Income Taxes

12 Months Ended

Sep. 28, 2019

U.S. Tax Cuts and Jobs Act

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain foreign earnings, for which the Company has elected to record certain deferred tax assets and liabilities. The Company completed its accounting for the income tax effects of the Act during 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.

Provision for Income Taxes and Effective Tax Rate

The provision for income taxes for 2019, 2018 and 2017, consisted of the following (in millions):



	2019			2018			2017
Federal:
Current	$	6,384		$	41,425		$	7,842
Deferred	(2,939		)	(33,819		)	5,980
Total	3,445			7,606			13,822
State:
Current	475			551			259
Deferred	(67		)	48			2
Total	408			599			261
Foreign:
Current	3,962			3,986			1,671
Deferred	2,666			1,181			(16		)
Total	6,628			5,167			1,655
Provision for income taxes	$	10,481		$	13,372		$	15,738

The foreign provision for income taxes is based on foreign pre-tax earnings of $44.3 billion, $48.0 billion and $44.7 billion in 2019, 2018 and 2017, respectively.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2019; 24.5% in 2018; 35% in 2017) to income before provision for income taxes for 2019, 2018 and 2017, is as follows (dollars in millions):



	2019			2018			2017
Computed expected tax	$	13,805		$	17,890		$	22,431
State taxes, net of federal effect	423			271			185
Impacts of the Act	—			1,515			—
Earnings of foreign subsidiaries	(2,625		)	(5,606		)	(6,135		)
Research and development credit, net	(548		)	(560		)	(678		)
Excess tax benefits from equity awards	(639		)	(675		)	—
Other	65			537			(65		)
Provision for income taxes	$	10,481		$	13,372		$	15,738
Effective tax rate	15.9		%	18.3		%	24.6		%

The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For restricted stock units (“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. Prior to 2018, the Company reflected net excess tax benefits from equity awards as increases to additional paid-in capital, which amounted to $620 million in 2017.

Deferred Tax Assets and Liabilities

As of September 28, 2019 and September 29, 2018, the significant components of the Company’s deferred tax assets and liabilities were (in millions):



	2019		2018
Deferred tax assets:
Amortization and depreciation	$	11,433	$	137
Accrued liabilities and other reserves	5,389		3,151
Deferred revenue	1,372		1,141
Share-based compensation	749		513
Unrealized losses	—		871
Other	697		797
Total deferred tax assets, net	19,640		6,610
Deferred tax liabilities:
Minimum tax on foreign earnings	10,809		—
Earnings of foreign subsidiaries	330		275
Other	456		501
Total deferred tax liabilities	11,595		776
Net deferred tax assets/(liabilities)	$	8,045	$	5,834

Deferred tax assets and liabilities reflect the effects of tax 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

As of September 28, 2019, the total amount of gross unrecognized tax benefits was $15.6 billion, of which $8.6 billion, if recognized, would impact the Company’s effective tax rate. As of September 29, 2018, the total amount of gross unrecognized tax benefits was $9.7 billion, of which $7.4 billion, if recognized, would have impacted the Company’s effective tax rate.

The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2019, 2018 and 2017, is as follows (in millions):



	2019			2018			2017
Beginning balances	$	9,694		$	8,407		$	7,724
Increases related to tax positions taken during a prior year	5,845			2,431			333
Decreases related to tax positions taken during a prior year	(686		)	(2,212		)	(952		)
Increases related to tax positions taken during the current year	1,697			1,824			1,880
Decreases related to settlements with taxing authorities	(852		)	(756		)	(539		)
Decreases related to expiration of the statute of limitations	(79		)	—			(39		)
Ending balances	$	15,619		$	9,694		$	8,407

The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are 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 inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $2.0 billion.

Interest and Penalties

The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 28, 2019 and September 29, 2018, the total amount of gross interest and penalties accrued was $1.3 billion and $1.4 billion, respectively. The Company recognized interest and penalty expense in 2019, 2018 and 2017 of $73 million, $489 million and $238 million, respectively.

European Commission State Aid Decision

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 ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. During the fourth quarter of 2019, the Irish Minister for Finance approved the Company’s request to reduce the recovery amount by €190 million due to taxes paid to other countries, resulting in an adjusted recovery amount of €12.9 billion as of September 28, 2019. 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. 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, subject to any foreign tax credit limitations in the Act. As of September 28, 2019, the entire adjusted recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.