Income Taxes

The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income from continuing operations before income taxes, based on tax jurisdiction, are as follows:



	Fiscal Year
(in millions)	2015		2014		2013
U.S.	$	639	$	1,690	$	1,806
International	2,847		2,015		2,445
Income from continuing operations before income taxes	$	3,486	$	3,705	$	4,251

The provision for income taxes from continuing operations consists of the following:



	Fiscal Year
(in millions)	2015			2014			2013
Current tax expense:
U.S.	$	1,128		$	532		$	509
International	502			248			219
Total current tax expense	1,630			780			728
Deferred tax (benefit) expense:
U.S.	(705		)	(175		)	46
International	(114		)	35			10
Net deferred tax (benefit) expense	(819		)	(140		)	56
Total provision for income taxes	$	811		$	640		$	784

Deferred taxes arise because of the different treatment of transactions for financial statement accounting and income tax accounting, known as “temporary differences.” The Company records the tax effect of these temporary differences as “deferred tax assets” and “deferred tax liabilities.” Deferred tax assets generally represent items that can be used as a tax deduction or credit in a tax return in future years for which the Company has already recorded the tax benefit in the consolidated statements of income. The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on the Company’s tax return but has not yet been recognized as an expense in the consolidated statements of income. Tax assets (liabilities), shown before jurisdictional netting of deferred tax assets (liabilities), are comprised of the following:



(in millions)	April 24, 2015			April 25, 2014
Deferred tax assets:
Net operating loss, capital loss, and credit carryforwards	$	5,912		$	487
Other accrued liabilities	585			205
Accrued compensation	330			201
Pension and post-retirement benefits	449			194
Stock-based compensation	418			171
Other	303			171
Inventory	171			118
Federal and state benefit on uncertain tax positions	296			79
Gross deferred tax assets	8,464			1,626
Valuation allowance	(5,607		)	(397		)
Total deferred tax assets	2,857			1,229
Deferred tax liabilities:
Intangible assets	(5,393		)	(652		)
Basis impairment	(204		)	(225		)
Realized loss on derivative financial instruments	(112		)	(110		)
Other	(96		)	(24		)
Accumulated depreciation	(217		)	(20		)
Unrealized gain on available-for-sale securities and derivative financial instruments	(160		)	—
Total deferred tax liabilities	(6,182		)	(1,031		)
Prepaid income taxes	427			320
Income tax receivables	188			113
Tax (liabilities)/assets, net	$	(2,710	)	$	631
Reported as (after valuation allowance and jurisdictional netting):
Tax assets	$	1,335		$	736
Long-term tax assets	774			300
Deferred tax liabilities	(119		)	(19		)
Long-term deferred tax liabilities	(4,700		)	(386		)
Tax (liabilities)/assets, net	$	(2,710	)	$	631

At April 24, 2015, the Company had approximately $26.794 billion of net operating loss carryforwards in certain non-U.S. jurisdictions, of which $20.827 billion have no expiration, and the remaining $5.967 billion will expire in future years through 2035. Included in these net operating loss carryforwards are $17.058 billion of net operating losses related to a subsidiary of the Company, substantially all of which were recorded in fiscal 2008 as a result of the receipt of a favorable tax ruling from certain non-U.S. taxing authorities. The Company has recorded a full valuation allowance against these net operating losses as management does not believe that it is more likely than not that these net operating losses will be utilized. Certain of the remaining non-US net operating loss carryforwards of $9.736 billion have a valuation allowance recorded against the carryforwards as management does not believe that it is more likely than not that these net operating losses will be utilized.

At April 24, 2015, the Company had $759 million of U.S. federal net operating loss carryforwards, which will expire during fiscal 2018 through 2035. For U.S. state purposes, the Company had $1.267 billion of net operating loss carryforwards at April 24, 2015, which will expire during fiscal 2016 through 2035.

At April 24, 2015, the Company also had $183 million of tax credits available to reduce future income taxes payable, of which $102 million have no expiration, and the remaining credits begin to expire during fiscal 2016. The Company has recorded a valuation allowance against a significant portion of these tax credits as management does not believe that it is more likely than not that they will be utilized.

The Company has established valuation allowances of $5.607 billion and $397 million at April 24, 2015 and April 25, 2014, respectively, primarily related to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. These valuation allowances would result in a reduction to the provision for income taxes in the consolidated statements of income, if they are ultimately not required.

At April 24, 2015, the Company had certain potential non-U.S. tax attributes that had not been recorded in the consolidated financial statements, including $12.587 billion of non-U.S. special deductions with an indefinite carryforward period. The Company has treated these amounts as special deductions for financial statement purposes since utilization is contingent upon the annual performance of certain economic factors. The Company intends to recognize the applicable portion of the special deduction annually at an estimated tax rate of between 1% and 3% when and if these economic factors are met.

The Company’s effective income tax rate from continuing operations varied from the U.S. federal statutory tax rate as follows:



	Fiscal Year
	2015		2014		2013
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
U.S. state taxes, net of federal tax benefit	0.8		0.6		0.5
Research and development credit	(0.7	)	(0.5	)	(1.1	)
Domestic production activities	(0.4	)	(0.4	)	(0.3	)
International	(24.3	)	(17.7	)	(16.7	)
Puerto Rico Excise Tax	(1.7	)	(1.6	)	(1.3	)
Impact of non-recurring adjustments (a)	13.3		5.6		2.0
Reversal of excess tax accruals	—		(1.9	)	—
Other, net	1.3		(1.8	)	0.3
Effective tax rate	23.3	%	17.3	%	18.4	%

(a) Non-recurring adjustments include the impact of inventory step-up, impact of product technology upgrade commitment, restructuring charges, net, certain litigation charges, net, acquisition-related items, amortization of intangible assets, and certain tax adjustments.

