Income Taxes



For the year ended	2014			2013			2012
Income (loss) before income taxes, net income attributable to noncontrolling interests and equity in net income (loss) of equity method investees:
Foreign	$	2,619		$	839		$	274
U.S.	114			446			(1,028		)
	$	2,733		$	1,285		$	(754	)

Income tax (provision) benefit:
Current:
Foreign	$	(46	)	$	(17	)	$	(22	)
U.S. federal	(3		)	—			14
State	(2		)	—			—
	(51		)	(17		)	(8		)
Deferred:
Foreign	(81		)	9			25
U.S. federal	4			—			—
	(77		)	9			25
Income tax (provision) benefit	$	(128	)	$	(8	)	$	17

Income tax (provision) benefit computed using the U.S. federal statutory rate reconciled to income tax (provision) benefit was as follows:



For the year ended	2014			2013			2012
U.S. federal income tax (provision) benefit at statutory rate	$	(956	)	$	(450	)	$	264
Change in unrecognized tax benefits	(152		)	2			52
State taxes, net of federal benefit	(39		)	6			9
Gain on MMJ Acquisition	(11		)	520			—
Change in valuation allowance	544			(418		)	(368		)
Foreign tax rate differential	474			339			77
Tax credits	11			36			2
Transaction costs related to the MMJ Acquisition	—			(38		)	—
Other	1			(5		)	(19		)
Income tax (provision) benefit	$	(128	)	$	(8	)	$	17

Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes as well as carryforwards. Deferred tax assets and liabilities consist of the following:



As of	2014			2013
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	3,162		$	4,048
Property, plant and equipment	284			313
Accrued salaries, wages and benefits	152			107
Other accrued liabilities	113			8
Other	104			169
Gross deferred tax assets	3,815			4,645
Less valuation allowance	(2,443		)	(3,155		)
Deferred tax assets, net of valuation allowance	1,372			1,490

Deferred tax liabilities:
Debt discount	(291		)	(294		)
Unremitted earnings on certain subsidiaries	(115		)	(126		)
Product and process technology	(29		)	(74		)
Other	(67		)	(14		)
Deferred tax liabilities	(502		)	(508		)

Net deferred tax assets	$	870		$	982

Reported as:
Current deferred tax assets (included in other current assets)	$	228		$	123
Noncurrent deferred tax assets	816			861
Current deferred tax liabilities (included in accounts payable and accrued expenses)	(4		)	(2		)
Noncurrent deferred tax liabilities (included in other noncurrent liabilities)	(170		)	—
Net deferred tax assets	$	870		$	982

As of August 28, 2014, we had a valuation allowance of $1.29 billion against substantially all U.S. net deferred tax assets, primarily related to net operating loss carryforwards. The valuation allowance is based on our assessment of the deferred tax assets that are more likely than not to be realized. As of August 28, 2014, we had partial valuation allowances of $979 million for Japan and $179 million for our other foreign subsidiaries against net deferred tax assets, primarily related to net operating loss carryforwards. As of August 28, 2014, we had $3.95 billion of net operating loss carryforwards in Japan of which $2.76 billion is subject to a valuation allowance. Our valuation allowance decreased $712 million in 2014 primarily due to the utilization of U.S. and foreign net operating losses as well as adjustments based on management's reassessment of the amount of foreign net operating losses that are more likely than not to be realized.

As of August 28, 2014, our federal, state and foreign net operating loss carryforward amounts and expiration periods as reported to tax authorities, were as follows:



Year of Expiration	U.S. Federal		State		Japan		Other Foreign		Total
2015 - 2019	$	—	$	102	$	83	$	513	$	698
2020 - 2024	—		179		3,862		872		4,913
2025 - 2029	2,081		934		—		—		3,015
2030 - 2033	1,812		493		—		—		2,305
Indefinite	—		—		—		39		39
	$	3,893	$	1,708	$	3,945	$	1,424	$	10,970

As of August 28, 2014, our federal and state tax credit carryforward amounts and expiration periods were as follows:



Year of Tax Credit Expiration	Federal		State		Total
2015 - 2019	$	9	$	69	$	78
2020 - 2024	91		55		146
2025 - 2029	78		38		116
2030 - 2034	72		—		72
Indefinite	—		31		31
	$	250	$	193	$	443

We have not recognized deferred tax assets of $207 million for excess tax benefits that arose directly from tax deductions related to equity compensation greater than amounts recognized for financial reporting. These excess stock compensation benefits will be credited to additional paid-in capital if realized. We use the "with and without" method, as described in ASC 740, for purposes of determining when excess tax benefits have been realized.

Provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from such companies are expected to result in additional tax liabilities. Remaining undistributed earnings of $4.91 billion as of August 28, 2014 have been indefinitely reinvested; therefore, no provision has been made for taxes due on approximately $6.55 billion of the excess of the financial reporting amount over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested. Determination of the amount of unrecognized deferred tax liabilities related to investments in these foreign subsidiaries is not practicable.

Below is a reconciliation of the beginning and ending amount of unrecognized tax benefits:



For the year ended	2014			2013			2012
Beginning unrecognized tax benefits	$	78		$	77		$	121
Increases related to tax positions taken during current year	152			4			6
Foreign currency translation increases (decreases) to tax positions	1			4			(9		)
Settlements with tax authorities	(1		)	(8		)	(29		)
Decreases related to tax positions from prior years	(1		)	—			(14		)
Lapse of statute of limitations	(1		)	—			—
Increases related to tax positions from prior years	—			—			2
Unrecognized tax benefits acquired in current year	—			1			—
Ending unrecognized tax benefits	$	228		$	78		$	77

Included in the unrecognized tax benefits balance as of August 28, 2014, August 29, 2013 and August 30, 2012 were $66 million, $63 million and $66 million, respectively, of unrecognized income tax benefits, which if recognized, would affect our effective tax rate. The increase in unrecognized tax benefits in fiscal 2014 primarily related to transfer pricing and other matters which were substantially offset by changes in our deferred tax asset valuation allowance. We recognize interest and penalties related to income tax matters within income tax expense. As of August 28, 2014, August 29, 2013 and August 30, 2012, the amount accrued for interest and penalties related to uncertain tax positions was $19 million, $16 million and $12 million, respectively. The resolution of tax audits or lapses of statute of limitations could reduce our unrecognized tax benefits. Although each matter is individually insignificant and the timing of final resolution is uncertain, the estimated potential reduction in our unrecognized tax benefits in the next 12 months ranges from $0 to $77 million, including interest and penalties.

We currently operate in several tax jurisdictions where we have arrangements that allow us to compute our tax provision at rates below the local statutory rates that expire in whole or in part at various dates through 2026. These arrangements benefitted our tax provision in 2014, 2013 and 2012 by $286 million ($0.24 per diluted share), $141 million ($0.13 per diluted share) and $52 million ($0.05 per diluted share), respectively.

We and our subsidiaries file income tax returns with the U.S. federal government, various U.S. states and various foreign jurisdictions throughout the world. Our U.S. federal and state tax returns remain open to examination for 2010 through 2014. In addition, tax returns open to examination in multiple foreign taxing jurisdictions range from the years 2005 to 2014. We believe that adequate amounts of taxes and related interest and penalties have been provided for, and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations or financial condition.