INCOME TAXES

In 2014, 2013, and 2012, we recorded net tax provisions of $167 million, $161 million, and $428 million. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. In December 2014, U.S. legislation was enacted providing a one year extension of accelerated depreciation deductions on qualifying property and the U.S. federal research and development credit through 2014. As such, cash taxes paid, net of refunds, were $177 million, $169 million, and $112 million for 2014, 2013, and 2012.

The components of the provision for income taxes, net are as follows (in millions):



	Year Ended December 31,
	2014			2013			2012
Current taxes:
U.S. Federal	$	214		$	99		$	528
U.S. State	65			45			34
International	204			173			131
Current taxes	483			317			693
Deferred taxes:
U.S. Federal	(125		)	(114		)	(129		)
U.S. State	(11		)	(19		)	(27		)
International	(180		)	(23		)	(109		)
Deferred taxes	(316		)	(156		)	(265		)
Provision for income taxes, net	$	167		$	161		$	428

U.S. and international components of income before income taxes are as follows (in millions):



	Year Ended December 31,
	2014			2013			2012
U.S.	$	292		$	704		$	882
International	(403		)	(198		)	(338		)
Income (loss) before income taxes	$	(111	)	$	506		$	544

The items accounting for differences between income taxes computed at the federal statutory rate and the provision recorded for income taxes are as follows (in millions):



	Year Ended December 31,
	2014			2013			2012
Income taxes computed at the federal statutory rate	$	(39	)	$	177		$	191
Effect of:
Impact of foreign tax differential	136			(41		)	172
State taxes, net of federal benefits	29			14			1
Tax credits	(85		)	(84		)	(24		)
Nondeductible compensation	117			86			72
Domestic production activities deduction	(20		)	(11		)	—
Other, net	29			20			16
Total	$	167		$	161		$	428

Our provision for income taxes in 2014 was higher than in 2013 primarily due to the increased losses in certain foreign subsidiaries for which we may not realize a tax benefit and audit-related developments, partially offset by the favorable impact of earnings in lower tax rate jurisdictions. Losses for which we may not realize a related tax benefit reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. Income earned in lower tax jurisdictions is primarily related to our European operations, which are headquartered in Luxembourg.

In 2013, our provision for income taxes was lower than in 2012 primarily due to a decline in the proportion of our losses for which we may not realize a related tax benefit, the favorable impact of earnings in lower tax rate jurisdictions, and the retroactive extension in 2013 of the U.S. federal research and development credit to 2012. In 2013, we recognized tax benefits for a greater proportion of losses for which we may not realize a related tax benefit, primarily due to losses of certain foreign subsidiaries, as compared to 2012. The favorable impact of earnings in lower tax rate jurisdictions was primarily related to our European operations.

Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected. Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S were $2.5 billion as of December 31, 2014. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable.

Deferred income tax assets and liabilities are as follows (in millions):



	December 31,
	2014 (1)			2013
Deferred tax assets:
Net operating losses U.S. - Federal/States (2)	$	357		$	53
Net operating losses foreign (3)	669			427
Accrued liabilities, reserves, & other expenses	780			590
Stock-based compensation	534			396
Deferred revenue	156			249
Assets held for investment	154			164
Other items	242			177
Tax credits (4)	115			107
Total gross deferred tax assets	3,007			2,163
Less valuation allowance (5)	(901		)	(698		)
Deferred tax assets, net of valuation allowance	2,106			1,465
Deferred tax liabilities:
Depreciation & amortization	(1,609		)	(1,021		)
Acquisition related intangible assets	(195		)	(201		)
Other items	(31		)	(16		)
Net deferred tax assets, net of valuation allowance	$	271		$	227

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(1)	Deferred tax assets related to net operating losses and tax credits are presented net of tax contingencies.


(2)	Excluding $261 million and $81 million of deferred tax assets as of December 31, 2014 and 2013, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity.


(3)	Excluding $2 million and $2 million of deferred tax assets as of December 31, 2014 and 2013, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity.


(4)	Excluding $268 million and $227 million of deferred tax assets as of December 31, 2014 and 2013, related to tax credits that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity.


(5)	Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions and future capital gains.

As of December 31, 2014, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $1.9 billion, $2.5 billion, and $1.1 billion. The federal and state net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and applicable state tax law. If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire in 2020, 2015, and 2015, respectively. As of December 31, 2014, our tax credit carryforwards for income tax purposes were approximately $506 million. If not utilized, a portion of the tax credit carryforwards will begin to expire in 2017.

The Company’s consolidated balance sheets reflect deferred tax assets related to net operating losses and tax credit carryforwards excluding amounts resulting from excess stock-based compensation. Amounts related to excess stock-based compensation are accounted for as an increase to additional paid-in capital if and when realized through a reduction in income taxes payable.

Tax Contingencies

We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

The reconciliation of our tax contingencies is as follows (in millions):



	December 31,
	2014			2013			2012
Gross tax contingencies – January 1	$	407		$	294		$	229
Gross increases to tax positions in prior periods	351			78			91
Gross decreases to tax positions in prior periods	(50		)	(18		)	(47		)
Gross increases to current period tax positions	20			54			26
Audit settlements paid	(16		)	(1		)	(4		)
Lapse of statute of limitations	(2		)	—			(1		)
Gross tax contingencies – December 31 (1)	$	710		$	407		$	294

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(1)	As of December 31, 2014, we had $710 million of tax contingencies, of which $604 million, if fully recognized, would decrease our effective tax rate.

As of December 31, 2014 and 2013, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $41 million and $33 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2014, 2013, and 2012 was $8 million, $8 million, and $1 million.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment from the IRS for transactions undertaken in the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $1.5 billion, subject to interest. To date, we have not resolved this matter administratively and are currently contesting it in U.S. Tax Court. We continue to disagree with these IRS positions and intend to defend ourselves vigorously in this matter. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, Amazon could be subject to significant additional tax liabilities.

Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by the French Tax Administration (“FTA”) for calendar year 2006 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. While we have not yet received a final assessment from the FTA, in September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. The notices propose additional French tax of approximately $250 million, including interest and penalties through the date of the assessment. We disagree with the proposed assessment and intend to contest it vigorously. We plan to pursue all available administrative remedies at the FTA, and if we are not able to resolve this matter with the FTA, we plan to pursue judicial remedies. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. We are also subject to taxation in various states and other foreign jurisdictions including Canada, China, Germany, India, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments in respect of these particular jurisdictions for 2003 and thereafter.

We expect the total amount of tax contingencies will grow in 2015. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings in years through 2014. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.