Income Taxes


(a)	Provision for Income Taxes

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



Years Ended	July 27, 2019			July 28, 2018			July 29, 2017
Federal:
Current	$	1,760		$	9,900		$	1,300
Deferred	(84		)	1,156			(42		)
	1,676			11,056			1,258
State:
Current	302			340			86
Deferred	(2		)	(232		)	56
	300			108			142
Foreign:
Current	1,238			1,789			1,416
Deferred	(264		)	(24		)	(138		)
	974			1,765			1,278
Total	$	2,950		$	12,929		$	2,678

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



Years Ended	July 27, 2019		July 28, 2018		July 29, 2017
United States	$	7,611	$	3,765	$	2,393
International	6,960		9,274		9,894
Total	$	14,571	$	13,039	$	12,287

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 27, 2019		July 28, 2018		July 29, 2017
Federal statutory rate	21.0	%	27.0	%	35.0	%
Effect of:
State taxes, net of federal tax benefit	2.0		0.6		1.1
Foreign income at other than U.S. rates	(4.5	)	(5.2	)	(13.4	)
Tax credits	(1.7	)	(2.5	)	(1.2	)
Foreign-derived intangible income deduction	(1.3	)	—		—
Domestic manufacturing deduction	—		(0.5	)	(0.4	)
Stock-based compensation	(0.6	)	(0.1	)	1.4
Impact of the Tax Act	6.1		80.1		—
Other, net	(0.8	)	(0.2	)	(0.7	)
Total	20.2	%	99.2	%	21.8	%

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries.

During fiscal 2018, we recorded a provisional tax expense of $10.4 billion related to the Tax Act. The provisional tax expense included an $863 million benefit associated with the U.S. taxation of deemed foreign dividends in the transition fiscal year. As previously disclosed, the benefit could be subject to reduction or elimination by subsequent government action. In the fourth quarter of fiscal 2019 we recorded an $872 million charge, which was the reversal of the previously recorded benefit associated with the U.S. taxation of deemed foreign dividends recorded in fiscal 2018, as a result of a retroactive final U.S. Treasury regulation issued during the quarter.

The total tax charge as a result of the Tax Act was $11.3 billion, consisting of $9.0 billion of tax expense for the U.S. transition tax on accumulated earnings of foreign subsidiaries, $1.2 billion of foreign withholding tax and $1.1 billion of tax expense for DTA re-measurement.

The Tax Act includes a Global Intangible Low-Taxed Income (GILTI) provision that imposes U.S. tax on certain foreign subsidiary income in the year it is earned. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.

Foreign taxes associated with the repatriation of earnings of foreign subsidiaries were not provided on a cumulative total of $6.6 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2019. We intend to reinvest these earnings indefinitely in such foreign subsidiaries. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we could be subject to additional foreign taxes. The amount of potential unrecognized deferred income tax liability related to these earnings is approximately $711 million.

As a result of certain employment and capital investment actions, our income in certain foreign countries is subject to reduced tax rates. A portion of these incentives expired at the end of fiscal 2015. The remaining tax incentives expired at the end of fiscal 2019. The gross income tax benefit attributable to tax incentives was estimated to be $0.3 billion ($0.08 per diluted share) in fiscal 2019. As of the end of fiscal 2018 and 2017, the gross income tax benefits attributable to tax incentives were estimated to be $0.9 billion and $1.3 billion ($0.19 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 foreign earnings.

Unrecognized Tax Benefits

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



Years Ended	July 27, 2019			July 28, 2018			July 29, 2017
Beginning balance	$	2,000		$	1,973		$	1,627
Additions based on tax positions related to the current year	185			251			336
Additions for tax positions of prior years	84			84			180
Reductions for tax positions of prior years	(283		)	(129		)	(78		)
Settlements	(38		)	(124		)	(43		)
Lapse of statute of limitations	(23		)	(55		)	(49		)
Ending balance	$	1,925		$	2,000		$	1,973

As of July 27, 2019, $1.7 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2019, we recognized $30 million of net interest expense and $6 million of penalty expense. During fiscal 2018, we recognized $10 million of net interest expense and no net penalty expense. During fiscal 2017, we recognized $26 million of net interest expense and a $4 million reduction in penalties. Our total accrual for interest and penalties was $220 million, $180 million, and $186 million as of the end of fiscal 2019, 2018, and 2017, respectively. We are no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2010. We are no longer subject to foreign or state income tax audits for returns covering tax years through fiscal 1999 and fiscal 2008, respectively.

We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. We believe 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. We estimate that the unrecognized tax benefits at July 27, 2019 could be reduced by $50 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 27, 2019			July 28, 2018
Deferred tax assets	$	4,065		$	3,219
Deferred tax liabilities	(95		)	(141		)
Total net deferred tax assets	$	3,970		$	3,078

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



	July 27, 2019			July 28, 2018
ASSETS
Allowance for doubtful accounts and returns	$	127		$	285
Sales-type and direct-financing leases	176			171
Inventory write-downs and capitalization	409			289
Investment provisions	—			54
IPR&D, goodwill, and purchased intangible assets	1,427			63
Deferred revenue	1,150			1,584
Credits and net operating loss carryforwards	1,241			1,087
Share-based compensation expense	164			190
Accrued compensation	342			370
Other	419			408
Gross deferred tax assets	5,455			4,501
Valuation allowance	(457		)	(374		)
Total deferred tax assets	4,998			4,127
LIABILITIES
Purchased intangible assets	(705		)	(753		)
Depreciation	(141		)	(118		)
Unrealized gains on investments	(70		)	(33		)
Other	(112		)	(145		)
Total deferred tax liabilities	(1,028		)	(1,049		)
Total net deferred tax assets	$	3,970		$	3,078

As of July 27, 2019, our federal, state, and foreign net operating loss carryforwards for income tax purposes were $676 million, $1 billion, and $756 million, respectively. A significant amount of the 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, state and foreign net operating loss carryforwards will begin to expire in fiscal 2020. We have provided a valuation allowance of $111 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.

As of July 27, 2019, our federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $25 million, $1.1 billion, and $5 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2020. The majority of state and foreign tax credits can be carried forward indefinitely. We have provided a valuation allowance of $346 million for deferred tax assets related to state and foreign tax credits that are not expected to be realized.