Advanced Micro Devices, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 28, 2019

Income (loss) before income taxes consists of the following:



	2019		2018		2017
	(In millions)
U.S.	$	334	$	114	$	53
Non-U.S.	38		214		(68		)
Total pre-tax income (loss) including equity loss in investee	$	372	$	328	$	(15	)

The provision for (benefit from) income taxes consists of:



	2019			2018			2017
	(In millions)
Current:
U.S. Federal	$	(13	)	$	12		$	(3	)
U.S. State and Local	1			—			—
Non-U.S.	50			(17		)	37
Total	38			(5		)	34
Deferred:
U.S. Federal	—			—			(15		)
Non-U.S.	(7		)	(4		)	(1		)
Total	(7		)	(4		)	(16		)
Provision for (benefit from) income taxes	$	31		$	(9	)	$	18

The table below displays the reconciliation between statutory federal income taxes and the total provision for (benefit from) income taxes.



	2019			2018			2017
	(In millions)
Statutory federal income tax expense (benefit) at 21%, 21% and 35% rate	$	78		$	69		$	22
State taxes	1			1			1
Foreign withholding taxes (refund)	22			(29		)	27
Foreign rate detriment	2			2			—
Valuation allowance change	(59		)	(64		)	(12		)
Credit monetization	—			(1		)	(20		)
Tax Reform Act	(13		)	13			—
Provision for (benefit from) income taxes	$	31		$	(9	)	$	18

The income tax provision in 2019 was primarily due to $22 million of tax provision of withholding tax related to cross-border transactions, $22 million tax provision in foreign locations offset by a $13 million benefit for a reduction of U.S. income taxes accrued in the prior year.

The income tax provision in 2018 was primarily due to a $36 million refund of withholding tax from a foreign jurisdiction related to a legal settlement from 2010, offset by $13 million of U.S. income taxes resulting from the Tax Reform Act, $7 million tax provision in foreign locations and $7 million of withholding taxes on cross-border transactions.

The income tax provision in 2017 was primarily due to $38 million of foreign taxes in profitable locations including $27 million of withholding taxes on cross-border transactions, offset by $1 million of tax benefits for Canadian tax credits and $19 million primarily attributable to the reversal of the valuation allowance on Alternate Minimum Tax (AMT) credit carryovers due to the Tax Reform Act.

Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 28, 2019 and December 29, 2018 are as follows:



	December 28, 2019			December 29, 2018
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	1,455		$	1,533
Accruals and reserves not currently deductible	245			123
Acquired intangibles and goodwill	45			101
Federal and state tax credit carryovers	617			527
Foreign research and development ITC credits	429			370
Other	159			104
Total deferred tax assets	2,950			2,758
Less: valuation allowance	(2,743		)	(2,580		)
Total deferred tax assets, net of valuation allowance	207			178
Deferred tax liabilities:
Discount of convertible notes	(22		)	(54		)
Undistributed foreign earnings	(110		)	(105		)
Other	(64		)	(15		)
Total deferred tax liabilities	(196		)	(174		)
Net deferred tax assets	$	11		$	4

The breakdown between deferred tax assets and deferred tax liabilities as of December 28, 2019 and December 29, 2018 is as follows:



	December 28, 2019			December 29, 2018
	(In millions)
Deferred tax assets	$	22		$	15
Deferred tax liabilities	(11		)	(11		)
Net deferred tax assets	$	11		$	4

Deferred tax assets are included in Other assets on the consolidated balance sheets. Deferred tax liabilities are included in Other long-term liabilities on the consolidated balance sheets.

As of December 28, 2019, substantially all of the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, continued to be subject to a valuation allowance. The Company evaluates the need for and the amount of a valuation allowance for deferred tax assets based on available evidence whether it is more-likely-than-not (a probability level of more than 50%) that these assets will be realized. In completing this assessment management must consider both objective and subjective factors in its assessment. These factors include, but are not limited to a history of losses in prior years, unique competitiveness of the semiconductor industry, future reversal of existing temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and loss carryforwards. After evaluating all available evidence, the Company determined that the valuation allowances for the United States and Canada should both be maintained.

The Company’s United States federal and state net operating losses carryforwards as of December 28, 2019, were $6.7 billion and $0.5 billion, respectively. The United States federal net operating losses will expire between 2026 through 2037, and the state net operating losses will expire at various dates through 2037. The federal credit of $399 million will expire at various dates between 2020 and 2039. The state credits of $239 million will expire at various dates between 2020 through 2039 except for California R&D credit, which does not expire. The Company also has $365 million of credit carryforward in Canada that will expire between 2023 and 2028.

The Tax Reform Act modified the income tax liability in the United States for companies with subsidiaries outside of the United States. As a result of the Tax Reform Act the impact of future distributions of undistributed earnings that are indefinitely

reinvested are anticipated to be withholding taxes from local jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $142 million as of December 28, 2019.

A reconciliation of the Company's gross unrecognized tax benefits is as follows:



	2019			2018			2017
	(In millions)
Balance at beginning of year	$	49		$	49		$	42
Increases for tax positions taken in prior years	5			1			7
Decreases for tax positions taken in prior years	—			(1		)	(2		)
Increases for tax positions taken in the current year	15			3			3
Decreases for settlements with taxing authorities	(3		)	(2		)	—
Decreases for lapsing of the statute of limitations	(1		)	(1		)	(1		)
Balance at end of year	$	65		$	49		$	49

The amount of unrecognized tax benefits that would impact the effective tax rate was $17 million, $9 million and $9 million as of December 28, 2019, December 29, 2018 and December 30, 2017, respectively. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 28, 2019, December 29, 2018 and December 30, 2017.

It is possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are highly uncertain. The Company and its subsidiaries have several foreign and U.S. state audits in process at any one point in time. The Company has provided for uncertain tax positions that require a liability under the adopted method to account for uncertainty in income taxes.

The Company is subject to taxation in the United States and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdiction in which the Company is subject to potential examination by the taxing authority is the United States, which is open for years from 2006 onwards due to the net operating losses.