Income Tax Expense

12 Months Ended

Jul. 03, 2020

Income Tax Disclosure [Abstract]

Income Tax Expense

Income Tax Expense

Income (loss) Before Taxes

The domestic and foreign components of Income (loss) before taxes were as follows:

	2020		2019		2018
	(in millions)
Foreign	$	(695)	$	(642)	$	2,398
Domestic	649		355		(313)
Income (loss) before taxes	$	(46)	$	(287)	$	2,085

Income Tax Expense (Benefit)

The components of the income tax expense (benefit) were as follows:

	2020		2019		2018
	(in millions)
Current:
Foreign	$	157	$	181	$	166
Domestic - Federal	124		(91)		1,597
Domestic - State	5		3		(5)
	286		93		1,758
Deferred:
Foreign	(29)		226		(39)
Domestic - Federal	(53)		141		(300)
Domestic - State	—		7		(9)
	(82)		374		(348)
Income tax expense	$	204	$	467	$	1,410

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic in the U.S. The CARES Act, among other things, allows NOLs arising in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and increases the business interest expense limitation from 30% to 50% of adjusted taxable income for tax years 2019 and 2020. Additionally, countries around the world continue to implement emergency tax measures to provide relief similar to the CARES Act. The provisions of the CARES Act and the emergency tax measures around the world did not result in a material cash benefit to the Company. However, the Company continues to monitor and evaluate the regulatory and interpretive guidance related to the CARES Act as well as in other jurisdictions.

The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the IRS have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and the Company anticipates the issuance of additional regulatory and interpretive guidance. The Company applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing its accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to the Company’s estimates in future periods.

Deferred Taxes

Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities were as follows:

	July 3, 2020		June 28, 2019
	(in millions)
Deferred tax assets:
Sales related reserves and accrued expenses not currently deductible	$	52	$	48
Accrued compensation and benefits not currently deductible	130		124
Net operating loss carryforward	251		285
Business credit carryforward	438		410
Long-lived assets	123		144
Other	133		135
Total deferred tax assets	1,127		1,146
Deferred tax liabilities:
Long-lived assets	(294)		(413)
Unremitted earnings of certain non-U.S. entities	(228)		(220)
Other	(26)		(32)
Total deferred tax liabilities	(548)		(665)
Valuation allowances	(624)		(619)
Deferred tax liabilities, net	$	(45)	$	(138)

The net deferred tax asset valuation allowance increased by $5 million in each of 2020 and 2019. The assessment of valuation allowances against deferred tax assets requires estimations and significant judgment. The Company continues to assess and adjust its valuation allowance based on operating results and market conditions. After weighing both the positive and negative evidence available, including, but not limited to, earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets, the Company determined that it is able to realize most of its deferred tax assets with the exception of certain loss and credit carryforwards.

Effective Tax Rate

Under the 2017 Act, the reduction of the U.S. federal corporate tax rate from 35% to 21% became effective January 1, 2018, requiring companies to use a blended rate for their fiscal 2018 tax year by applying a pro-rated percentage of the number of days before and after the January 1, 2018 effective date. This results in the use of an estimated annual effective tax rate of approximately 28% for the Company’s U.S. federal corporate tax rate for fiscal year 2018. For fiscal year 2019 and beyond, the Company will utilize the enacted U.S. federal corporate tax rate of 21%.

Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows:

	2020		2019		2018
U.S. Federal statutory rate	21	%	21	%	28	%
Tax rate differential on international income	(443)		(75)		(34)
Tax effect of U.S. foreign income inclusion	(38)		(7)		1
Tax effect of U.S. foreign minimum tax	(235)		(38)		—
Tax effect of U.S. foreign derived intangible income	109		11		—
Tax effect of U.S. non-deductible stock-based compensation	(21)		(1)		1
Tax effect of U.S. permanent differences	(26)		(3)		(1)
Impact of 2017 Act:
One-time mandatory deemed repatriation tax	—		(41)		75
Re-measurement of deferred taxes	—		2		(3)
Change in valuation allowance	(12)		(2)		5
Unremitted earnings of certain non-U.S. entities	(114)		(79)		—
Foreign income tax credits	191		23		—
Federal R&D credits	147		24		(4)
Other	(22)		2		—
Effective tax rate	(443)	%	(163)	%	68	%

Tax Holidays and Carryforwards

A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines and Thailand operate under various tax holidays and tax incentive programs which expired or will expire in whole or in part at various dates during fiscal years 2021 through 2030. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was an increase to the Company’s net earnings by $464 million, or $1.54 per diluted share, $393 million, or $1.33 per diluted share, and $519 million, or $1.69 per diluted share, in 2020, 2019, and 2018, respectively.

