Income Tax Expense

12 Months Ended

Jul. 01, 2022

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:

	2022		2021		2020
	(in millions)
Foreign	$	1,384	$	218	$	(695)
Domestic	739		709		649
Income (loss) before taxes	$	2,123	$	927	$	(46)

Income Tax Expense (Benefit)

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

	2022		2021		2020
	(in millions)
Current:
Foreign	$	143	$	195	$	157
Domestic - Federal	341		154		124
Domestic - State	25		(1)		5
	509		348		286
Deferred:
Foreign	27		(20)		(29)
Domestic - Federal	84		(208)		(53)
Domestic - State	3		(14)		—
	114		(242)		(82)
Income tax expense	$	623	$	106	$	204

The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, 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 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.

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 net operating losses 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 implemented 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.

On December 27, 2020, the Consolidated Appropriations Act (the “Appropriations Act”) was enacted to fund the federal government through their fiscal year, extend certain expiring tax provisions and provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic in the U.S. The provisions of the Appropriations Act did not result in a material impact on the Company’s Consolidated Financial Statements.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “Rescue Act”) was enacted to provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic in the U.S. The Rescue Act includes certain business-related provisions, which did not have a material impact on the Company’s Consolidated Financial Statements. The Company continues to monitor and evaluate the regulatory and interpretive guidance related to the CARES Act, the Appropriations Act and the Rescue Act, as well as legislation in other jurisdictions.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which contained significant law changes related to tax, climate, energy, and health care. The tax measures include, among other things, a corporate alternative minimum tax of 15%. The corporate alternative minimum tax will not be effective for the Company until fiscal year 2024 and the Company is currently evaluating the potential effects of these legislative changes.

Deferred Taxes

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

	July 1, 2022		July 2, 2021
	(in millions)
Deferred tax assets:
Sales related reserves and accrued expenses not currently deductible	$	71	$	88
Accrued compensation and benefits not currently deductible	114		143
Deferred revenue	—		128
Net operating loss carryforward	195		196
Business credit carryforward	483		461
Long-lived assets	72		101
Other	178		131
Total deferred tax assets	1,113		1,248
Deferred tax liabilities:
Long-lived assets	(128)		(202)
Unremitted earnings of certain non-U.S. entities	(288)		(280)
Other	(17)		(20)
Total deferred tax liabilities	(433)		(502)
Valuation allowances	(580)		(558)
Deferred tax assets, net	$	100	$	188

The net deferred tax asset valuation allowance increased by $22 million primarily due to an increase from the generation of additional business state tax credits carryforwards during the year ended July 1, 2022. 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.

The Company is permanently reinvested with respect to certain foreign earnings. There is no unrecognized deferred tax liability associated with the repatriation of these foreign undistributed earnings as it can be achieved without additional federal tax consequences.

Effective Tax Rate

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

	2022		2021		2020
U.S. Federal statutory rate	21	%	21	%	21	%
Tax rate differential on international income	(9)		8		(443)
Tax effect of U.S. foreign income inclusion	—		5		(38)
Tax effect of U.S. foreign minimum tax	5		1		(235)
Tax effect of U.S. foreign derived intangible income	(1)		(14)		109
Tax effect of U.S. non-deductible stock-based compensation	1		1		(21)
Tax effect of U.S. permanent differences	—		1		(26)
IRS Tentative Settlement	15		—		—
Change in valuation allowance	1		(7)		(12)
Unremitted earnings of certain non-U.S. entities	1		6		(114)
Foreign income tax credits	(3)		(5)		191
R&D tax credits	(4)		(8)		147
Other	2		2		(22)
Effective tax rate	29	%	11	%	(443)	%

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 will expire in whole or in part at various dates during 2024 through 2031. 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 $566 million, or $1.79 per diluted share, $390 million, or $1.26 per diluted share, and $464 million, or $1.54 per diluted share, in 2022, 2021, and 2020, respectively.

