
16.	Income Taxes


(a)	Provision for Income Taxes

The provision for income taxes consists of the following (in millions):



Years Ended	July 30, 2016			July 25, 2015			July 26, 2014
Federal:
Current	$	865		$	1,583		$	1,672
Deferred	(93		)	43			(383		)
	772			1,626			1,289
State:
Current	78			130			176
Deferred	13			(20		)	(64		)
	91			110			112
Foreign:
Current	1,432			530			692
Deferred	(114		)	(46		)	(231		)
	1,318			484			461
Total	$	2,181		$	2,220		$	1,862

Income before provision for income taxes consists of the following (in millions):



Years Ended	July 30, 2016		July 25, 2015		July 26, 2014
United States	$	2,907	$	3,570	$	2,734
International	10,013		7,631		6,981
Total	$	12,920	$	11,201	$	9,715

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consist of the following:



Years Ended	July 30, 2016		July 25, 2015		July 26, 2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
Effect of:
State taxes, net of federal tax benefit	0.5		0.8		0.5
Foreign income at other than U.S. rates	(14.5	)	(15.2	)	(16.4	)
Tax credits	(1.7	)	(1.2	)	(0.7	)
Domestic manufacturing deduction	(0.6	)	(0.7	)	(0.9	)
Nondeductible compensation	1.4		2.0		3.3
Tax audit settlement	(2.8	)	—		—
Other, net	(0.4	)	(0.9	)	(1.6	)
Total	16.9	%	19.8	%	19.2	%

During fiscal 2016, the Internal Revenue Service (IRS) and the Company settled all outstanding items related to the audit of the Company's federal income tax returns for the fiscal years ended July 26, 2008 through July 31, 2010. As a result of the settlement, the Company recognized a net benefit to the provision for income taxes of $367 million, which included a reduction of interest expense of $21 million. In addition, the Protecting Americans from Tax Hikes Act of 2015 reinstated the U.S. federal R&D tax credit permanently. As a result, the tax provision in fiscal 2016 included a tax benefit of $226 million related to the U.S. R&D tax credit, of which $81 million was attributable to fiscal 2015.

During fiscal 2015, the Tax Increase Prevention Act of 2014 reinstated the U.S. federal R&D tax credit for calendar year 2014 R&D expenses. As a result, the tax provision in fiscal 2015 included a tax benefit of $138 million related to the U.S. R&D tax credit, of which $78 million was attributable to fiscal 2014.

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $65.6 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2016. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject to reduced tax rates. A portion of these incentives expired at the end of fiscal 2015. The majority of the remaining tax incentives will expire at the end of fiscal 2018. The gross income tax benefit attributable to tax incentives was estimated to be $1.2 billion ($0.23 per diluted share) in fiscal 2016. As of the end of fiscal 2015 and 2014, the gross income tax benefits attributable to tax incentives were estimated to be $1.4 billion and $1.3 billion ($0.28 and $0.25 per diluted share) for the respective years. The gross income tax benefits were partially offset by accruals of U.S. income taxes on undistributed earnings.

Unrecognized Tax Benefits

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):



Years Ended	July 30, 2016			July 25, 2015			July 26, 2014
Beginning balance	$	2,029		$	1,938		$	1,775
Additions based on tax positions related to the current year	255			276			262
Additions for tax positions of prior years	116			137			64
Reductions for tax positions of prior years	(457		)	(30		)	(13		)
Settlements	(241		)	(165		)	(17		)
Lapse of statute of limitations	(75		)	(127		)	(133		)
Ending balance	$	1,627		$	2,029		$	1,938

As a result of the IRS tax settlement related to the federal income tax returns for the fiscal years ended July 26, 2008 through July 31, 2010, the amount of gross unrecognized tax benefits in fiscal 2016 was reduced by approximately $563 million. The Company also reduced the amount of accrued interest by $63 million.

As of July 30, 2016, $1.2 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2016, the Company recognized a $55 million reduction in net interest expense and a $40 million reduction in penalties. During fiscal 2015, the Company recognized a $37 million reduction in net interest expense and a $3 million reduction in penalties. During fiscal 2014, the Company recognized $20 million of net interest expense and $8 million of penalties. The Company’s total accrual for interest and penalties was $154 million, $274 million, and $304 million as of the end of fiscal 2016, 2015, and 2014, respectively. The Company is no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2010. The Company is no longer subject to foreign, state, or local income tax audits for returns covering tax years through fiscal 2000.

The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving transfer pricing and various other matters. The Company estimates that the unrecognized tax benefits at July 30, 2016 could be reduced by approximately $150 million in the next 12 months.


(b)	Deferred Tax Assets and Liabilities

The following table presents the breakdown for net deferred tax assets (in millions):



	July 30, 2016			July 25, 2015
Deferred tax assets	$	4,299		$	4,454
Deferred tax liabilities	(278		)	(349		)
Total net deferred tax assets	$	4,021		$	4,105

The following table presents the components of the deferred tax assets and liabilities (in millions):



	July 30, 2016			July 25, 2015
ASSETS
Allowance for doubtful accounts and returns	$	524		$	417
Sales-type and direct-financing leases	289			266
Inventory write-downs and capitalization	417			345
Investment provisions	126			112
IPR&D, goodwill, and purchased intangible assets	139			134
Deferred revenue	1,858			1,795
Credits and net operating loss carryforwards	863			746
Share-based compensation expense	438			520
Accrued compensation	572			467
Other	516			670
Gross deferred tax assets	5,742			5,472
Valuation allowance	(134		)	(84		)
Total deferred tax assets	5,608			5,388
LIABILITIES
Purchased intangible assets	(995		)	(950		)
Depreciation	(289		)	(143		)
Unrealized gains on investments	(225		)	(175		)
Other	(78		)	(15		)
Total deferred tax liabilities	(1,587		)	(1,283		)
Total net deferred tax assets	$	4,021		$	4,105

As of July 30, 2016, the Company’s federal, state, and foreign net operating loss carryforwards for income tax purposes were $466 million, $735 million, and $809 million, respectively. A significant amount of the federal net operating loss carryforwards relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. If not utilized, the federal net operating loss will begin to expire in fiscal 2018, and the state and foreign net operating loss carryforwards will begin to expire in fiscal 2018 and 2017, respectively. The Company has provided a valuation allowance of $97 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.

As of July 30, 2016, the Company’s federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $8 million, $734 million, and $20 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2017. The majority of state tax credits can be carried forward indefinitely. The foreign tax credits carryforwards will begin to expire in fiscal 2018. The Company has provided a valuation allowance of $32 million for deferred tax assets related to state and foreign tax credits that are not expected to be realized.