Income Taxes

12 Months Ended

Sep. 26, 2020

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.

Provision for Income Taxes and Effective Tax Rate

The provision for income taxes for 2020, 2019 and 2018, consisted of the following (in millions):


	2020		2019		2018
Federal:
Current	$	6,306	$	6,384	$	41,425
Deferred	(3,619)		(2,939)		(33,819)
Total	2,687		3,445		7,606
State:
Current	455		475		551
Deferred	21		(67)		48
Total	476		408		599
Foreign:
Current	3,134		3,962		3,986
Deferred	3,383		2,666		1,181
Total	6,517		6,628		5,167
Provision for income taxes	$	9,680	$	10,481	$	13,372

The foreign provision for income taxes is based on foreign pre-tax earnings of $38.1 billion, $44.3 billion and $48.0 billion in 2020, 2019 and 2018, respectively.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2020 and 2019; 24.5% in 2018) to income before provision for income taxes for 2020, 2019 and 2018, is as follows (dollars in millions):


	2020			2019			2018
Computed expected tax	$	14,089		$	13,805		$	17,890
State taxes, net of federal effect	423			423			271
Impacts of the Act	(582)			—			1,515
Earnings of foreign subsidiaries	(2,534)			(2,625)			(5,606)
Research and development credit, net	(728)			(548)			(560)
Excess tax benefits from equity awards	(930)			(639)			(675)
Other	(58)			65			537
Provision for income taxes	$	9,680		$	10,481		$	13,372
Effective tax rate	14.4		%	15.9		%	18.3		%

Deferred Tax Assets and Liabilities

As of September 26, 2020 and September 28, 2019, the significant components of the Company’s deferred tax assets and liabilities were (in millions):


	2020		2019
Deferred tax assets:
Amortization and depreciation	$	8,317	$	11,645
Accrued liabilities and other reserves	4,934		5,196
Lease liabilities	2,038		—
Deferred revenue	1,638		1,372
Other	2,409		2,174
Total deferred tax assets	19,336		20,387
Less: Valuation allowance	(1,041)		(747)
Total deferred tax assets, net	18,295		19,640
Deferred tax liabilities:
Minimum tax on foreign earnings	7,045		10,809
Right-of-use assets	1,862		—
Unrealized gains	526		186
Other	705		600
Total deferred tax liabilities	10,138		11,595
Net deferred tax assets	$	8,157	$	8,045

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 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would impact the Company’s effective tax rate. 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 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 2020, 2019 and 2018, is as follows (in millions):


	2020		2019		2018
Beginning balances	$	15,619	$	9,694	$	8,407
Increases related to tax positions taken during a prior year	454		5,845		2,431
Decreases related to tax positions taken during a prior year	(791)		(686)		(2,212)
Increases related to tax positions taken during the current year	1,347		1,697		1,824
Decreases related to settlements with taxing authorities	(85)		(852)		(756)
Decreases related to expiration of the statute of limitations	(69)		(79)		—
Ending balances	$	16,475	$	15,619	$	9,694

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 $3.9 billion.

Interest and Penalties

The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 26, 2020 and September 28, 2019, the total amount of gross interest and penalties accrued was $1.4 billion and $1.3 billion, respectively. The Company recognized interest and penalty expense in 2020, 2019 and 2018 of $85 million, $73 million and $489 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. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25, 2020, the European Commission appealed the General Court’s decision to the European Court of Justice. 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.

On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of September 26, 2020, the adjusted recovery amount was €12.9 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details