Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 26, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income before income taxes consists of the following:
2020 2019 2018
  (In millions)
U.S. $ 1,213  $ 334  $ 114 
Non-U.S. 67  38  214 
Total pre-tax income including equity income (loss) in investee $ 1,280  $ 372  $ 328 
The income tax provision (benefit) consists of:
2020 2019 2018
  (In millions)
Current:
U.S. Federal $ —  $ (13) $ 12 
U.S. State and Local 5  1  — 
Non-U.S. 8  50  (17)
Total 13  38  (5)
Deferred:
U.S. Federal (1,193) —  — 
U.S. State and Local (28) —  — 
Non-U.S. (2) (7) (4)
Total (1,223) (7) (4)
Income tax provision (benefit) $ (1,210) $ 31  $ (9)
The table below displays the reconciliation between statutory federal income taxes and the total income tax provision (benefit).
2020 2019 2018
  (In millions)
Statutory federal income tax expense at 21% $ 269  $ 78  $ 69 
State taxes (6) 1  1 
Foreign withholding taxes (refund) 10  22  (29)
Foreign rate detriment / (benefit) (3) 2  2 
Valuation allowance change (1,301) (59) (64)
Research credits (57) —  (1)
Excess tax benefits relating to share-based compensation (116) —  — 
Tax Reform Act —  (13) 13 
Other (6) —  — 
Income tax provision (benefit) $ (1,210) $ 31  $ (9)
The income tax benefit in 2020 was primarily due to $1.3 billion of tax benefit from the valuation allowance release in the U.S. This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes and $75 million increase in valuation allowance against certain state and foreign tax credits, which are reflected as part of the state taxes and foreign rate benefit in the reconciliation table above.
The income tax provision in 2019 was primarily due to $22 million of withholding tax related to cross-border transactions and $22 million of tax in foreign locations, partially 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, partially offset by $13 million of U.S. income taxes resulting from the Tax Reform Act, a $7 million tax provision in foreign locations and $7 million of withholding taxes on cross-border transactions.
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 26, 2020 and December 28, 2019 were as follows:
December 26,
2020		 December 28,
2019
  (In millions)
Deferred tax assets:
Net operating loss carryovers $ 1,029  $ 1,357 
Accruals and reserves not currently deductible 514  257 
Acquired intangibles and goodwill —  50 
Federal and state tax credit carryovers 569  584 
Foreign research and development ITC credits 489  429 
Capitalized costs 174  232 
Lease liability 72  57 
Other 149  105 
Total deferred tax assets 2,996  3,071 
Less: valuation allowance (1,576) (2,867)
Total deferred tax assets, net of valuation allowance 1,420  204 
Deferred tax liabilities:
Right-of-use assets (62) (49)
Discount of convertible notes (2) (16)
Undistributed foreign earnings (114) (111)
Other (8) (17)
Total deferred tax liabilities (186) (193)
Net deferred tax assets $ 1,234  $ 11 
The movement in the deferred tax valuation allowance was as follows:
2020 2019 2018
  (In millions)
Balance at beginning of year $ 2,867  $ 2,443  $ 2,621 
Charges (reductions) to income tax expense/other accounts* (1,301) (61) (59)
Net (deductions) recoveries+
10  485  (119)
Balance at end of year $ 1,576  $ 2,867  $ 2,443 
*
Amounts recorded against other accounts are not material
+ The 2019 and 2020 net recoveries were primarily related to net originating deferred tax assets and newly generated tax credits
Deferred tax liabilities are included in Other long-term liabilities on the consolidated balance sheets. The breakdown between deferred tax assets and deferred tax liabilities as of December 26, 2020 and December 28, 2019 is as follows:
December 26,
2020		 December 28,
2019
  (In millions)
Deferred tax assets $ 1,245  $ 22 
Deferred tax liabilities (11) (11)
Net deferred tax assets $ 1,234  $ 11 
Through the end of 2020, the Company demonstrated consistent and continued profitability over the preceding three-year period. The Company’s ability to sustain and grow its such profitability is supported by the continued positive momentum of its consumer and commercial products including its newly released desktop, mobile and graphics processors, greater market acceptance for its server products, the successful adoption of its new game console processor products, and its continued leadership in the development of HPC products. In assessing the realizability of the deferred tax assets, the Company considered the highly dynamic and competitive landscape of its industry, the continued performance and market acceptance of its new products, and the impact of such market acceptance on forecasts of future profitability. As a result, in the fourth quarter of 2020, the Company concluded that its history of profitable operating results, including the current period results, along with increasingly favorable forecasts of continued future profitability, provided sufficient positive evidence supporting the realizability of a certain amount of its U.S. deferred tax assets and, accordingly, the release of the related valuation allowance previously recorded against these deferred tax assets, resulting in a tax benefit of $1.3 billion in the fourth quarter of 2020.
The Company continues to maintain a valuation allowance of approximately $1.6 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to current limitations, including limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign valuation allowance maintained is due to lack of sufficient sources of income.
The Company’s United States federal and state net operating losses carryforwards as of December 26, 2020, were $5.2 billion and $343 million, respectively. The United States federal net operating losses will expire between 2029 and 2037, and the state net operating losses will expire at various dates through 2039. The federal tax credits of $385 million will expire at various dates between 2021 and 2040. The state tax credits of $252 million will expire at various dates between 2021 through 2035 except for California R&D credit, which does not expire. The Company also has $494 million of credit carryforward in Canada that will expire between 2026 and 2040.
Under current U.S. tax law the impact of future distributions of undistributed earnings that are indefinitely reinvested are anticipated to be withholding taxes from local jurisdictions and non-conforming U.S. state jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $304 million as of December 26, 2020.
A reconciliation of the Company's gross unrecognized tax benefits was as follows:
2020 2019 2018
  (In millions)
Balance at beginning of year $ 65  $ 49  $ 49 
Increases for tax positions taken in prior years 41  5  1 
Decreases for tax positions taken in prior years (15) —  (1)
Increases for tax positions taken in the current year 30  15  3 
Decreases for settlements with taxing authorities (1) (3) (2)
Decreases for lapsing of the statute of limitations (1) (1) (1)
Balance at end of year $ 119  $ 65  $ 49 
The amount of unrecognized tax benefits that would impact the effective tax rate was $77 million, $17 million and $9 million as of December 26, 2020, December 28, 2019 and December 29, 2018, respectively. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 26, 2020, December 28, 2019 and December 29, 2018.
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 2007 onwards due to the net operating losses.