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. 31, 2016

The provision for income taxes consists of:



	2016			2015			2014
	(In millions)
Current:
U.S. Federal	$	(2	)	$	(1	)	$	(1	)
U.S. State and Local	—			—			—
Foreign National and Local	21			16			6
Total	19			15			5
Deferred:
U.S. Federal	(1		)	—			—
Foreign National and Local	21			(1		)	—
Total	20			(1		)	—
Provision for income taxes	$	39		$	14		$	5

Loss before income taxes consists of the following:



	2016			2015			2014
	(In millions)
U.S.	$	(604	)	$	(1,100	)	$	(621	)
Foreign	146			454			223
Total pre-tax loss including ATMP JV equity loss	$	(458	)	$	(646	)	$	(398	)

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 31, 2016 and December 26, 2015 are as follows:



	December 31, 2016			December 26, 2015
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	2,480		$	2,342
Deferred distributor income	26			20
Inventory valuation	26			39
Accrued expenses not currently deductible	65			74
Acquired intangibles	213			257
Tax deductible goodwill	146			192
Federal and state tax credit carryovers	427			400
Foreign capitalized research and development costs	—			60
Foreign research and development ITC credits	341			231
Discount of convertible notes	2			1
Other	83			119
Total deferred tax assets	3,809			3,735
Less: valuation allowance	(3,633		)	(3,669		)
Total deferred tax assets, net of valuation allowance	176			66
Deferred tax liabilities:
Undistributed foreign earnings	(158		)	(33		)
Other	(18		)	(23		)
Total deferred tax liabilities	(176		)	(56		)
Net deferred tax assets	$	—		$	10

The breakdown between current and non-current deferred tax assets and deferred tax liabilities as of December 31, 2016 and December 26, 2015 is as follows:



	December 31, 2016			December 26, 2015
	(In millions)
Current deferred tax assets	$	—		$	8
Non-current deferred tax assets	11			48
Current deferred tax liabilities	—			(46		)
Non-current deferred tax liabilities	$	(11	)	$	—
Net deferred tax assets	$	—		$	10

Current deferred tax assets and current deferred tax liabilities are included in captions Other current assets and Accrued liabilities, respectively, on the consolidated balance sheets. Non-current deferred tax assets are included in the caption “Other assets” on the consolidated balance sheets.

As of December 31, 2016, 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 realization of these assets is dependent on substantial future taxable income which, at December 31, 2016, in management’s estimate, is not more likely than not to be achieved. In 2016, the net valuation allowance decreased by $36 million primarily for decreases in deferred tax assets related to foreign capitalized research costs, acquired intangibles and goodwill. In 2015, the net valuation allowance increased by $174 million primarily for increases in deferred tax assets related to the net operating losses generated from pre-tax book losses in the U.S. In 2014, the net valuation allowance increased by $120 million primarily for increases in deferred tax assets related to net operating losses generated from pre-tax book losses in the U.S.

As of December 31, 2016 and December 26, 2015, the Company had $95 million and $118 million, respectively, of deferred tax assets subject to a valuation allowance that related to excess stock option deductions, which are not presented in the deferred tax asset balances.

The following is a summary of the various tax attribute carryforwards the Company had as of December 31, 2016. The amounts presented below include amounts related to excess stock option deductions, as discussed above.



Carryforward	Federal		State / Provincial		Expiration
	(In millions)
U.S.-net operating loss carryovers	$	6,973	$	348	2017 to 2036
U.S.-credit carryovers	$	398	$	209	2017 to 2036
Canada-net operating loss carryovers	$	13	$	13	2027 to 2028
Canada-credit carryovers	$	331	$	39	2021 to 2036
Barbados-net operating loss carryovers	$	29	N/A		2017
Other foreign net operating loss carryovers	$	36	N/A		various

Utilization of $10 million of the Company’s U.S. federal net operating loss carryforwards are subject to annual limitations as a result of the ATI Technologies ULC (ATI) acquisition.

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



	2016			2015			2014
	(In millions)
Statutory federal income tax benefit at 35% rate	$	(160	)	$	(226	)	$	(139	)
State taxes, net of federal benefit	1			1			1
Foreign (income) expense at other than U.S. rates	(1		)	9			1
U.S. valuation allowance generated	201			232			144
Credit monetization	(2		)	(2		)	(2		)
Provision for income taxes	$	39		$	14		$	5

The Company has made no provision for U.S. income taxes on approximately $37 million of cumulative undistributed earnings of certain foreign subsidiaries through December 31, 2016 because it is the Company’s intention to indefinitely reinvest such earnings (2015: approximately $307 million). If such earnings were distributed, the Company would incur additional income taxes of approximately $13 million (after an adjustment for foreign tax credits). These additional income taxes may not result in income tax expense or a cash payment to the Internal Revenue Service, but may result in the utilization of deferred tax assets that are currently subject to a valuation allowance.

