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Financial Review

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NOTE 13 — INCOME TAXES

The components of the provision for income taxes were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
Current taxes:
U.S. federal $ 4,415 $ 3,159 $ 4,357
U.S. state and local 357 192 256
International 1,701 1,139 1,007
Current taxes 6,473 4,490 5,620
Deferred Taxes
Deferred taxes (220) 762 513
Provision for income taxes $6,253 $5,252 $6,133

U.S. and international components of income before income taxes were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
U.S. $ 9,575 $5,529 $12,682
International 15,438 14,292 11,132
Income before income taxes $25,013 $ 19,821 $ 23,814

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:

Year Ended June 30, 2010 2009 2008
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
Foreign earnings taxed at lower rates (12.1)% (9.3)% (7.0)%
Internal Revenue Service settlement 0% 0% (5.8)%
European Commission fine 0% 0% 2.1%
Other reconciling items, net 2.1% 0.8% 1.5%
Effective rate 25.0% 26.5% 25.8%

In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and research credits. In fiscal years 2010, 2009 and 2008, there were no individually significant other reconciling items.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)
June 30, 2010 2009
Deferred income tax assets:
Stock-based compensation expense $1,329 $2,004
Other expense items 1,696 1,595
Unearned revenue 556 743
Impaired investments 289 236
Other revenue items 80 120
Deferred income tax assets $3,950 $4,698
Deferred income tax liabilities:
International earnings $(1,056) $(1,191)
Unrealized gain on investments (674) (516)
Other (265) (499)
Deferred income tax liabilities (1,995) (2,206)
Net deferred income tax assets $1,955 $2,492
Reported as:
Current deferred income tax assets $2,184 $2,213
Long-term deferred income tax assets (liabilities) (229) 279
Net deferred income tax assets $1,955 $2,492

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered.

We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $29.5 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the U.S. The unrecognized deferred tax liability associated with these temporary differences is approximately $9.2 billion.

Income taxes paid were $4.1 billion, $6.6 billion, and $5.4 billion in fiscal years 2010, 2009, and 2008, respectively.

Uncertain Tax Positions

As of June 30, 2010, we had $6.5 billion of unrecognized tax benefits of which $5.6 billion, if recognized, would affect our effective tax rate. As of June 30, 2009, we had $5.4 billion of unrecognized tax benefits of which $4.4 billion, if recognized, would affect our effective tax rate.

Interest on unrecognized tax benefits was $193 million, $230 million, and $121 million in fiscal years 2010, 2009 and 2008, respectively. As of June 30, 2010, 2009 and 2008, we had accrued interest related to uncertain tax positions of $747 million, $554 million, and $324 million, respectively, net of federal income tax benefits.

The aggregate changes in the balance of unrecognized tax benefits were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
Balance, beginning of year $ 5,403 $3,195 $7,076
Decreases related to settlements (57) (82) (4,787)
Increases for tax positions related to the current year 1,012 2,203 934
Increases for tax positions related to prior years 364 239 66
Decreases for tax positions related to prior years (166) (132) (80)
Reductions due to lapsed statute of limitations (14) (20) (14)
Balance, end of year $ 6,542 $5,403 $3,195

We are under audit by the IRS for the tax years 2004-2006. We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months as we do not believe the examination will be concluded within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S., and certain jurisdictions are under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.