Provision for income taxes


Notes to Financial Statements

NOTE 13 — INCOME TAXES

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

 

(In millions)  


Year Ended June 30,    2013     2012     2011  
Current Taxes                   

U.S. federal

   $   3,131      $   2,235      $   3,108   

U.S. state and local

     332        153        209   

International

     1,745        1,947        1,602   


 


 


Current taxes

     5,208        4,335        4,919   
Deferred Taxes                   

Deferred taxes

     (19     954        2   


 


 


Provision for income taxes

   $ 5,189      $ 5,289      $ 4,921   
    


 


 


 

U.S. and international components of income before income taxes were as follows:

 

(In millions)  


Year Ended June 30,    2013     2012     2011  

U.S.

   $ 6,674      $ 1,600      $ 8,862   

International

     20,378        20,667        19,209   


 


 


Income before income taxes

   $   27,052      $   22,267      $   28,071   
    


 


 


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,    2013     2012     2011  

Federal statutory rate

     35.0%        35.0%        35.0%   

Effect of:

                        

Foreign earnings taxed at lower rates

     (17.5)%        (21.1)%        (15.6)%   

Goodwill impairment

     0%        9.7%        0%   

I.R.S. settlement

     0%        0%        (1.7)%   

Other reconciling items, net

     1.7%        0.2%        (0.2)%   


 


 


Effective rate

     19.2%        23.8%        17.5%   
    


 


 


The reduction from the federal statutory rate from foreign earnings taxed at lower rates results from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. Our foreign earnings, which are taxed at rates lower than the U.S. rate and are generated from our regional operating centers, were 79%, 79%, and 78% of our international income before tax in fiscal years 2013, 2012, and 2011, respectively. In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and credits. In fiscal years 2013, 2012, and 2011, there were no individually significant other reconciling items. The I.R.S. settlement is discussed below.

 

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

 

(In millions)             


June 30,    2013     2012  
Deferred Income Tax Assets             

Stock-based compensation expense

   $ 888      $ 882   

Other expense items

     917        965   

Unearned revenue

     445        571   

Impaired investments

     246        152   

Loss carryforwards

     715        532   

Other revenue items

     55        79   


 


Deferred income tax assets

   $    3,266      $    3,181   

Less valuation allowance

     (579     (453


 


Deferred income tax assets, net of valuation allowance

   $ 2,687      $ 2,728   


 


Deferred Income Tax Liabilities             

International earnings

   $ (1,146   $ (1,072

Unrealized gain on investments

     (1,012     (830

Depreciation and amortization

     (604     (670

Other

     (2     (14


 


Deferred income tax liabilities

   $ (2,764   $ (2,586


 


Net deferred income tax assets (liabilities)

   $ (77   $ 142   
    


 


Reported As             

Current deferred income tax assets

   $ 1,632      $ 2,035   

Long-term deferred income tax liabilities

     (1,709     (1,893


 


Net deferred income tax assets (liabilities)

   $ (77   $ 142   
    


 


As of June 30, 2013, we had net operating loss carryforwards of $2.7 billion, including $2.2 billion of foreign net operating loss carryforwards acquired through our acquisition of Skype. The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards 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 actually paid or recovered.

As of June 30, 2013, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $76.4 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 $24.4 billion at June 30, 2013.

Income taxes paid were $3.9 billion, $3.5 billion, and $5.3 billion in fiscal years 2013, 2012, and 2011, respectively.

Uncertain Tax Positions

As of June 30, 2013, we had $8.6 billion of unrecognized tax benefits of which $6.5 billion, if recognized, would affect our effective tax rate. As of June 30, 2012, we had $7.2 billion of unrecognized tax benefits of which $6.2 billion, if recognized, would have affected our effective tax rate.

Interest on unrecognized tax benefits was $400 million, $154 million, and $38 million in fiscal years 2013, 2012, and 2011, respectively. As of June 30, 2013, 2012, and 2011, we had accrued interest related to uncertain tax positions of $1.3 billion, $939 million, and $785 million, respectively, net of federal income tax benefits.

 

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

 

(In millions)                   


Year Ended June 30,    2013     2012     2011  

Balance, beginning of year

   $   7,202      $    6,935      $    6,542   

Decreases related to settlements

     (30     (16     (632

Increases for tax positions related to the current year

     612        481        739   

Increases for tax positions related to prior years

     931        118        405   

Decreases for tax positions related to prior years

     (65     (292     (119

Decreases due to lapsed statutes of limitations

     (2     (24     0   


 


 


Balance, end of year

   $ 8,648      $ 7,202      $ 6,935   
    


 


 


During the third quarter of fiscal year 2011, we reached a settlement of a portion of an I.R.S. audit of tax years 2004 to 2006, which reduced our income tax expense by $461 million. While we settled a portion of the I.R.S. audit, we remain under audit for these years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of the examination. As of June 30, 2013, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our financial statements if not resolved favorably. We believe our allowances for tax contingencies are appropriate. We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months, because we do not believe the remaining open issues will be resolved within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2012.

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 2012, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.