Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

In 2018, 2019, and 2020, we recorded net tax provisions of $1.2 billion, $2.4 billion, and $2.9 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 $1.2 billion, $881 million, and $1.7 billion for 2018, 2019, and 2020.

U.S. companies are eligible for a deduction that lowers the effective tax rate on certain foreign income. This regime is referred to as the Foreign-Derived Intangible Income deduction (“FDII”). In addition, certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. The U.S. tax rules also provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022. Our federal tax provision included the election of full expensing of qualified property for 2018 and 2019 and a partial election for 2020.

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

	Year Ended December 31,
	2018		2019		2020
U.S. Federal:
Current	$	(129)	$	162	$	1,835
Deferred	565		914		(151)
Total	436		1,076		1,684
U.S. State:
Current	322		276		626
Deferred	5		8		(190)
Total	327		284		436
International:
Current	563		1,140		956
Deferred	(129)		(126)		(213)
Total	434		1,014		743
Provision for income taxes, net	$	1,197	$	2,374	$	2,863

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

	Year Ended December 31,
	2018		2019		2020
U.S.	$	11,157	$	13,285	$	20,219
International	104		691		3,959
Income before income taxes	$	11,261	$	13,976	$	24,178

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,
	2018		2019		2020
Income taxes computed at the federal statutory rate	$	2,365	$	2,935	$	5,078
Effect of:
Tax impact of foreign earnings and losses	162		453		(538)
State taxes, net of federal benefits	263		221		343
Tax credits	(419)		(466)		(639)
Stock-based compensation (1)	(1,086)		(850)		(1,107)
Foreign income deduction (FDII)	(43)		(72)		(372)
2017 Impact of U.S. Tax Act	(157)		—		—
Other, net	112		153		98
Total	$	1,197	$	2,374	$	2,863

___________________

(1)Includes non-deductible stock-based compensation and excess tax benefits from stock-based compensation. Our tax provision includes $1.6 billion, $1.4 billion, and $1.8 billion of excess tax benefits from stock-based compensation for 2018, 2019, and 2020.

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.

Our provision for income taxes in 2020 was higher than in 2019 primarily due to an increase in pretax income. This was partially offset by the impact of developments in our ongoing global tax controversies on taxes related to our foreign earnings and losses, an increase in excess tax benefits from stock-based compensation, and an increase in our foreign income deduction under FDII. In addition, our Luxembourg operations generated earnings in 2020 and utilized deferred tax assets previously subject to valuation allowances.

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,
	2019		2020
Deferred tax assets (1):
Loss carryforwards U.S. - Federal/States	188		245
Loss carryforwards - Foreign	3,232		3,876
Accrued liabilities, reserves, and other expenses	1,373		2,457
Stock-based compensation	1,585		2,033
Depreciation and amortization	2,385		1,886
Operating lease liabilities	6,648		10,183
Other items	728		559
Tax credits	772		207
Total gross deferred tax assets	16,911		21,446
Less valuation allowances (2)	(5,754)		(5,803)
Deferred tax assets, net of valuation allowances	11,157		15,643
Deferred tax liabilities:
Depreciation and amortization	(5,507)		(5,508)
Operating lease assets	(6,331)		(9,539)
Other items	(640)		(1,462)
Net deferred tax assets (liabilities), net of valuation allowances	$	(1,321)	$	(866)

 ___________________

(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, 2020. Our foreign net operating loss carryforwards for income tax purposes as of December 31, 2020 were approximately $13.4 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 2021. All remaining federal tax credits, which were primarily related to the U.S. federal research and development credit, reduced our federal tax liability in 2020.

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. The effects of the COVID-19 pandemic on our business make estimates of future earnings more challenging. Since Q2 2017, we have recorded a valuation allowance against our net deferred tax assets in Luxembourg. There is still significant uncertainty whether our earnings in Luxembourg are sustainable in the future and we will maintain the valuation allowance until sufficient positive evidence exists to support a release of the valuation allowance.

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,
	2018		2019		2020
Gross tax contingencies – January 1	$	2,309	$	3,414	$	3,923
Gross increases to tax positions in prior periods	164		216		88
Gross decreases to tax positions in prior periods	(90)		(181)		(465)
Gross increases to current period tax positions	1,088		707		507
Settlements with tax authorities	(36)		(207)		(1,207)
Lapse of statute of limitations	(21)		(26)		(26)
Gross tax contingencies – December 31 (1)	$	3,414	$	3,923	$	2,820

 ___________________

(1)As of December 31, 2020, we had approximately $2.8 billion of accrued tax contingencies of which $1.5 billion, if fully recognized, would decrease our effective tax rate. The decrease in our tax contingencies in 2020 was primarily a result of developments in our global tax controversies.

As of December 31, 2019 and 2020, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $131 million and $83 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2018, 2019, and 2020 was $20 million, $4 million, and $(48) million.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2013 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. During Q3 2020, we resolved the audits of tax years 2007 through 2012 with the IRS for amounts that were materially consistent with our accrual.

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 tax laws, regulations, administrative practices, principles, and interpretations may impact 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 prior years’ tax filings. 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.