As of July 3, 2020, the Company had varying amounts of federal and state NOL/tax credit carryforwards that do not expire or, if not used, expire in various years. Following is a summary of the Company’s federal and state NOL/tax credit carryforwards and the related expiration dates of these NOL/tax credit carryforwards:

Jurisdiction	NOL/Tax Credit Carryforward Amount		Expiration
	(in millions)
Federal NOL (Pre 2017 Act Generation)	$	676	2021 to 2037
Federal NOL (Post 2017 Act Generation)	—		No expiration
State NOL	471		2021 to 2038
Federal tax credits	58		2021 to 2034
State tax credits	619		No expiration

The federal and state NOLs and credits relating to various acquisitions are subject to limitations under Sections 382 and 383 of the Internal Revenue Code. The Company expects the total amount of federal and state NOLs ultimately realized will be reduced as a result of these provisions by $128 million and $349 million, respectively. The Company expects the total amount of federal and state credits ultimately realized will be reduced as a result of these provisions by $27 million and $2 million, respectively.

As of July 3, 2020, the Company had varying amounts of foreign NOL carryforwards that do not expire or, if not used, expire in various years, depending on the country. The major jurisdictions that the Company receives foreign NOL carryforwards and the related amounts and expiration dates of these NOL carryforwards are as follows:

Jurisdiction	NOL Carryforward Amount		Expiration
	(in millions)
Malaysia	$	167	2025 to 2027
Japan	127		2023 to 2026
Belgium	121		No expiration
China	103		2022 to 2025
Spain	48		No expiration

Uncertain Tax Positions

With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Consolidated Balance Sheets.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties:

	2020		2019		2018
	(in millions)
Unrecognized tax benefit, beginning balance	$	695	$	551	$	522
Gross increases related to current year tax positions	11		172		38
Gross increases related to prior year tax positions	35		8		30
Gross decreases related to prior year tax positions	(4)		(24)		(9)
Settlements	(12)		(1)		(19)
Lapse of statute of limitations	(8)		(11)		(11)
Acquisitions	—		—		—
Unrecognized tax benefit, ending balance	$	717	$	695	$	551

Interest and penalties related to unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded in the provision for income taxes. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of July 3, 2020, June 28, 2019 and June 29, 2018 was $137 million, $123 million and $110 million, respectively. Included within long-term liabilities in the Consolidated Balance Sheets are the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, of $720 million, $699 million, and $508 million as of July 3, 2020, June 28, 2019 and June 29, 2018, respectively. The entire balance of the gross unrecognized tax benefits as of July 3, 2020, June 28, 2019 and June 29, 2018, if recognized, would affect the effective tax rate.

The Company files U.S. Federal, U.S. state and foreign tax returns. For both federal and state tax returns, with few exceptions, the Company is subject to examination for fiscal years 2013 through 2019. The Company is no longer subject to examination by the IRS for periods prior to 2012, although carry forwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in a subsequent period. In the major foreign jurisdictions where there is no tax holiday, the Company could be subject to examination in China for calendar years 2010 through 2019, in Ireland for calendar year 2014 through fiscal year 2019, in India for fiscal years 2008 through 2019, in Israel for calendar year 2015 through fiscal year 2019 and in Japan for fiscal years 2013 through 2019.

The IRS previously completed its field examination of the Company’s federal income tax returns for fiscal years 2008 through 2012 and proposed certain adjustments. As previously disclosed, the Company received Revenue Agent Reports from the IRS for fiscal years 2008 through 2009, proposing adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances. The Company disagrees with the proposed adjustments and in September 2015 filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. The Company and the IRS Appeals Office did not reach a settlement on the disputed matters. On June 28, 2018, the IRS issued a statutory notice of deficiency with respect to the disputed matters for fiscal years 2008 through 2009, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal tax through fiscal year 2009 totaling approximately $516 million, subject to interest and penalties. The Company filed a petition with the U.S. Tax Court in September 2018. On December 10, 2018, the IRS issued a statutory notice of deficiency with respect to fiscal years 2010 through 2012, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal tax for fiscal years 2010 through 2012 totaling approximately $549 million, subject to interest and penalties. Approximately $535 million of the total additional federal tax for fiscal years 2010 through 2012 relates to proposed adjustments for transfer pricing with the Company’s foreign subsidiaries, intercompany payable balances and the utilization of certain tax attributes. The Company filed a petition with the U.S. Tax Court in March 2019. The U.S. Tax Court consolidated the case for fiscal years 2008 through 2009 with the case for fiscal years 2010 through 2012. On May 4, 2020, the IRS filed with the U.S. Tax Court Amendments to Answer to assert penalties totaling $340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2009 and fiscal years 2010 through 2012. The Company continues to believe that its tax positions are properly supported and will vigorously contest the position taken by the IRS.

The Company believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. As of July 3, 2020, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.