During the fourth quarter of fiscal year 2015, a tentative settlement was reached with the IRS for the Kyphon acquisition-related matters. As a result, the Company recorded a $329 million certain tax adjustment associated with the proposed settlement. In addition, the certain tax adjustments includes a $20 million charge related to a taxable gain associated with the Covidien acquisition. The $349 million net tax cost was recorded in the provision for income taxes in the consolidated statement of income for fiscal year 2015.

In fiscal year 2014, the Company recorded a $71 million net tax benefit associated with the reversal of excess tax accruals. This net tax benefit included $63 million related to the settlement of certain issues reached with the IRS involving the review of the Company’s fiscal years 2009 through 2011 domestic income tax returns and the remaining amount related to the resolution of various state and foreign audit proceedings covering multiple years and issues. The $71 million net tax benefit was recorded in the provision for income taxes in the consolidated statement of income for fiscal year 2014.

At April 24, 2015, no deferred taxes have been provided for any portion of the approximately $27.837 billion of undistributed earnings of the Company’s subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. The Company has not provided U.S. income taxes on approximately $20.529 billion, and $18.123 billion of undistributed earnings, net, from non-U.S. subsidiaries as of April 25, 2014 and April 26, 2013, respectively. Due to the number of legal entities and jurisdictions involved and the complexity of the legal entity structure of the Company, the complexity of the tax laws in the relevant jurisdictions, including, but not limited to the rules pertaining to the utilization of foreign tax credits in the United States and the impact of projections of income for future years to any calculations, the Company believes it is not practicable to estimate, within any reasonable range, the amount of additional taxes which may be payable upon distribution of these earnings.

Currently, the Company’s operations in Puerto Rico, Switzerland, Singapore, Dominican Republic, Costa Rica, and Israel have various tax incentive grants. The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share by $0.37 in fiscal year 2015, $0.42 in fiscal year 2014, and $0.42 in fiscal year 2013. Unless these grants are extended, they will expire between fiscal years 2016 and 2027. The Company’s historical practice has been to renew, extend, or obtain new tax incentive grants upon expiration of existing tax incentive grants. If the Company is not able to renew, extend, or obtain new tax incentive grants, the expiration of existing tax incentive grants could have a material impact on the Company’s financial results in future periods.

The Company had $2.860 billion, $1.172 billion, and $1.068 billion of gross unrecognized tax benefits as of April 24, 2015, April 25, 2014, and April 26, 2013, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2015, 2014, and 2013 is as follows:



	Fiscal Year
(in millions)	2015			2014			2013
Gross unrecognized tax benefits at beginning of fiscal year	$	1,172		$	1,068		$	917
Gross increases:
Prior year tax positions	331			64			12
Current year tax positions	231			166			169
Acquisitions	1,199			—			—
Gross decreases:
Prior year tax positions	(40		)	(58		)	(21		)
Settlements	(33		)	(66		)	(6		)
Statute of limitation lapses	—			(2		)	(3		)
Gross unrecognized tax benefits at end of fiscal year	$	2,860		$	1,172		$	1,068
Cash advance paid in connection with proposed settlements	(378		)	—			—
Gross unrecognized tax benefits at end of fiscal year, net of cash advance	$	2,482		$	1,172		$	1,068

If all of the Company’s unrecognized tax benefits as of April 24, 2015, April 25, 2014, and April 26, 2013 were recognized, $2.233 billion, $1.104 billion, and $1.028 billion would impact the Company’s effective tax rate, respectively. Although the Company believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on the Company’s effective tax rate in future periods. The Company has recorded $267 million of gross unrecognized tax benefits as a current liability, and $2.593 billion as a long-term liability.

The Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the consolidated statements of income and records the liability in the current or long-term accrued income taxes in the consolidated balance sheets, as appropriate. The Company had $656 million, $141 million, and $88 million of accrued gross interest and penalties as of April 24, 2015, April 25, 2014, and April 26, 2013, respectively. During the fiscal years ended April 24, 2015, April 25, 2014, and April 26, 2013, the Company recognized gross interest expense of approximately $142 million, $36 million, and $33 million in the provision for income taxes in the consolidated statements of income, respectively.

The Company’s reserves for uncertain tax positions relate to unresolved matters with the IRS and other taxing authorities. These reserves are subject to a high degree of estimation and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or foreign tax authorities during future tax audits, could have a material impact on the Company’s financial results in future periods. The Company continues to believe that its reserves for uncertain tax positions are appropriate and that it has meritorious defenses for its tax filings and will vigorously defend them during the audit process, appellate process, and through litigation in courts, as necessary.

The major tax jurisdictions where the Company conducts business which remain subject to examination are as follows:



Jurisdiction		Earliest Year Open
United States - federal and state		1996
Brazil		2009
Canada		2005
China		2009
Costa Rica		2012
Dominican Republic		2011
France		2007
Germany		2010
India		2002
Ireland		2010
Israel		2009
Italy		2005
Japan		2009
Luxembourg		2009
Mexico		2005
Puerto Rico		2005
Singapore		2009
Switzerland		2004
United Kingdom		2010

See Note 16 for additional information regarding the status of current tax audits and proceedings.