Income Taxes



	2016		2015		2014
Income Before Income Taxes
Domestic (including U.S. exports)	$	14,018	$	12,825	$	11,376
Foreign subsidiaries	850		1,043		870
	$	14,868	$	13,868	$	12,246



Income Tax Expense/(Benefit)
Current
Federal	$	3,146		$	4,182		$	2,932
State	154			333			206
Foreign ⁽¹⁾	533			525			600
	3,833			5,040			3,738
Deferred
Federal	1,172			82			409
State	100			(52		)	81
Foreign	(27		)	(54		)	14
	1,245			(24		)	504
	$	5,078		$	5,016		$	4,242

⁽¹⁾ Includes foreign withholding taxes



	October 1, 2016			October 3, 2015
Components of Deferred Tax Assets and Liabilities
Deferred tax assets
Accrued liabilities	$	(2,385	)	$	(2,244	)
Net operating losses and tax credit carryforwards	(1,567		)	(1,396		)
Other	(917		)	(945		)
Total deferred tax assets	(4,869		)	(4,585		)
Deferred tax liabilities
Depreciable, amortizable and other property	5,682			5,260
Foreign subsidiaries	348			583
Licensing revenues	480			396
Other	295			297
Total deferred tax liabilities	6,805			6,536
Net deferred tax liability before valuation allowance	1,936			1,951
Valuation allowance	1,602			1,288
Net deferred tax liability	$	3,538		$	3,239

At October 1, 2016 and October 3, 2015, the valuation allowance primarily related to $1.2 billion and $1.1 billion, respectively, of deferred tax assets for International Theme Parks’s net operating losses primarily in France and Hong Kong, and to a lesser extent, China. The noncontrolling interest share of the net operating losses were $0.4 billion and $0.4 billion at October 1, 2016 and October 3, 2015, 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.

In the prior year, 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 deferred tax asset was written off to income tax expense in fiscal 2015.

As of October 1, 2016, the Company had undistributed earnings of foreign subsidiaries of approximately $3.4 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 2016 fiscal year end, the incremental federal tax applicable to the earnings would be approximately $0.7 billion.

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



	2016		2015		2014
Federal income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.8		1.9		2.0
Domestic production activity deduction	(1.6	)	(1.9	)	(2.1	)
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate	(1.1	)	(1.5	)	(0.7	)
Disneyland Paris recapitalization	—		2.9		—
Other, including tax reserves and related interest	0.1		(0.2	)	0.4
	34.2	%	36.2	%	34.6	%

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



	2016			2015			2014
Balance at the beginning of the year	$	912		$	803		$	1,120
Increases for current year tax positions	71			98			51
Increases for prior year tax positions	142			280			133
Decreases in prior year tax positions	(158		)	(193		)	(487		)
Settlements with taxing authorities	(123		)	(76		)	(14		)
Balance at the end of the year	$	844		$	912		$	803

The fiscal year-end 2016, 2015 and 2014 balances include $469 million, $501 million and $453 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 2016, 2015 and 2014, the Company had $221 million, $231 million and $216 million, respectively, in accrued interest and penalties related to unrecognized tax benefits. During fiscal years 2016, 2015 and 2014, the Company accrued additional interest and penalties of $22 million, $68 million and $25 million, respectively, and recorded reductions in accrued interest and penalties of $32 million, $54 million and $21 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 2006.

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 $143 million.

In fiscal years 2016, 2015 and 2014, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. Accordingly, $207 million, $313 million and $255 million were credited to shareholders’ equity, respectively, in these years.