Income taxes

Income before income taxes included the following (in millions):



	Years ended December 31,
	2016		2015		2014
Domestic	$	4,478	$	3,532	$	1,456
Foreign	4,685		4,446		4,129
Total income before income taxes	$	9,163	$	7,978	$	5,585

The provision for income taxes included the following (in millions):



	Years ended December 31,
	2016			2015			2014
Current provision:
Federal	$	984		$	1,129		$	251
State	65			40			58
Foreign	176			272			194
Total current provision	1,225			1,441			503
Deferred provision (benefit):
Federal	372			(290		)	(22		)
State	(69		)	(78		)	(4		)
Foreign	(87		)	(34		)	(50		)
Total deferred provision (benefit)	216			(402		)	(76		)
Total provision	$	1,441		$	1,039		$	427

Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax credit carryforwards and the tax effects of net operating loss (NOL) carryforwards.

Significant components of our deferred tax assets and liabilities were as follows (in millions):



	December 31,
	2016			2015
Deferred income tax assets:
NOL and credit carryforwards	$	688		$	620
Expense accruals	562			706
Expenses capitalized for tax	255			199
Stock-based compensation	167			179
Undistributed earnings of foreign subsidiaries	—			144
Other	117			161
Total deferred income tax assets	1,789			2,009
Valuation allowance	(381		)	(327		)
Net deferred income tax assets	1,408			1,682

Deferred income tax liabilities:
Acquired intangibles	(3,139		)	(3,633		)
Debt	(345		)	—
Other	(307		)	(227		)
Total deferred income tax liabilities	(3,791		)	(3,860		)
Total deferred income taxes, net	$	(2,383	)	$	(2,178	)

Valuation allowances are provided to reduce the amounts of our deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.

The valuation allowance increased in 2016 due primarily to the Company’s expectation that some state R&D credits will not be utilized. This increase was offset partially by valuation allowance releases due to sufficient positive evidence to conclude that it is more likely than not that certain foreign NOL carryforwards are realizable. The valuation allowance decreased in 2015 due primarily to the release of valuation allowances against U.S. and foreign deferred tax assets due to the existence of sufficient taxable temporary differences that enable the use of the tax benefit of existing deferred tax assets.

At December 31, 2016, we had $20 million of federal tax credit carryforwards available to reduce future federal income taxes and have provided no valuation allowance for those federal tax credit carryforwards. The federal tax credit carryforwards expire between 2026 and 2034. We had $385 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $363 million of those state tax credit carryforwards. The state credits for which no valuation allowance has been provided expire between 2022 and 2030.

At December 31, 2016, we had $147 million of NOL carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $6 million of those federal NOL carryforwards. The federal NOL carryforwards, for which no valuation allowance has been provided, expire between 2020 and 2035. We had $469 million of NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $445 million of those state NOL carryforwards. The state NOLs for which no valuation allowance has been provided expire between 2017 and 2032. We had $1.8 billion of NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $587 million of those foreign NOL carryforwards. $594 million of the foreign NOLs for which no valuation allowance has been provided have no expiry; the remaining NOLs for which no valuation allowance has been provided will expire between 2017 and 2023.

The reconciliations of the total gross amounts of UTBs (excluding interest, penalties, foreign tax credits and the federal tax benefit of state taxes related to UTBs) were as follows (in millions):



	During the years ended December 31,
	2016			2015			2014
Balance at beginning of year	$	2,114		$	1,772		$	1,415
Additions based on tax positions related to the current year	425			413			379
Additions based on tax positions related to prior years	18			9			37
Reductions for tax positions of prior years	(7		)	(32		)	(45		)
Reductions for expiration of statute of limitations	—			—			(12		)
Settlements	(7		)	(48		)	(2		)
Balance at end of year	$	2,543		$	2,114		$	1,772

Substantially all of the UTBs as of December 31, 2016, if recognized, would affect our effective tax rate. During the year ended December 31, 2016, we settled various examinations with state tax authorities for prior tax years. As a result of these developments, we remeasured our UTBs accordingly. As of December 31, 2016, we believe it is reasonably possible that our gross liabilities for UTBs may decrease by approximately $63 million within the succeeding 12 months due to the resolution of state audits.

Interest and penalties related to UTBs are included in our provision for income taxes. During 2016, 2015 and 2014, we recognized income tax expense of approximately $125 million, $17 million and $35 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. At December 31, 2016 and 2015, accrued interest and penalties associated with UTBs totaled approximately $276 million and $151 million, respectively.

The reconciliations between the federal statutory tax rate applied to income before income taxes and our effective tax rate were as follows:



	Years ended December 31,
	2016		2015		2014
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign earnings, including earnings invested indefinitely	(15.5	)%	(18.1	)%	(22.4	)%
Credits, Puerto Rico Excise Tax	(2.3	)%	(2.5	)%	(4.4	)%
Share-based payments	(1.3	)%	—	%	—	%
Credits, primarily federal R&D	(0.7	)%	(1.4	)%	(1.5	)%
State taxes	0.1	%	0.1	%	0.7	%
Audit settlements (federal, state, foreign)	—	%	(0.5	)%	—	%
Other, net	0.4	%	0.4	%	0.2	%
Effective tax rate	15.7	%	13.0	%	7.6	%

The effective tax rates for the years ended December 31, 2016, 2015 and 2014, are different from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States. Substantially all of the benefit from foreign earnings on our effective tax rate results from foreign income associated with the Company’s operation conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes, and is subject to tax incentive grants through 2035. At December 31, 2016, the cumulative amount of these earnings was approximately $36.6 billion. If these earnings were repatriated to the United States, we would be required to recognize and pay approximately $12.8 billion of additional income taxes based on the current tax rates in effect.

Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate of 4% was recently extended and is now set to expire December 31, 2027. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.

Income taxes paid during the years ended December 31, 2016, 2015 and 2014, totaled $1.1 billion, $919 million and $269 million, respectively.

One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely audited by the tax authorities in those jurisdictions. Significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income and expense among various tax jurisdictions because of differing interpretations of tax laws, regulations and the interpretation of the relevant facts. We are no longer subject to U.S. federal income tax examinations for tax years ended on or before December 31, 2009, or to California state income tax examinations for tax years ended on or before December 31, 2008. We are currently under audit by the IRS for tax years ended December 31, 2010, 2011 and 2012.