Income Taxes

The provision for income taxes for 2017, 2016 and 2015, consisted of the following (in millions):



	2017			2016			2015
Federal:
Current	$	7,842		$	7,652		$	11,730
Deferred	5,980			5,043			3,408
Total ⁽¹⁾	13,822			12,695			15,138
State:
Current	259			990			1,265
Deferred	2			(138		)	(220		)
Total	261			852			1,045
Foreign:
Current	1,671			2,105			4,744
Deferred	(16		)	33			(1,806		)
Total	1,655			2,138			2,938
Provision for income taxes	$	15,738		$	15,685		$	19,121


(1)	Includes taxes of $7.9 billion, $6.7 billion and $7.3 billion provided on foreign pre-tax earnings in 2017, 2016 and 2015, respectively.

The foreign provision for income taxes is based on foreign pre-tax earnings of $44.7 billion, $41.1 billion and $47.6 billion in 2017, 2016 and 2015, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 30, 2017, U.S. income taxes have not been provided on a cumulative total of $128.7 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $42.2 billion.

As of September 30, 2017 and September 24, 2016, $252.3 billion and $216.0 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2017, 2016 and 2015) to income before provision for income taxes for 2017, 2016 and 2015, is as follows (dollars in millions):



	2017			2016			2015
Computed expected tax	$	22,431		$	21,480		$	25,380
State taxes, net of federal effect	185			553			680
Indefinitely invested earnings of foreign subsidiaries	(6,135		)	(5,582		)	(6,470		)
Domestic production activities deduction	(209		)	(382		)	(426		)
Research and development credit, net	(678		)	(371		)	(171		)
Other	144			(13		)	128
Provision for income taxes	$	15,738		$	15,685		$	19,121
Effective tax rate	24.6		%	25.6		%	26.4		%

The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For RSUs, the Company receives an income tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. The Company had net excess tax benefits from equity awards of $620 million, $379 million and $748 million in 2017, 2016 and 2015, respectively, which were reflected as increases to common stock.

As of September 30, 2017 and September 24, 2016, the significant components of the Company’s deferred tax assets and liabilities were (in millions):



	2017			2016
Deferred tax assets:
Accrued liabilities and other reserves	$	4,019		$	4,135
Basis of capital assets	1,230			2,107
Deferred revenue	1,521			1,717
Deferred cost sharing	667			667
Share-based compensation	703			601
Other	834			788
Total deferred tax assets, net of valuation allowance of $0	8,974			10,015
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries	36,355			31,436
Other	207			485
Total deferred tax liabilities	36,562			31,921
Net deferred tax liabilities	$	(27,588	)	$	(21,906	)

Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Uncertain Tax Positions

Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the Consolidated Balance Sheets.

As of September 30, 2017, the total amount of gross unrecognized tax benefits was $8.4 billion, of which $2.5 billion, if recognized, would affect the Company’s effective tax rate. As of September 24, 2016, the total amount of gross unrecognized tax benefits was $7.7 billion, of which $2.8 billion, if recognized, would have affected the Company’s effective tax rate.

The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2017, 2016 and 2015, is as follows (in millions):



	2017			2016			2015
Beginning balances	$	7,724		$	6,900		$	4,033
Increases related to tax positions taken during a prior year	333			1,121			2,056
Decreases related to tax positions taken during a prior year	(952		)	(257		)	(345		)
Increases related to tax positions taken during the current year	1,880			1,578			1,278
Decreases related to settlements with taxing authorities	(539		)	(1,618		)	(109		)
Decreases related to expiration of statute of limitations	(39		)	—			(13		)
Ending balances	$	8,407		$	7,724		$	6,900

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 30, 2017 and September 24, 2016, the total amount of gross interest and penalties accrued was $1.2 billion and $1.0 billion, respectively, which is classified as non-current liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2017, 2016 and 2015 of $165 million, $295 million and $709 million, respectively.

The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the IRS is currently examining the years 2013 through 2015. The Company is also subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its gross unrecognized tax benefits would materially change in the next 12 months.

On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision orders Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still computing the recovery amount, the Company expects the amount to be in line with the European Commission’s announced recovery amount of €13 billion, plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These amounts are expected to be placed into escrow in 2018, where they will remain pending conclusion of all appeals. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.