INCOME TAXES

In 2015, 2014, and 2013, we recorded net tax provisions of $950 million, $167 million, and $161 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 2015, U.S. legislation was enacted that extended accelerated depreciation deductions on qualifying property through 2019 and made permanent the U.S. federal research and development credit. As such, cash taxes paid, net of refunds, were $273 million, $177 million, and $169 million for 2015, 2014, and 2013.

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



	Year Ended December 31,
	2015			2014			2013
Current taxes:
U.S. Federal	$	215		$	214		$	99
U.S. State	237			65			45
International	417			204			173
Current taxes	869			483			317
Deferred taxes:
U.S. Federal	473			(125		)	(114		)
U.S. State	(171		)	(11		)	(19		)
International	(221		)	(180		)	(23		)
Deferred taxes	81			(316		)	(156		)
Provision for income taxes, net	$	950		$	167		$	161

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



	Year Ended December 31,
	2015			2014			2013
U.S.	$	2,186		$	292		$	704
International	(618		)	(403		)	(198		)
Income (loss) before income taxes	$	1,568		$	(111	)	$	506

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,
	2015			2014			2013
Income taxes computed at the federal statutory rate	$	549		$	(39	)	$	177
Effect of:
Impact of foreign tax differential	350			136			(41		)
State taxes, net of federal benefits	37			29			14
Tax credits	(99		)	(85		)	(84		)
Nondeductible compensation	149			117			86
Domestic production activities deduction	(44		)	(20		)	(11		)
Other, net	8			29			20
Total	$	950		$	167		$	161

Our provision for income taxes in 2015 was higher than in 2014 primarily due to an increase in U.S. pre-tax income and increased losses in certain foreign subsidiaries for which we may not realize a tax benefit. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, 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. We generated income in lower tax jurisdictions primarily related to our European operations, which are headquartered in Luxembourg.

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 were primarily generated by our foreign subsidiaries. Income earned in lower tax 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 $1.5 billion as of December 31, 2015. 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,
	2015			2014
Deferred tax assets (1):
Net operating losses U.S. - Federal/States (2)	$	107		$	357
Net operating losses foreign (3)	856			669
Accrued liabilities, reserves, & other expenses	854			780
Stock-based compensation	727			534
Deferred revenue	189			156
Assets held for investment	148			154
Depreciation & amortization	222			117
Other items	268			125
Tax credits (4)	41			115
Total gross deferred tax assets	3,412			3,007
Less valuation allowance (5)	(1,069		)	(901		)
Deferred tax assets, net of valuation allowance	2,343			2,106
Deferred tax liabilities:
Depreciation & amortization	(1,970		)	(1,609		)
Acquisition related intangible assets	(203		)	(195		)
Other items	(88		)	(31		)
Net deferred tax assets, net of valuation allowance	$	82		$	271

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


(2)	Excluding $380 million and $261 million of deferred tax assets as of December 31, 2015 and 2014, 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 of deferred tax assets as of December 31, 2015 and 2014, 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 $447 million and $268 million of deferred tax assets as of December 31, 2015 and 2014, 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, 2015, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $1.1 billion, $3.4 billion, and $2.0 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, 2016, and 2016, respectively. As of December 31, 2015, our tax credit carryforwards for income tax purposes were approximately $725 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,
	2015			2014			2013
Gross tax contingencies – January 1	$	710		$	407		$	294
Gross increases to tax positions in prior periods	254			351			78
Gross decreases to tax positions in prior periods	(22		)	(50		)	(18		)
Gross increases to current period tax positions	242			20			54
Audit settlements paid	—			(16		)	(1		)
Lapse of statute of limitations	(3		)	(2		)	—
Gross tax contingencies – December 31 (1)	$	1,181		$	710		$	407

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(1)	As of December 31, 2015, we had $1.2 billion of tax contingencies, of which $882 million, if fully recognized, would decrease our effective tax rate.

As of December 31, 2015 and 2014, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $59 million and $41 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2015, 2014, and 2013 was $18 million, $8 million, and $8 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, we 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 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. In June 2015, we received final tax collection notices for these years assessing additional French tax of €196 million, including interest and penalties through September 2012. We disagree with the 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 to the risk of additional tax for years 2006 through 2010, if this litigation is adversely determined or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities. 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 2016. 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 2015. 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.