INCOME TAXES

In 2014, 2015, and 2016, we recorded net tax provisions of $167 million, $950 million, and $1.4 billion. 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 $177 million, $273 million, and $412 million for 2014, 2015, and 2016.

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



	Year Ended December 31,
	2014			2015			2016
Current taxes:
U.S. Federal	$	214		$	215		$	1,136
U.S. State	65			237			208
International	204			417			327
Current taxes	483			869			1,671
Deferred taxes:
U.S. Federal	(125		)	473			116
U.S. State	(11		)	(171		)	(31		)
International	(180		)	(221		)	(331		)
Deferred taxes	(316		)	81			(246		)
Provision for income taxes, net	$	167		$	950		$	1,425

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



	Year Ended December 31,
	2014			2015			2016
U.S.	$	292		$	2,186		$	4,551
International	(403		)	(618		)	(659		)
Income (loss) before income taxes	$	(111	)	$	1,568		$	3,892

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			2015			2016
Income taxes computed at the federal statutory rate	$	(39	)	$	549		$	1,362
Effect of:
Impact of foreign tax differential	136			350			(69		)
State taxes, net of federal benefits	29			37			110
Tax credits	(85		)	(99		)	(119		)
Nondeductible compensation	117			149			189
Domestic production activities deduction	(20		)	(44		)	(94		)
Other, net	29			8			46
Total	$	167		$	950		$	1,425

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 also generated income in lower tax jurisdictions primarily related to our European operations, which are headquartered in Luxembourg.

Our provision for income taxes in 2016 was higher than in 2015 primarily due to an increase in U.S. pre-tax income, partially offset by an increase in the proportion of foreign losses for which we may realize a tax benefit, an increase in tax amortization deductions, and a decline in the proportion of nondeductible expenses. 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 and losses in lower tax jurisdictions 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 $2.8 billion as of December 31, 2016. 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			2016
Deferred tax assets (1):
Loss carryforwards U.S. - Federal/States (2)	$	107		$	198
Loss carryforwards - Foreign (3)	856			1,062
Accrued liabilities, reserves, & other expenses	854			968
Stock-based compensation	727			1,073
Deferred revenue	189			330
Assets held for investment	148			66
Depreciation & amortization	222			179
Other items	268			171
Tax credits (4)	41			39
Total gross deferred tax assets	3,412			4,086
Less valuation allowance (5)	(1,069		)	(1,012		)
Deferred tax assets, net of valuation allowance	2,343			3,074
Deferred tax liabilities:
Depreciation & amortization	(1,970		)	(2,332		)
Acquisition related intangible assets	(203		)	(226		)
Other items	(88		)	(62		)
Net deferred tax assets, net of valuation allowance	$	82		$	454

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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 $18 million of deferred tax assets as of December 31, 2015 and 2016, 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 $9 million of deferred tax assets as of December 31, 2015 and 2016, 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 $659 million of deferred tax assets as of December 31, 2015 and 2016, 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, 2016, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $76 million, $4.8 billion, and $1.0 billion. The federal, foreign, and state net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and applicable foreign and state tax law. If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire in 2020, 2017, and 2017, respectively. As of December 31, 2016, 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. As of December 31, 2016, our federal capital loss carryforwards for income tax purposes was approximately $404 million. If not utilized, a portion of the capital loss 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			2015			2016
Gross tax contingencies – January 1	$	407		$	710		$	1,181
Gross increases to tax positions in prior periods	351			254			355
Gross decreases to tax positions in prior periods	(50		)	(22		)	(133		)
Gross increases to current period tax positions	20			242			308
Audit settlements paid	(16		)	—			—
Lapse of statute of limitations	(2		)	(3		)	(1		)
Gross tax contingencies – December 31 (1)	$	710		$	1,181		$	1,710

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(1)	As of December 31, 2016, we had $1.7 billion of accrued tax contingencies, of which $1.1 billion, if fully recognized, would decrease our effective tax rate.

As of December 31, 2015 and 2016, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $59 million and $67 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2014, 2015, and 2016 was $8 million, $18 million, and $9 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, and if we are not able to resolve this matter, 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 from 2003 onwards 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, Italy, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities in respect of these particular jurisdictions primarily for 2008 and thereafter.

We expect the total amount of tax contingencies will grow in 2017. 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 2016. 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.