Income Taxes

Components of earnings/(loss) before income taxes (in millions):



Fiscal Year Ended	Sep 28, 2014		Sep 29, 2013								Sep 30, 2012
	Sep 28, 2014		Total			Litigation charge			All Other		Sep 30, 2012
United States	$	2,572.4	$	(674.0	)	$	(2,784.1	)	$	2,110.1	$	1,679.6
Foreign	587.3		444.1			—			444.1		379.5
Total earnings/(loss) before income taxes	$	3,159.7	$	(229.9	)	$	(2,784.1	)	$	2,554.2	$	2,059.1

Provision/(benefit) for income taxes (in millions):



Fiscal Year Ended	Sep 28, 2014			Sep 29, 2013									Sep 30, 2012
	Sep 28, 2014			Total			Litigation charge			All Other			Sep 30, 2012
Current taxes:
US federal	$	822.7		$	616.6		$	—		$	616.6		$	466.0
US state and local	132.9			93.8			—			93.8			79.9
Foreign	128.8			95.9			—			95.9			76.8
Total current taxes	1,084.4			806.3			—			806.3			622.7
Deferred taxes:
US federal	12.0			(898.8		)	(922.3		)	23.5			49.2
US state and local	(4.9		)	(144.0		)	(148.7		)	4.7			(0.7		)
Foreign	0.5			(2.2		)	—			(2.2		)	3.2
Total deferred taxes	7.6			(1,045.0		)	(1,071.0		)	26.0			51.7
Total income tax expense/(benefit)	$	1,092.0		$	(238.7	)	$	(1,071.0	)	$	832.3		$	674.4

Reconciliation of the statutory US federal income tax rate with our effective income tax rate:



Fiscal Year Ended	Sep 28, 2014		Sep 29, 2013						Sep 30, 2012
	Sep 28, 2014		Total		Litigation charge		All Other		Sep 30, 2012
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.6		15.8		3.5		2.4		2.5
Benefits and taxes related to foreign operations	(1.9	)	37.5		—		(3.4	)	(3.3	)
Domestic production activity deduction	(0.7	)	8.1		—		(0.7	)	(0.7	)
Domestic tax credits	(0.2	)	2.8		—		(0.3	)	(0.3	)
Charitable contributions	(0.4	)	3.9		—		(0.3	)	(0.5	)
Other, net	0.2		0.7		—		(0.1	)	0.1
Effective tax rate	34.6	%	103.8	%	38.5	%	32.6	%	32.8	%

Our effective tax rate in fiscal 2013 was significantly affected by the litigation charge we recorded as a result of the conclusion of our arbitration with Kraft. In order to provide a more meaningful analysis of tax expense and the effective tax rate, the tables above present separate reconciliations of the effect of the litigation charge. The deferred tax asset related to the litigation charge is estimated to be recovered over a period of 15 years; the deferred tax asset has been classified between current and non-current consistent with the expected recovery period for income tax reporting purposes.

US income and foreign withholding taxes have not been provided on approximately $2.2 billion of cumulative undistributed earnings of foreign subsidiaries and equity investees. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the US, in the form of dividends or otherwise, we would be subject to additional US income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because of the complexities with its hypothetical calculation, and the amount of liability, if any, is dependent on circumstances existing if and when remittance occurs.

Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in millions):



	Sep 28, 2014			Sep 29, 2013
Deferred tax assets:
Property, plant and equipment	$	78.5		$	64.9
Accrued occupancy costs	58.8			69.0
Accrued compensation and related costs	75.3			77.6
Other accrued liabilities	27.6			22.0
Asset retirement obligation asset	18.6			21.0
Deferred revenue	63.4			49.9
Asset impairments	49.5			33.3
Tax credits	20.3			19.1
Stock-based compensation	131.5			120.9
Net operating losses	104.4			99.0
Litigation charge	1,002.0			1,071.9
Other	77.0			62.7
Total	$	1,706.9		$	1,711.3
Valuation allowance	(166.8		)	(160.5		)
Total deferred tax asset, net of valuation allowance	$	1,540.1		$	1,550.8
Deferred tax liabilities:
Property, plant and equipment	(148.2		)	(182.9		)
Intangible assets and goodwill	(92.9		)	(81.6		)
Other	(89.4		)	(53.1		)
Total	(330.5		)	(317.6		)
Net deferred tax asset	$	1,209.6		$	1,233.2
Reported as:
Current deferred income tax assets	$	317.4		$	277.3
Long-term deferred income tax assets	903.3			967.0
Current deferred income tax liabilities (included in Accrued liabilities)	(4.2		)	(1.0		)
Long-term deferred income tax liabilities (included in Other long-term liabilities)	(6.9		)	(10.1		)
Net deferred tax asset	$	1,209.6		$	1,233.2

The valuation allowance as of September 28, 2014 and September 29, 2013 is primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries. The net change in the total valuation allowance was an increase of $6.3 million for both fiscal 2014 and 2013.

As of September 28, 2014, Starbucks has state tax credit carryforwards of $31.2 million with an expiration date of fiscal 2024. Starbucks has foreign net operating loss carryforwards of $342.4 million, with the predominant amount having no expiration date.

Uncertain Tax Positions

As of September 28, 2014, we had $112.7 million of gross unrecognized tax benefits of which $85.3 million, if recognized, would affect our effective tax rate. We recognized expense of $5.9 million, a benefit of $0.8 million, and a benefit of $0.7 million of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2014, 2013 and 2012, respectively. As of September 28, 2014 and September 29, 2013, we had accrued interest and penalties of $10.6 million and $4.7 million, respectively, before the benefit of the federal tax deduction, included within the related tax liability on the consolidated balance sheets.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):



	Sep 28, 2014			Sep 29, 2013			Sep 30, 2012
Beginning balance	$	88.8		$	75.3		$	52.9
Increase related to prior year tax positions	1.4			8.9			8.8
Decrease related to prior year tax positions	(2.2		)	(9.3		)	—
Increase related to current year tax positions	26.7			19.3			20.0
Decrease related to current year tax positions	(1.9		)	(0.4		)	(1.1		)
Decreases related to settlements with taxing authorities	(0.1		)	—			(0.5		)
Decreases related to lapsing of statute of limitations	—			(5.0		)	(4.8		)
Ending balance	$	112.7		$	88.8		$	75.3

We are currently under routine audit by various jurisdictions inside and outside the US as well as US state taxing jurisdictions for fiscal years 2006 through 2013. We are no longer subject to US federal or state examination for years prior to fiscal year 2011, with the exception of eleven states. We are no longer subject to examination in any material international markets prior to 2006.

There is a reasonable possibility that our unrecognized tax benefit liability will change within 12 months; however, we do not expect this change to be material to the consolidated financial statements.