U.S. federal	—			—			6
	(153		)	(28		)	(88		)
Deferred
Foreign	39			(32		)	(85		)
State	—			2			1
U.S. federal	—			39			15
Income tax (provision) benefit	$	(114	)	$	(19	)	$	(157	)

Income tax (provision) benefit computed using the U.S. federal statutory rate reconciled to income tax (provision) benefit was as follows:



For the year ended	2017			2016			2015
U.S. federal income tax (provision) benefit at statutory rate	$	(1,819	)	$	98		$	(913	)
Foreign tax rate differential	1,571			(300		)	515
Change in valuation allowance	64			63			260
Change in unrecognized tax benefits	12			52			(118		)
Tax credits	66			48			53
Noncontrolling investment transactions	—			—			57
Other	(8		)	20			(11		)
Income tax (provision) benefit	$	(114	)	$	(19	)	$	(157	)

We operate in a number of tax jurisdictions, including Singapore and Taiwan, where our earnings are indefinitely reinvested and are taxed at lower effective tax rates than the U.S. statutory rate and in a number of locations outside the United States, including Singapore, where we have tax incentive arrangements that are conditional, in part, upon meeting certain business operations and employment thresholds. The effect of tax incentive arrangements, which expire in whole or in part at various dates through 2030, reduced our tax provision by $742 million (benefiting our diluted earnings per share by $0.64) for 2017, were not material in 2016, and by $338 million ($0.29 per diluted share) for 2015.

Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes as well as carryforwards. Deferred tax assets and liabilities consist of the following:



As of	2017			2016
Deferred tax assets
Net operating loss and tax credit carryforwards	$	3,426		$	3,014
Accrued salaries, wages, and benefits	211			142
Other accrued liabilities	59			76
Other	86			65
Gross deferred tax assets	3,782			3,297
Less valuation allowance	(2,321		)	(2,107		)
Deferred tax assets, net of valuation allowance	1,461			1,190

Deferred tax liabilities
Debt discount	(145		)	(170		)
Property, plant, and equipment	(300		)	(135		)
Unremitted earnings on certain subsidiaries	(123		)	(121		)
Product and process technology	(85		)	(81		)
Other	(59		)	(28		)
Deferred tax liabilities	(712		)	(535		)

Net deferred tax assets	$	749		$	655

Reported as
Deferred tax assets	$	766		$	657
Deferred tax liabilities (included in other noncurrent liabilities)	(17		)	(2		)
Net deferred tax assets	$	749		$	655

We continually assess positive and negative evidence for each jurisdiction to determine whether it is more likely than not that existing deferred tax assets will be realized. As of August 31, 2017 and September 1, 2016, we had a valuation allowance of $1.52 billion and $1.16 billion, respectively, against U.S. net deferred tax assets, primarily related to net operating loss and tax credit carryforwards. Income taxes on U.S. operations for 2017, 2016, and 2015 were substantially offset by changes in the valuation allowance. We had valuation allowances against net deferred tax assets, primarily related to net operating loss carryforwards, for our subsidiaries in Japan and for our other foreign subsidiaries, of $627 million and $172 million, respectively, as of August 31, 2017, and $765 million and $177 million, respectively, as of September 1, 2016. Changes in the valuation allowance were due to the effect of income or loss in the United States, changes in foreign currency, adjustments based on management's assessment of foreign net operating losses that are more likely than not to be realized. Due to the adoption of ASU 2016-09, we recognized deferred tax assets of $325 million offset by an equal increase in valuation allowance. See "Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Recently Adopted Accounting Standards."

As of August 31, 2017, our federal, state, and foreign net operating loss carryforward amounts and expiration periods, as reported to tax authorities, were as follows:



Year of Expiration	U.S. Federal		State		Japan		Taiwan		Other Foreign		Total
2018 - 2022	$	—	$	27	$	3,485	$	473	$	680	$	4,665
2023 - 2027	—		330		587		685		6		1,608
2028 - 2032	3,027		1,277		—		—		—		4,304
2033 - 2037	852		320		—		—		—		1,172
Indefinite	—		—		—		342		45		387
	$	3,879	$	1,954	$	4,072	$	1,500	$	731	$	12,136

As of August 31, 2017, our federal and state tax credit carryforward amounts and expiration periods, as reported to tax authorities, were as follows:



Year of Tax Credit Expiration	U.S. Federal		State		Total
2018 - 2022	$	48	$	62	$	110
2023 - 2027	99		37		136
2028 - 2032	64		76		140
2033 - 2037	205		1		206
Indefinite	—		57		57
	$	416	$	233	$	649

Provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from such companies are expected to result in additional tax liabilities. No provision has been made for taxes due on approximately $12.91 billion of the excess of the financial reporting amount over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested. Generally, this amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Determination of the amount of unrecognized deferred tax liabilities related to investments in these foreign subsidiaries is not practicable.

Below is a reconciliation of the beginning and ending amount of unrecognized tax benefits:



For the year ended	2017			2016			2015
Beginning unrecognized tax benefits	$	304		$	351		$	228
Increases due to the Inotera Acquisition	54			—			—
Increases related to tax positions taken in current year	15			5			119
Foreign currency translation increases (decreases) to tax positions	2			—			(6		)
Settlements with tax authorities	(47		)	(47		)	(1		)
Expiration of statute of limitations	(1		)	(5		)	(6		)
Increases related to tax positions from prior years	—			—			17
Ending unrecognized tax benefits	$	327		$	304		$	351

As of the date of the Inotera Acquisition, Inotera's net operating loss carryforwards were $654 million, which expire on various dates through 2023. In connection with the Inotera Acquisition, we assumed $54 million of uncertain tax positions. The decrease in unrecognized tax benefits in 2017 and 2016 is primarily related to favorable resolution of certain tax matters.

Included in the unrecognized tax benefits balance in the table above as of August 31, 2017 were $8 million of unrecognized income tax benefits, which if recognized, would affect our effective tax rate. The amount accrued for interest and penalties related to uncertain tax positions was not material for any period presented. The resolution of tax audits or expiration of statute of limitations could also reduce our unrecognized tax benefits. Although the timing of final resolution is uncertain, the estimated potential reduction in our unrecognized tax benefits in the next 12 months would not be material.

We and our subsidiaries file income tax returns with the U.S. federal government, various U.S. states, and various foreign jurisdictions throughout the world. Our U.S. federal and state tax returns remain open to examination for 2013 through 2017. In addition, tax returns that remain open to examination in Japan range from the years 2011 to 2017 and in Singapore and Taiwan from 2012 to 2017. We believe that adequate amounts of taxes and related interest and penalties have been provided for, and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations, or financial condition.