Income Taxes



	2015		2014		2013
Income Before Income Taxes
Domestic (including U.S. exports)	$	12,825	$	11,376	$	8,972
Foreign subsidiaries	1,043		870		648
	$	13,868	$	12,246	$	9,620



Income Tax Expense/(Benefit)
Current
Federal	$	4,182		$	2,932	$	2,354
State	333			206		98
Foreign ⁽¹⁾	525			600		474
	5,040			3,738		2,926
Deferred
Federal	82			409		29
State	(52		)	81		61
Foreign	(54		)	14		(32		)
	(24		)	504		58
	$	5,016		$	4,242	$	2,984

⁽¹⁾ Includes foreign withholding taxes



	October 3, 2015			September 27, 2014
Components of Deferred Tax Assets and Liabilities
Deferred tax assets
Accrued liabilities	$	(2,244	)	$	(2,171	)
Foreign subsidiaries	—			(742		)
Net operating losses and tax credit carryforwards	(1,396		)	(973		)
Other	(945		)	(342		)
Total deferred tax assets	(4,585		)	(4,228		)
Deferred tax liabilities
Depreciable, amortizable and other property	5,260			6,183
Foreign subsidiaries	583			—
Licensing revenues	396			351
Other	297			223
Total deferred tax liabilities	6,536			6,757
Net deferred tax liability before valuation allowance	1,951			2,529
Valuation allowance	1,288			1,045
Net deferred tax liability	$	3,239		$	3,574

The valuation allowance primarily relates to $1.1 billion of deferred tax assets for net operating losses at the International Theme Parks including the noncontrolling interest share of losses ($0.4 billion and $0.7 billion at the end of fiscal 2015 and 2014, respectively). The International Theme Parks net operating losses have an indefinite carryforward period in France and Hong Kong and a five-year carryforward period in China.

The Company had a $399 million deferred income tax asset on the difference between the Company’s tax basis in its investment in Disneyland Paris and the Company’s financial statement carrying value of Disneyland Paris. As a result of the Disneyland Paris recapitalization and the increase in the Company’s ownership interest (see Note 6 for further discussion of this transaction), the Company can no longer recognize the deferred tax asset on the basis difference. Accordingly, the deferred tax asset was written off to income tax expense in fiscal 2015.

As of October 3, 2015, the Company had undistributed earnings of foreign subsidiaries of approximately $2.7 billion for which deferred U.S. federal income taxes have not been provided. The Company intends to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Assuming these foreign earnings were repatriated under laws and rates applicable at 2015 fiscal year end, the incremental federal tax applicable to the earnings would be approximately $547 million.

A reconciliation of the effective income tax rate to the federal rate is as follows:



	2015		2014		2013
Federal income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.9		2.0		1.8
Domestic production activity deduction	(1.9	)	(2.1	)	(2.5	)
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate	(1.5	)	(0.7	)	(1.9	)
Disneyland Paris recapitalization	2.9		—		—
Other, including tax reserves and related interest	(0.2	)	0.4		(1.4	)
	36.2	%	34.6	%	31.0	%

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding the related accrual for interest, is as follows:



	2015			2014			2013
Balance at the beginning of the year	$	803		$	1,120		$	668
Increases for current year tax positions	98			51			222
Increases for prior year tax positions	280			133			365
Decreases in prior year tax positions	(193		)	(487		)	(9		)
Settlements with taxing authorities	(76		)	(14		)	(126		)
Balance at the end of the year	$	912		$	803		$	1,120

The fiscal year-end 2015, 2014 and 2013 balances include $501 million, $453 million and $449 million, respectively, that if recognized, would reduce our income tax expense and effective tax rate. These amounts are net of the offsetting benefits from other tax jurisdictions.

As of the end of fiscal 2015, 2014 and 2013, the Company had $231 million, $216 million and $211 million, respectively, in accrued interest and penalties related to unrecognized tax benefits. During fiscal years 2015, 2014 and 2013, the Company accrued additional interest and penalties of $68 million, $25 million and $42 million, respectively, and recorded reductions in accrued interest and penalties of $54 million, $21 million and $55 million, respectively, as a result of audit settlements and other prior-year adjustments. The Company’s policy is to report interest and penalties as a component of income tax expense.

The Company is no longer subject to U.S. federal examination for years prior to 2013 and is no longer subject to examination in any of its major state or foreign tax jurisdictions for years prior to 2005.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the resolution of certain tax matters, which could include payments on those tax matters. These resolutions and payments could reduce our unrecognized tax benefits by $131 million.

In fiscal years 2015, 2014 and 2013, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. Accordingly, $313 million, $255 million and $204 million were credited to shareholders’ equity, respectively, in these years.