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,    2011     2010     2009  
Current Taxes                   

U.S. federal

   $   3,108      $   4,415      $   3,159   

U.S. state and local

     209        357        192   

International

     1,602        1,701        1,139   


 


 


Current taxes

     4,919        6,473        4,490   
Deferred Taxes                   

Deferred taxes

     2        (220     762   


 


 


Provision for income taxes

   $ 4,921      $ 6,253      $ 5,252   
    


 


 


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

 

(In millions)  


Year Ended June 30,    2011     2010     2009  

U.S.

   $ 8,862      $ 9,575      $ 5,529   

International

     19,209        15,438        14,292   


 


 


Income before income taxes

   $   28,071      $   25,013      $   19,821   
    


 


 


 

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,    2011     2010     2009  

Federal statutory rate

     35.0%        35.0%        35.0%   

Effect of:

                        

Foreign earnings taxed at lower rates

     (15.6)%        (12.1)%        (9.3)%   

Internal Revenue Service settlement

     (1.7)%        0%        0%   

Other reconciling items, net

     (0.2)%        2.1%        0.8%   


 


 


Effective rate

     17.5%        25.0%        26.5%   
    


 


 


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, which are subject to lower income tax rates. In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and credits. In fiscal years 2011, 2010, and 2009, 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,    2011     2010  
Deferred Income Tax Assets             

Stock-based compensation expense

   $ 1,079      $ 1,329   

Other expense items

     1,411        1,696   

Unearned revenue

     463        556   

Impaired investments

     424        289   

Other revenue items

     69        80   


 


Deferred income tax assets

   $ 3,446      $ 3,950   


 


Deferred Income Tax Liabilities             

International earnings

   $    (1,266   $    (1,056

Unrealized gain on investments

     (904     (674

Other

     (265     (265


 


Deferred income tax liabilities

     (2,435     (1,995


 


Net deferred income tax assets

   $ 1,011      $ 1,955   
    


 


Reported As             

Current deferred income tax assets

   $ 2,467      $ 2,184   

Long-term deferred income tax liabilities

     (1,456     (229


 


Net deferred income tax assets

   $ 1,011      $ 1,955   
    


 


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.

We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $44.8 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 is approximately $14.2 billion.

Income taxes paid were $5.3 billion, $4.1 billion, and $6.6 billion in fiscal years 2011, 2010, and 2009, respectively.

 

Uncertain Tax Positions

As of June 30, 2011, we had $6.9 billion of unrecognized tax benefits of which $5.9 billion, if recognized, would affect our effective tax rate. As of June 30, 2010, we had $6.5 billion of unrecognized tax benefits of which $5.6 billion, if recognized, would have affected our effective tax rate.

Interest on unrecognized tax benefits was $38 million, $193 million, and $230 million in fiscal years 2011, 2010, and 2009, respectively. As of June 30, 2011, 2010, and 2009, we had accrued interest related to uncertain tax positions of $785 million, $747 million, and $554 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,    2011     2010     2009  

Balance, beginning of year

   $   6,542      $   5,403      $   3,195   

Decreases related to settlements

     (632     (57     (82

Increases for tax positions related to the current year

     739        1,012        2,203   

Increases for tax positions related to prior years

     405        364        239   

Decreases for tax positions related to prior years

     (119     (166     (132

Decreases due to lapsed statute of limitations

     0        (14     (20


 


 


Balance, end of year

   $ 6,935      $ 6,542      $ 5,403   
    


 


 


During the third quarter of fiscal year 2011, we reached a partial settlement agreement with the I.R.S. on tax years 2004 to 2006 and recorded a $461 million income tax provision benefit. During the fourth quarter of fiscal year 2011, the I.R.S. completed its examination and issued a Revenue Agent’s Report (“RAR”) for the remaining unresolved items. We do not agree with the adjustments in the RAR, and we have filed a protest to initiate the administrative appeals process. The proposed adjustments are primarily related to transfer pricing and could have a significant impact on our financial statements if not resolved favorably. 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, as we do not believe the appeals process will be concluded within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2010.

We are subject to income tax in many jurisdictions outside the U.S., and certain jurisdictions remain subject to examination and are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.