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. 30, 2017

The provision for income taxes consists of:



	2017			2016			2015
	(In millions)
Current:
U.S. Federal	$	(3	)	$	(2	)	$	(1	)
U.S. State and Local	—			—			—
Foreign National and Local	38			21			16
Total	35			19			15
Deferred:
U.S. Federal	(15		)	(1		)	—
Foreign National and Local	(1		)	21			(1		)
Total	(16		)	20			(1		)
Provision for income taxes	$	19		$	39		$	14

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



	2017			2016			2015
	(In millions)
U.S.	$	108		$	(604	)	$	(1,100	)
Foreign	(46		)	146			454
Total pre-tax income (loss) including equity loss in investee	$	62		$	(458	)	$	(646	)

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 30, 2017 and December 31, 2016 are as follows:



	December 30, 2017			December 31, 2016
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	1,551		$	2,480
Deferred distributor income	7			26
Inventory valuation	20			26
Accrued expenses not currently deductible	61			65
Acquired intangibles	102			213
Tax deductible goodwill	56			146
Federal and state tax credit carryovers	546			427
Foreign research and development ITC credits	391			341
Other	55			83
Total deferred tax assets	2,789			3,807
Less: valuation allowance	(2,621		)	(3,526		)
Total deferred tax assets, net of valuation allowance	168			281
Deferred tax liabilities:
Discount of convertible notes	(58		)	(105		)
Undistributed foreign earnings	(97		)	(158		)
Other	(13		)	(18		)
Total deferred tax liabilities	(168		)	(281		)
Net deferred tax assets	$	—		$	—

The breakdown between current and non-current deferred tax assets and deferred tax liabilities as of December 30, 2017 and December 31, 2016 is as follows:



	December 30, 2017			December 31, 2016
	(In millions)
Current deferred tax assets	$	—		$	—
Non-current deferred tax assets	11			11
Current deferred tax liabilities	—			—
Non-current deferred tax liabilities	$	(11	)	$	(11	)
Net deferred tax assets	$	—		$	—

Non-current deferred tax assets are included in the caption Other assets on the consolidated balance sheets. Non-current deferred tax liabilities are included in the caption Other long-term liabilities on the consolidated balance sheets.

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (Tax Reform Act). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a modified territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. ASC 740: Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which will allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company has adjusted its deferred tax assets and liabilities based on the reduction of the U.S. federal corporate tax rate from 35% to 21% and assessed the realizability of our deferred tax assets based on our current understanding of the provisions of the new law. The Company considers its accounting for the impacts of the Tax Reform Act to be incomplete and the Company will continue to assess the impact of the Tax Reform Act (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on its business and consolidated financial statements over the next 12 months.

The Tax Reform Act eliminated the corporate alternative minimum tax (AMT) for tax years commencing on or after January 1, 2018. As a result, AMT credit carryforwards may be utilized to reduce future income tax liabilities. In addition, excess AMT credits are refundable in any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the Company has reclassified $16 million of AMT credit carry forwards as a non-current tax receivable.

As of December 30, 2017, 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 30, 2017, in management’s estimate, is not more likely than not to be achieved. In 2017, gross deferred tax assets decreased by $1,018 million primarily for provisional decreases related to the remeasurement of deferred tax assets due to the 21% tax rate under the Tax Reform Act, as well as decreases related to acquired intangibles and goodwill, offset by a decrease in the gross deferred tax liability balance of $112 million primarily for provisional decreases related to the remeasurement of deferred tax liabilities due to the 21% tax rate under the Tax Reform Act, and a decrease in the gross valuation allowance of $905 million. In 2016, the net valuation allowance decreased by $143 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.

The following is a summary of the Company’s various tax attribute carryforwards as of December 30, 2017.



Carryforward	Federal		State / Provincial		Expiration
	(In millions)
U.S.-net operating loss carryovers	$	7,254	$	309	2018 to 2037
U.S.-credit carryovers	$	394	$	213	2018 to 2037
Canada-credit carryovers	$	369	$	42	2021 to 2037
Other foreign net operating loss carryovers	$	37	N/A		various

Utilization of $8 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.



	2017			2016			2015
	(In millions)
Statutory federal income tax expense (benefit) at 35% rate	$	22		$	(160	)	$	(226	)
State taxes, net of federal benefit	1			1			1
Foreign (income) expense at other than U.S. rates	—			(1		)	9
U.S. valuation allowance generated	16			201			232
Credit monetization	(20		)	(2		)	(2		)
Provision for income taxes	$	19		$	39		$	14

As part of the transition from a world-wide tax system to a territorial (dividend exemption) system, the Tax Reform Act imposes a one-time transition tax on the cumulative undistributed post-1986 earnings and profits of certain foreign subsidiaries. The transition tax applies at a rate of 15.5% for earnings held as liquid assets and 8.0% for earnings held as illiquid assets by the foreign subsidiaries. The Company is currently estimating that it will not be subject to the transition tax because of the aggregate cumulative post-1986 earnings and profits of its foreign subsidiaries are in an overall deficit, however the Company has not yet completed its calculations of the total post-1986 earnings and profits and associated tax pools for its foreign subsidiaries. Additionally, the Company understands that there could be further interpretations from U.S. federal and state governments and regulatory organizations that may impact its final calculation.

Because of the transition to a territorial system under the Tax Reform Act, the taxation of future dividend distributions by foreign subsidiaries is expected to be limited to withholding taxes which may apply based on the jurisdiction of the subsidiary. The Company has made no provision for taxes on approximately $117 million of cumulative undistributed earnings of certain foreign subsidiaries through December 30, 2017 based on the Company’s intention to indefinitely reinvest such earnings (2016: approximately $82 million). However, if such earnings were distributed, the Company would incur additional withholding taxes.

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 increase the Company’s net income in 2017 because the Company’s operations in Malaysia were immaterial. The net impact of tax holidays did not decrease the Company’s net loss in 2016 and 2015 because the Company’s operations in Malaysia operated at a loss.

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



	2017			2016			2015
	(In millions)
Balance at beginning of year	$	42		$	38		$	28
Increases for tax positions taken in prior years	7			3			11
Decreases for tax positions taken in prior years	(2		)	—			(1		)
Increases for tax positions taken in the current year	3			2			2
Decreases for settlements with taxing authorities	—			—			(2		)
Decreases for lapsing of the statute of limitations	(1		)	(1		)	—
Balance at end of year	$	49		$	42		$	38

The amount of unrecognized tax benefits that would impact the effective tax rate was $9 million, $4 million and $4 million as of December 30, 2017, December 31, 2016 and December 26, 2015, respectively. The Company had no or immaterial amounts of accrued interest and no accrued penalties related to unrecognized tax benefits as of December 30, 2017, December 31, 2016 and December 26, 2015. 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 December 31, 2017, the Company expects to reduce its unrecognized tax benefits by $1 million primarily as a result of the lapse of statute 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 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.