NOTE 13 — INCOME TAXES

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2017			2016		2015

Current Taxes

U.S. federal	$	2,739		$	545	$	3,661
U.S. state and local		30			136		364
Foreign		2,472			1,940		2,065


Current taxes		5,241			2,621		6,090

Deferred Taxes

Deferred taxes		(3,296	)		332		224


Provision for income taxes	$	1,945		$	2,953	$	6,314

In fiscal year 2017, deferred taxes included U.S. and foreign deferred tax benefit of $2.7 billion and $617 million, respectively.

U.S. and foreign components of income (loss) before income taxes were as follows:

(In millions)


Year Ended June 30,	2017		2016			2015

U.S.	$	453	$	(325	)	$	7,363
Foreign		22,696		20,076			11,144


Income before income taxes	$	23,149	$	19,751		$	18,507

In fiscal year 2017, income before income taxes included the net impact of U.S. and foreign revenue deferrals related to the sales of Windows 10 of $6.4 billion and $317 million, respectively. In fiscal year 2016, income before income taxes included the net impact of U.S. and foreign revenue deferrals related to the sales of Windows 10 of $6.0 billion and $588 million, respectively. In fiscal year 2015, income before income taxes included the net impact of U.S. and foreign impairment, integration, and restructuring expenses relating to our phone business of $1.1 billion and $8.9 billion, respectively.

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2017		2016		2015

Federal statutory rate		35.0%		35.0%		35.0%
Effect of:
Foreign earnings taxed at lower rates		(15.7)%		(19.4)%		(20.9)%
Phone business losses		(7.3)%		1.3%		19.1%
Excess tax benefits relating to stock-based compensation		(2.7)%		(2.0)%		0%
Domestic production activities deduction		(1.4)%		(0.6)%		(2.4)%
Interest, net		1.8%		1.2%		1.5%
Other reconciling items, net		(1.3)%		(0.5)%		1.8%


Effective rate		8.4%		15.0%		34.1%

The reduction from the federal statutory rate is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. Our foreign regional operating centers, which are taxed at rates lower than the U.S. rate, generated 64%, 69%, and 73% of our foreign income before tax in fiscal years 2017, 2016, and 2015, respectively. Additionally, our effective tax rate in fiscal year 2017 reflects the realization of tax benefits attributable to previous phone business losses. In general, other reconciling items consist primarily of U.S. state income taxes, permanent items, and credits. In fiscal years 2017, 2016, and 2015, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2017 compared to fiscal year 2016 was primarily due to the realization of tax benefits attributable to previous phone business losses, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries. The fiscal year 2016 effective tax rate included the impact of nondeductible phone charges and valuation allowances.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2017			2016

Deferred Income Tax Assets

Stock-based compensation expense	$	777		$	809
Other expense items		1,550			1,609
Restructuring charges		66			284
Unearned revenue		1,889			494
Impaired investments		59			226
Loss carryforwards		4,809			4,252
Depreciation and amortization		53			115
Other revenue items		130			89


Deferred income tax assets		9,333			7,878
Less valuation allowance		(3,310	)		(4,729	)


Deferred income tax assets, net of valuation allowance	$	6,023		$	3,149


Deferred Income Tax Liabilities

Foreign earnings	$	(1,107	)	$	(1,242	)
Unrealized gain on investments and debt		(1,384	)		(2,102	)
Depreciation and amortization		(1,630	)		(1,008	)
Other		(21	)		(54	)


Deferred income tax liabilities		(4,142	)		(4,406	)


Net deferred income tax assets (liabilities)	$	1,881		$	(1,257	)


Reported As

Other long-term assets	$	2,412		$	219
Long-term deferred income tax liabilities		(531	)		(1,476	)


Net deferred income tax assets (liabilities)	$	1,881		$	(1,257	)

In fiscal year 2017, we corrected the table above to include a $2.5 billion loss carryforward and valuation allowance as of June 30, 2016. We do not consider this correction to be material, and there was no impact to our consolidated financial statements.

As of June 30, 2017, we had net operating loss carryforwards of $13.7 billion, including $11.1 billion of foreign net operating loss carryforwards. The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.

As of June 30, 2017, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $142 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the U.S. The unrecognized deferred tax liability associated with these temporary differences was approximately $45 billion as of June 30, 2017.

Income taxes paid, net of refunds, were $2.4 billion, $3.9 billion, and $4.4 billion in fiscal years 2017, 2016, and 2015, respectively.

Tax contingencies and other income tax liabilities were $13.5 billion and $11.8 billion as of June 30, 2017 and 2016, respectively, and are included in other long-term liabilities. This increase relates primarily to current period intercompany transfer pricing and tax credits.

Uncertain Tax Positions

Unrecognized tax benefits as of June 30, 2017, 2016, and 2015, were $11.7 billion, $10.2 billion, and $9.6 billion, respectively. If recognized, these tax benefits would affect our effective tax rates for fiscal years 2017, 2016, and 2015, by $10.2 billion, $8.8 billion, and $7.9 billion, respectively.

As of June 30, 2017, 2016, and 2015, we had accrued interest expense related to uncertain tax positions of $2.3 billion, $1.9 billion, and $1.7 billion, respectively, net of federal income tax benefits. Interest expense on unrecognized tax benefits was $399 million, $163 million, and $237 million in fiscal years 2017, 2016, and 2015, respectively, and was included in provision for income taxes.

The aggregate changes in the balance of unrecognized tax benefits were as follows:

(In millions)


Year Ended June 30,	2017			2016			2015

Balance, beginning of year	$	10,164		$	9,599		$	8,714
Decreases related to settlements		(4	)		(201	)		(50	)
Increases for tax positions related to the current year		1,277			1,086			1,091
Increases for tax positions related to prior years		397			115			94
Decreases for tax positions related to prior years		(49	)		(317	)		(144	)
Decreases due to lapsed statutes of limitations		(48	)		(118	)		(106	)


Balance, end of year	$	11,737		$	10,164		$	9,599

While we settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, and settled a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year 2016, we remain under audit for those years. We also continue to be subject to examination by the IRS for tax years 2010 to 2016. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the audit phase of the examination. As of June 30, 2017, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved favorably. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2017, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our consolidated financial statements.