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. 29, 2018

The provision (benefit) for income taxes consists of:



	2018			2017 ⁽¹⁾			2016 ⁽¹⁾
	(In millions)
Current:
U.S. Federal	$	12		$	(3	)	$	(2	)
U.S. State and Local	—			—			—
Foreign National and Local	(17		)	37			21
Total	(5		)	34			19
Deferred:
U.S. Federal	—			(15		)	(1		)
Foreign National and Local	(4		)	(1		)	21
Total	(4		)	(16		)	20
Provision (benefit) for income taxes	$	(9	)	$	18		$	39

⁽¹⁾ Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 2.

The income tax benefit 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 withholding taxes applicable to IP-related revenue and licensing gains from foreign locations.

The income tax provision in 2016 was primarily due to $41 million of foreign taxes in profitable locations including $27 million attributable to a gain on the sale of 85% of the ownership interest in the subsidiary operating a factory in Suzhou and $9 million of withholding taxes on cross-border transactions where no foreign tax credit is expected to be realizable, offset by $2 million of tax benefits for Canadian tax credits and the monetization of certain U.S. tax credits.

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



	2018		2017			2016
	(In millions)
U.S.	$	114	$	53		$	(609	)
Foreign	214		(68		)	150
Total pre-tax income (loss) including equity loss in investee	$	328	$	(15	)	$	(459	)

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 29, 2018 and December 30, 2017 are as follows:



	December 29, 2018			December 30, 2017 ⁽¹⁾
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	1,533		$	1,551
Inventory valuation	25			20
Accrued expenses not currently deductible	98			61
Acquired intangibles	76			102
Tax deductible goodwill	25			56
Federal and state tax credit carryovers	527			546
Foreign research and development ITC credits	370			391
Other	89			62
Total deferred tax assets	2,743			2,789
Less: valuation allowance	(2,580		)	(2,621		)
Total deferred tax assets, net of valuation allowance	163			168
Deferred tax liabilities:
Discount of convertible notes	(54		)	(58		)
Undistributed foreign earnings	(94		)	(97		)
Other	(11		)	(13		)
Total deferred tax liabilities	(159		)	(168		)
Net deferred tax assets	$	4		$	—

⁽¹⁾ Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 2.

The breakdown between deferred tax assets and deferred tax liabilities as of December 29, 2018 and December 30, 2017 is as follows:



	December 29, 2018			December 30, 2017 ⁽¹⁾
	(In millions)
Deferred tax assets	$	15		$	11
Deferred tax liabilities	(11		)	(11		)
Net deferred tax assets	$	4		$	—

⁽¹⁾ Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 2.

Deferred tax assets are included in the caption Other assets on the consolidated balance sheets. 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 No. 118 (SAB 118) which allowed companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As a result, in 2017, the Company provisionally 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 its deferred tax assets based upon the best available information at that time. In addition, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 30, 2017. During 2018, the Company finalized its computation of the impact of the Tax Reform Act.

The Tax Reform Act also 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 recorded $16 million of AMT credit carry forwards as a tax receivable in 2017.

As of December 29, 2018, 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 29, 2018, in management’s estimate, is not more likely than not to be achieved. In 2018, the net valuation allowance decreased by $43 million primarily for decreases related to net operating loss carryovers, federal and state tax credit carryovers, acquired intangibles and goodwill. 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 increases in deferred tax assets related to foreign capitalized research costs, acquired intangibles and goodwill.

The following is a summary of the Company’s various tax attribute carryforwards as of December 29, 2018.



Carryforward	Federal		State / Provincial		Expiration
	(In millions)
U.S.-net operating loss carryovers	$	7,140	$	317	2018 to 2037
U.S.-credit carryovers	$	372	$	219	2018 to 2037
Canada-net operating loss carryovers	$	17	$	17	2027 to 2028
Canada-credit carryovers	$	338	$	28	2023 to 2037
Other foreign net operating loss carryovers	$	44	N/A		various

Utilization of $6 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 the reconciliation between statutory federal income taxes and the total provision (benefit) for income taxes.



	2018			2017			2016
	(In millions)
Statutory federal income tax expense (benefit) at 21%, 35% and 35% rate	$	69		$	22		$	(160	)
State taxes, net of federal benefit	1			1			1
Foreign (income) expense at other than U.S. rates	2			—			(1		)
U.S. valuation allowance generated (utilized)	(93		)	15			201
Credit monetization	(1		)	(20		)	(2		)
Tax Reform Act taxes	13			—			—
Provision (benefit) for income taxes	$	(9	)	$	18		$	39

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.

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 $142 million of cumulative undistributed earnings of certain foreign subsidiaries as of December 29, 2018, and on approximately $117 million as of December 30, 2017, based on the Company’s intention to indefinitely reinvest such earnings. However, if such earnings were distributed, the Company would incur additional foreign withholding taxes.

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



	2018			2017 ⁽¹⁾			2016 ⁽¹⁾
	(In millions)
Balance at beginning of year	$	49		$	42		$	38
Increases for tax positions taken in prior years	1			7			3
Decreases for tax positions taken in prior years	(1		)	(2		)	—
Increases for tax positions taken in the current year	3			3			2
Decreases for settlements with taxing authorities	(2		)	—			—
Decreases for lapsing of the statute of limitations	(1		)	(1		)	(1		)
Balance at end of year	$	49		$	49		$	42

⁽¹⁾ Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 2.

The amount of unrecognized tax benefits that would impact the effective tax rate was $9 million, $9 million and $4 million as of December 29, 2018, December 30, 2017 and December 31, 2016, respectively. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 29, 2018, December 30, 2017 and December 31, 2016.

The Company does not believe it is reasonably possible that its unrecognized tax benefits will materially change in the next 12 months. However, the resolutions and/or closure of open audits are highly uncertain. 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.