Income Taxes

12 Months Ended

Jul. 25, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

(a) Provision for Income Taxes

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

Years Ended	July 25, 2020			July 27, 2019			July 28, 2018
Federal:
Current	$	1,101		$	1,760		$	9,900
Deferred	(374		)	(84		)	1,156
	727			1,676			11,056
State:
Current	264			302			340
Deferred	287			(2		)	(232		)
	551			300			108
Foreign:
Current	1,429			1,238			1,789
Deferred	49			(264		)	(24		)
	1,478			974			1,765
Total	$	2,756		$	2,950		$	12,929

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

Years Ended	July 25, 2020		July 27, 2019		July 28, 2018
United States	$	7,534	$	7,611	$	3,765
International	6,436		6,960		9,274
Total	$	13,970	$	14,571	$	13,039

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 25, 2020		July 27, 2019		July 28, 2018
Federal statutory rate	21.0	%	21.0	%	27.0	%
Effect of:
State taxes, net of federal tax benefit	3.5		2.0		0.6
Foreign income at other than U.S. rates	(1.5	)	(4.5	)	(5.2	)
Tax credits	(0.9	)	(1.7	)	(2.5	)
Foreign-derived intangible income deduction	(2.6	)	(1.3	)	—
Domestic manufacturing deduction	—		—		(0.5	)
Stock-based compensation	(0.1	)	(0.6	)	(0.1	)
Impact of the Tax Act	—		6.1		80.1
Other, net	0.3		(0.8	)	(0.2	)
Total	19.7	%	20.2	%	99.2	%

During fiscal 2018 and 2019, we recorded a total tax charge as a result of the Tax Act of $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.

During fiscal 2020, the Internal Revenue Service (IRS) and Cisco settled all outstanding items related to the audit of our federal income tax returns for the fiscal year ended July 30, 2011 through July 27, 2013. As a result of the settlement, we recognized a net benefit to the provision for income taxes of $102 million, which included a reduction in interest expense of $4 million. We are no longer subject to U.S. federal tax audit through fiscal 2013.

Foreign taxes associated with the repatriation of earnings of foreign subsidiaries were not provided on a cumulative total of $6.8 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2020. 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 $706 million.

As a result of certain employment and capital investment actions, our income in certain foreign countries was subject to reduced tax rates. The tax incentives expired at the end of fiscal 2019. As of the end of fiscal 2019 and 2018, the gross income tax benefits attributable to tax incentives were estimated to be $0.3 billion and $0.9 billion ($0.08 and $0.19 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 25, 2020			July 27, 2019			July 28, 2018
Beginning balance	$	1,925		$	2,000		$	1,973
Additions based on tax positions related to the current year	188			185			251
Additions for tax positions of prior years	554			84			84
Reductions for tax positions of prior years	(136		)	(283		)	(129		)
Settlements	(4		)	(38		)	(124		)
Lapse of statute of limitations	(9		)	(23		)	(55		)
Ending balance	$	2,518		$	1,925		$	2,000

As of July 25, 2020, $2.2 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2020, we recognized $104 million of net interest expense and increased our unrecognized tax benefits for prior year tax positions by $554 million to reflect expected settlement positions in on-going U.S. federal, state, and foreign income tax return examinations. We recognized net interest expense of $30 million and $10 million, respectively, during fiscal 2019 and 2018. Our net penalty expense for fiscal 2020, 2019 and 2018 was not material. Our total accrual for interest and penalties was $340 million, $220 million, and $180 million as of the end of fiscal 2020, 2019, and 2018, respectively. We are no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2013. 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 25, 2020 could be reduced by $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 25, 2020			July 27, 2019
Deferred tax assets	$	3,990		$	4,065
Deferred tax liabilities	(81		)	(95		)
Total net deferred tax assets	$	3,909		$	3,970

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

	July 25, 2020			July 27, 2019
ASSETS
Allowance for doubtful accounts and returns	$	110		$	127
Sales-type and direct-financing leases	179			176
Inventory write-downs and capitalization	350			409
Deferred foreign income	253			—
IPR&D, goodwill, and purchased intangible assets	1,289			1,427
Deferred revenue	1,182			1,150
Credits and net operating loss carryforwards	1,105			1,241
Share-based compensation expense	135			164
Accrued compensation	353			342
Lease liabilities	240			—
Other	571			419
Gross deferred tax assets	5,767			5,455
Valuation allowance	(700		)	(457		)
Total deferred tax assets	5,067			4,998
LIABILITIES
Purchased intangible assets	(577		)	(705		)
Depreciation	(179		)	(141		)
Unrealized gains on investments	(119		)	(70		)
ROU lease assets	(222		)	—
Other	(61		)	(112		)
Total deferred tax liabilities	(1,158		)	(1,028		)
Total net deferred tax assets	$	3,909		$	3,970

As of July 25, 2020, our federal, state, and foreign net operating loss carryforwards for income tax purposes were $405 million, $1.2 billion, and $644 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 net operating loss carryforwards will begin to expire in fiscal 2022, and the state and foreign net operating loss carryforwards will begin to expire in fiscal 2021. We have provided a valuation allowance of $98 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.

As of July 25, 2020, our federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $10 million, $1.2 billion, and $5 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2021. The majority of state and foreign tax credits can be carried forward indefinitely. We have provided a valuation allowance of $541 million for deferred tax assets related to state and foreign tax credits that are not expected to be realized.