Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

In 2017, 2018, and 2019, we recorded net tax provisions of $769 million, $1.2 billion, and $2.4 billion. Tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions are reducing our U.S. taxable income. Cash taxes paid, net of refunds, were $957 million, $1.2 billion, and $881 million for 2017, 2018, and 2019.

The U.S. Tax Act was signed into law on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The U.S. Tax Act also enhanced and extended accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022. We reasonably estimated the effects of the U.S. Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We recorded a provisional tax benefit for the impact of the U.S. Tax Act of approximately $789 million. This amount was primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%, after taking into account the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries. The amount of this one-time tax was not material. In 2018, we completed our determination of the accounting implications of the U.S. Tax Act.

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



	Year Ended December 31,
	2017			2018			2019
U.S. Federal:
Current	$	(137	)	$	(129	)	$	162
Deferred	(202		)	565			914
Total	(339		)	436			1,076
U.S. State:
Current	211			322			276
Deferred	(26		)	5			8
Total	185			327			284
International:
Current	724			563			1,140
Deferred	199			(129		)	(126		)
Total	923			434			1,014
Provision for income taxes, net	$	769		$	1,197		$	2,374

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



	Year Ended December 31,
	2017			2018		2019
U.S.	$	5,630		$	11,157	$	13,285
International	(1,824		)	104		691
Income before income taxes	$	3,806		$	11,261	$	13,976

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,
	2017			2018			2019
Income taxes computed at the federal statutory rate (1)	$	1,332		$	2,365		$	2,935
Effect of:
Tax impact of foreign earnings	1,178			119			381
State taxes, net of federal benefits	114			263			221
Tax credits	(220		)	(419		)	(466		)
Stock-based compensation (2)	(917		)	(1,086		)	(850		)
2017 Impact of U.S. Tax Act	(789		)	(157		)	—
Other, net	71			112			153
Total	$	769		$	1,197		$	2,374

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(1)	The U.S. Tax Act reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018.


(2)	Includes non-deductible stock-based compensation and excess tax benefits from stock-based compensation. Our tax provision includes $1.3 billion, $1.6 billion, and $1.4 billion of excess tax benefits from stock-based compensation for 2017, 2018, and 2019.

Our provision for income taxes in 2018 was higher than in 2017 primarily due to an increase in U.S. pre-tax income and the one-time provisional tax benefit of the U.S. Tax Act recognized in 2017. This was partially offset by the reduction to the U.S. federal statutory tax rate in 2018, a decline in the proportion of foreign losses for which we may not realize a tax benefit and an increase in excess tax benefits from stock-based compensation.

We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing jurisdiction in which we operate. In performing this assessment with respect to each jurisdiction, we review all available evidence, including recent cumulative loss experience and expectations of future earnings, capital gains, and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. In Q2 2017, we

recognized an estimated charge to tax expense of $600 million to record a valuation allowance against the net deferred tax assets in Luxembourg.

Our provision for income taxes in 2019 was higher than in 2018 primarily due to an increase in U.S. pre-tax income, a decline in excess tax benefits from stock-based compensation, and the one-time provisional tax benefit of the U.S. Tax Act recognized in 2018.

Certain foreign subsidiary earnings are subject to U.S. taxation under the U.S. Tax Act, which also repeals U.S. taxation on the subsequent repatriation of those earnings. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.

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



	December 31,
	2018			2019
Deferred tax assets (1):
Loss carryforwards U.S. - Federal/States	222			188
Loss carryforwards - Foreign	2,551			3,232
Accrued liabilities, reserves, and other expenses	1,064			1,373
Stock-based compensation	1,293			1,585
Depreciation and amortization	2,386			2,385
Operating lease liabilities	—			6,648
Other items	484			728
Tax credits	734			772
Total gross deferred tax assets	8,734			16,911
Less valuation allowances (2)	(4,950		)	(5,754		)
Deferred tax assets, net of valuation allowances	3,784			11,157
Deferred tax liabilities:
Depreciation and amortization	(3,579		)	(5,507		)
Operating lease assets	—			(6,331		)
Other items	(749		)	(640		)
Net deferred tax assets (liabilities), net of valuation allowances	$	(544	)	$	(1,321	)

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(1)	Deferred tax assets are presented after tax effects and net of tax contingencies.


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

Our valuation allowances primarily relate to foreign deferred tax assets, including substantially all of our foreign net operating loss carryforwards as of December 31, 2019. Our foreign net operating loss carryforwards for income tax purposes as of December 31, 2019 were approximately $8.6 billion before tax effects and certain of these amounts are subject to annual limitations under applicable tax law. If not utilized, a portion of these losses will begin to expire in 2020. As of December 31, 2019, our federal tax credit carryforwards for income tax purposes were approximately $1.7 billion. If not utilized, a portion of the tax credit carryforwards will begin to expire in 2027.

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,
	2017			2018			2019
Gross tax contingencies – January 1	$	1,710		$	2,309		$	3,414
Gross increases to tax positions in prior periods	223			164			216
Gross decreases to tax positions in prior periods	(139		)	(90		)	(181		)
Gross increases to current period tax positions	518			1,088			707
Settlements with tax authorities	—			(36		)	(207		)
Lapse of statute of limitations	(3		)	(21		)	(26		)
Gross tax contingencies – December 31 (1)	$	2,309		$	3,414		$	3,923

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(1)	As of December 31, 2019, we had approximately $3.9 billion of accrued tax contingencies of which $2.1 billion, if fully recognized, would decrease our effective tax rate.

As of December 31, 2018 and 2019, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $127 million and $131 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2017, 2018, and 2019 was $40 million, $20 million, and $4 million.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2007 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.

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. On October 4, 2017, the European Commission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid. Based on that decision the European Commission announced an estimated recovery amount of approximately €250 million, plus interest, for the period May 2006 through June 2014, and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery. Luxembourg computed an initial recovery amount, consistent with the European Commission’s decision, that we deposited into escrow in March 2018, subject to adjustment pending conclusion of all appeals. In December 2017, Luxembourg appealed the European Commission’s decision. In May 2018, we appealed. We believe the European Commission’s decision to be without merit and will continue to defend ourselves vigorously in this matter. We are also subject to taxation in various states and other foreign jurisdictions including China, Germany, India, 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 2009 and thereafter.

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 twelve 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 could result in changes to our contingencies related to positions on tax filings in years through 2019. 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.