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,    2012     2011     2010  
Current Taxes                   

U.S. federal

   $   2,235      $   3,108      $   4,415   

U.S. state and local

     153        209        357   

International

     1,947        1,602        1,701   


 


 


Current taxes

     4,335        4,919        6,473   
Deferred Taxes                   

Deferred taxes

     954        2        (220


 


 


Provision for income taxes

   $ 5,289      $ 4,921      $ 6,253   
    


 


 


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

 

(In millions)  


Year Ended June 30,    2012     2011     2010  

U.S.

   $ 1,600      $ 8,862      $ 9,575   

International

     20,667        19,209        15,438   


 


 


Income before income taxes

   $   22,267      $   28,071      $   25,013   
    


 


 


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,    2012     2011     2010  

Federal statutory rate

     35.0%        35.0%        35.0%   

Effect of:

                        

Foreign earnings taxed at lower rates

     (21.1)%        (15.6)%        (12.1)%   

Goodwill impairment

     9.7%        0%        0%   

I.R.S. settlement

     0%        (1.7)%        0%   

Other reconciling items, net

     0.2%        (0.2)%        2.1%   


 


 


Effective rate

     23.8%        17.5%        25.0%   
    


 


 


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 have 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 2012, 2011, and 2010, 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,    2012     2011  
Deferred Income Tax Assets             

Stock-based compensation expense

   $       882      $    1,079   

Other expense items

     965        1,321   

Unearned revenue

     571        463   

Impaired investments

     152        424   

Loss carryforwards

     532        90   

Other revenue items

     79        69   


 


Deferred income tax assets

   $ 3,181      $ 3,446   

Less valuation allowance

     (453     0   


 


Deferred income tax assets, net of valuation allowance

   $ 2,728      $ 3,446   


 


Deferred Income Tax Liabilities             

International earnings

   $ (1,072   $ (1,266

Unrealized gain on investments

     (830     (904

Depreciation and amortization

     (670     (265

Other

     (14     0   


 


Deferred income tax liabilities

     (2,586     (2,435


 


Net deferred income tax assets

   $ 142      $ 1,011   
    


 


Reported As             

Current deferred income tax assets

   $ 2,035      $ 2,467   

Long-term deferred income tax liabilities

     (1,893     (1,456


 


Net deferred income tax assets

   $ 142      $ 1,011   
    


 


The valuation allowance disclosed in the table above relates to a portion of a $2.0 billion net operating loss carryforward generated primarily in foreign countries and acquired primarily through our acquisition of Skype 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, 2012, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $60.8 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 was approximately $19.4 billion at June 30, 2012.

Income taxes paid were $3.5 billion, $5.3 billion, and $4.1 billion in fiscal years 2012, 2011, and 2010, respectively.

Uncertain Tax Positions

As of June 30, 2012, we had $7.2 billion of unrecognized tax benefits of which $6.2 billion, if recognized, would affect our effective tax rate. As of June 30, 2011, we had $6.9 billion of unrecognized tax benefits of which $5.9 billion, if recognized, would have affected our effective tax rate.

Interest on unrecognized tax benefits was $154 million, $38 million, and $193 million in fiscal years 2012, 2011, and 2010, respectively. As of June 30, 2012, 2011, and 2010, we had accrued interest related to uncertain tax positions of $939 million, $785 million, and $747 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,    2012     2011     2010  

Balance, beginning of year

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

Decreases related to settlements

     (16     (632     (57

Increases for tax positions related to the current year

     481        739        1,012   

Increases for tax positions related to prior years

     118        405        364   

Decreases for tax positions related to prior years

     (292     (119     (166

Decreases due to lapsed statutes of limitations

     (24     0        (14


 


 


Balance, end of year

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


 


 


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, 2012, 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, as 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 2011.

We are subject to income tax in many jurisdictions outside the U.S. Certain jurisdictions remain subject to examination for tax years 1996 to 2011, 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.