As of July 1, 2022, 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)	$	627	2023 to 2038
State NOL	364		2031 to 2038
Federal tax credits	57		2023 to 2043
State tax credits	691		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 $125 million and $240 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 1, 2022, 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	$	122	2025 to 2028
Belgium	106		No expiration
Japan	84		2024 to 2031
Spain	46		No expiration
Netherlands	12		2025 to 2026

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:

	2022		2021		2020
	(in millions)
Unrecognized tax benefit, beginning balance	$	748	$	717	$	695
Gross increases related to current year tax positions	12		21		11
Gross increases related to prior year tax positions	358		46		35
Gross decreases related to prior year tax positions	(65)		(20)		(4)
Settlements	(1)		(9)		(12)
Lapse of statute of limitations	(5)		(7)		(8)
Unrecognized tax benefit, ending balance	$	1,047	$	748	$	717

As of July 1, 2022, July 2, 2021 and July 3, 2020, the portion of the gross unrecognized tax benefits, if recognized, that would affect the effective tax rate is $903 million, $612 million, and $583 million. 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 1, 2022, July 2, 2021 and July 3, 2020 was $254 million, $138 million and $137 million, respectively. As of July 1, 2022, July 2, 2021 and July 3, 2020, the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, were $1.16 billion, $750 million, and $720 million, respectively. The Company believes it is reasonably likely that payments of approximately $600 million to $700 million may be made within the next twelve months and have classified that portion of these unrecognized tax benefits, including interest, in Income taxes payable on the Consolidated Balance Sheets as of July 1, 2022. The remaining payables related to unrecognized tax benefits are included in Other liabilities on the Consolidated Balance Sheets as of July 1, 2022, July 2, 2021 and July 3, 2020.

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 2013 through 2020. 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 2012 through 2021, in Ireland for calendar year 2018 through fiscal year 2021, in India for fiscal years 2008 through 2021, in Israel for calendar year 2016 through fiscal year 2021 and in Japan for fiscal years 2015 through 2021, in Malaysia for fiscal years 2014 through 2021, in Thailand for fiscal years 2012 through 2021, in Singapore for fiscal years 2018 through 2021, and in the United Kingdom for fiscal years 2017 through 2021.

As previously disclosed, the IRS issued statutory notices of deficiency and notices of proposed adjustments with respect to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for years 2008 through 2015. In September 2018 and March 2019, the Company filed petitions with the U.S. Tax Court covering years 2008 through 2012, for which it had received statutory notices of deficiency, while years 2013 through 2015 remain in the jurisdiction of the IRS’s Examination function. The IRS has filed various Amendments to Answer with the U.S. Tax Court which, together with the notices of proposed adjustments, would result in additional federal income tax liabilities totaling approximately $1.6 billion and penalties totaling $449 million with respect to years 2008 through 2015. In May 2022, the Company and the IRS tentatively reached a settlement for resolving the statutory notices of deficiency and notices of proposed adjustments with respect to years 2008 through 2015 subject to the parties entering into final stipulations and a closing agreement. As a result, the trial originally scheduled to take place in May 2022 was cancelled. The tentative settlement for resolution incrementally increased the liability for unrecognized tax benefits, including interest and offsetting tax benefits, by $324 million. Including this incremental increase, the Company expects to pay tax and interest totaling approximately $600 million to $700 million, which the Company expects to be partially offset by future reductions to its mandatory deemed repatriation tax obligations and tax savings from interest deductions aggregating to approximately $100 to $150 million. While the Company continues to work with the IRS to come to a final agreement on the federal tax and interest calculations, the Company is uncertain as to when a final agreement will be reached and the exact timing of when any payments will be made. However, the Company believes it is reasonably likely that these payments may be made within the next twelve months and have classified that portion of these unrecognized tax benefits, including interest in Income taxes payable on its Consolidated Balance Sheet as of July 1,2022. This classification and amount may be subject to change in the next twelve months depending on when the Company is able to reach a final agreement with the IRS.

The Company believes that adequate provision has been made for any adjustments that may result from any other tax examinations. However, the outcome of such 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 1, 2022, with the exception of the tentative settlement, 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 relating to the examination of the Company’s tax returns.