The year-on-year reduction in cumulative undistributed earnings for which no provision for U.S. income taxes has been provided is primarily due to a combination of dividend distributions, other US federal income tax return inclusions, and changes in circumstances in certain subsidiaries such that their undistributed earnings are no longer considered indefinitely reinvested in full or in part. Significant movements in previously undistributed earnings of foreign subsidiaries are discussed below.

The Company recognized the U.S. income tax effect of undistributed earnings within certain subsidiaries in China and Malaysia of $83 million through December 31, 2016. In addition, dividends and other U.S. federal income tax return inclusions of $198 million were recognized in U.S. taxable income through December 31, 2016. The tax effect of the total recognition of $281 million distributed and undistributed by these subsidiaries is the utilization of deferred tax assets and an equivalent reduction in valuation allowances over those assets. These movements arise because the Company closed the transaction to sell 85% of the ownership interest in the subsidiaries operating factories in Suzhou and Penang.

The Company recognized the U.S. income tax effect of undistributed earnings within a subsidiary in Bermuda and its subsidiaries of $127 million through December 31, 2016 because of a simplification plan which resulted in the relocation of certain activities between entities within the Company group. On completion these initiatives will allow a merger of two operating subsidiaries and reduce their role within the group’s operating activities. This causes the Company to modify its judgment that the associated undistributed earnings of these subsidiaries remain indefinitely reinvested. The tax effect of this recognition is the utilization of deferred tax assets and an equivalent reduction in valuation allowances over those assets.

The Company partially recognized undistributed earnings within certain subsidiaries in China of $56 million through December 26, 2015 because the announcement in October 2015 of an agreement to sell 85% of the ownership interest in the subsidiary operating a factory in Suzhou caused the Company to modify its judgment that associated undistributed earnings of that subsidiary’s holding company in China will remain indefinitely reinvested. A future distribution of these earnings will give rise to an associated future withholding tax of $6 million. This is recognized as an income tax expense within the 2015 income tax provision. The same event results in the Chinese holding company recognizing the future benefit of tax losses available to offset taxable gains when the deal closes. The future benefit of those losses is $7 million and is a reduction in the 2015 income tax provision. The net effect of this event in the 2015 income tax provision is a reduction of $1 million.

The Company’s operations in Malaysia currently operate under a tax holiday, which will expire in 2018. This tax holiday may be extended if specific conditions are met. The net impact of the tax holiday did not decrease the Company’s net loss in 2016 because the Company’s operations in Malaysia operated at a net loss. The net impact of tax holidays did not decrease the Company’s net loss in 2015 because the Company’s operations in Malaysia operated at a loss. The net impact of tax holidays decreased the Company’s net loss by $2 million in 2014, less than $.01 per share, diluted.

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



	2016			2015			2014
	(In millions)
Balance at beginning of year	$	38		$	28		$	52
Increases for tax positions taken in prior years	3			11			1
Decreases for tax positions taken in prior years	—			(1		)	—
Increases for tax positions taken in the current year	2			2			2
Decreases for settlements with taxing authorities	—			(2		)	(27		)
Decreases for lapsing of the statute of limitations	(1		)	—			—
Balance at end of year	$	42		$	38		$	28

The amount of unrecognized tax benefits that would impact the effective tax rate was $4 million, $4 million and $3 million as of December 31, 2016, December 26, 2015 and December 27, 2014, respectively. The Company had no or immaterial amounts of accrued interest and no accrued penalties related to unrecognized tax benefits as of December 31, 2016, December 26, 2015 and December 27, 2014. The Company recognizes the accrued interest and penalties to unrecognized tax benefits as interest expense and income tax expense, respectively.

During the 12 months beginning January 1, 2017, the Company expects to reduce its unrecognized tax benefits by $1 million primarily as a result of the lapse of statue with certain tax authorities. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolutions and/or closure of open audits are highly uncertain.

As of December 27, 2014, the Canada Revenue Agency, or CRA, had completed its audit of ATI for the years 2005 through 2010 and issued its final Notice of Assessment, which the Company has reviewed and agreed to. As of December 26, 2015, the Italian tax authorities had concluded their audit of the Company’s subsidiaries’ activities in Italy for the years 2003 through 2013. The Company entered into a settlement for $11 million in taxes and penalties and $2 million in interest. The Company and its subsidiaries have several foreign, foreign provincial, 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 has not recognized any current or long-term deferred tax assets under a valuation allowance as a result of the application of uncertainty in income taxes in ASC 740 for unrecognized tax benefits as of December 31, 2016.