Income Taxes


(a)	Provision for Income Taxes

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



Years Ended	July 29, 2017			July 30, 2016			July 25, 2015
Federal:
Current	$	1,300		$	865		$	1,583
Deferred	(42		)	(93		)	43
	1,258			772			1,626
State:
Current	86			78			130
Deferred	56			13			(20		)
	142			91			110
Foreign:
Current	1,416			1,432			530
Deferred	(138		)	(114		)	(46		)
	1,278			1,318			484
Total	$	2,678		$	2,181		$	2,220

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



Years Ended	July 29, 2017		July 30, 2016		July 25, 2015
United States	$	2,393	$	2,907	$	3,570
International	9,894		10,013		7,631
Total	$	12,287	$	12,920	$	11,201

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 29, 2017		July 30, 2016		July 25, 2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
Effect of:
State taxes, net of federal tax benefit	1.1		0.5		0.8
Foreign income at other than U.S. rates	(13.4	)	(14.5	)	(15.2	)
Tax credits	(1.2	)	(1.7	)	(1.2	)
Domestic manufacturing deduction	(0.4	)	(0.6	)	(0.7	)
Nondeductible compensation	1.4		1.4		2.0
Tax audit settlement	—		(2.8	)	—
Other, net	(0.7	)	(0.4	)	(0.9	)
Total	21.8	%	16.9	%	19.8	%

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. federal 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. federal 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 $71.1 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2017. 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 are reasonably expected to expire at the end of fiscal 2018. The gross income tax benefit attributable to tax incentives was estimated to be $1.3 billion ($0.25 per diluted share) in fiscal 2017. As of the end of fiscal 2016 and 2015, the gross income tax benefits attributable to tax incentives were estimated to be $1.2 billion and $1.4 billion ($0.23 and $0.28 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 29, 2017			July 30, 2016			July 25, 2015
Beginning balance	$	1,627		$	2,029		$	1,938
Additions based on tax positions related to the current year	336			255			276
Additions for tax positions of prior years	180			116			137
Reductions for tax positions of prior years	(78		)	(457		)	(30		)
Settlements	(43		)	(241		)	(165		)
Lapse of statute of limitations	(49		)	(75		)	(127		)
Ending balance	$	1,973		$	1,627		$	2,029

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 29, 2017, $1.4 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2017, the Company recognized $26 million of net interest expense and a $4 million reduction in penalties. 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. The Company’s total accrual for interest and penalties was $186 million, $154 million, and $274 million as of the end of fiscal 2017, 2016, and 2015, 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 29, 2017 could be reduced by approximately $100 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 29, 2017			July 30, 2016
Deferred tax assets	$	4,239		$	4,299
Deferred tax liabilities	(271		)	(278		)
Total net deferred tax assets	$	3,968		$	4,021

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



	July 29, 2017			July 30, 2016
ASSETS
Allowance for doubtful accounts and returns	$	443		$	524
Sales-type and direct-financing leases	277			289
Inventory write-downs and capitalization	446			417
Investment provisions	171			126
IPR&D, goodwill, and purchased intangible assets	125			139
Deferred revenue	2,057			1,858
Credits and net operating loss carryforwards	976			863
Share-based compensation expense	273			438
Accrued compensation	504			572
Other	559			516
Gross deferred tax assets	5,831			5,742
Valuation allowance	(244		)	(134		)
Total deferred tax assets	5,587			5,608
LIABILITIES
Purchased intangible assets	(1,037		)	(995		)
Depreciation	(340		)	(289		)
Unrealized gains on investments	(203		)	(225		)
Other	(39		)	(78		)
Total deferred tax liabilities	(1,619		)	(1,587		)
Total net deferred tax assets	$	3,968		$	4,021

As of July 29, 2017, the Company’s federal, state, and foreign net operating loss carryforwards for income tax purposes were $719 million, $985 million, and $840 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 2019, respectively. The Company has provided a valuation allowance of $132 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.

As of July 29, 2017, the Company’s federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $18 million, $832 million, and $20 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2018. 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 $91 million for deferred tax assets related to state and foreign tax credits that are not expected to be realized.