Income Taxes
NOTE 13 — INCOME TAXES
The components of the provision for income taxes were as follows:
| (In millions) | |||||
| Year Ended June 30, | 2011 | 2010 | 2009 | ||
| Current Taxes | |||||
| U.S. federal | $ 3,108 | $ 4,415 | $ 3,159 | ||
| U.S. state and local | 209 | 357 | 192 | ||
| International | 1,602 | 1,701 | 1,139 | ||
| Current taxes | 4,919 | 6,473 | 4,490 | ||
| Deferred Taxes | |||||
| Deferred taxes | 2 | (220 ) | 762 | ||
| Provision for income taxes | $ 4,921 | $ 6,253 | $ 5,252 | ||
U.S. and international components of income before income taxes were as follows:
| (In millions) | |||||
| Year Ended June 30, | 2011 | 2010 | 2009 | ||
| U.S. | $ 8,862 | $ 9,575 | $ 5,529 | ||
| International | 19,209 | 15,438 | 14,292 | ||
| Income before income taxes | $ 28,071 | $ 25,013 | $ 19,821 | ||
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
| Year Ended June 30, | 2011 | 2010 | 2009 | ||
| Federal statutory rate | 35.0% | 35.0% | 35.0% | ||
| Effect of: | |||||
| Foreign earnings taxed at lower rates | (15.6)% | (12.1)% | (9.3)% | ||
| Internal Revenue Service settlement | (1.7)% | 0% | 0% | ||
| Other reconciling items, net | (0.2)% | 2.1% | 0.8% | ||
| Effective rate | 17.5% | 25.0% | 26.5% |
The reduction from the federal statutory rate from foreign earnings taxed at lower rates results from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which are subject to lower income tax rates. In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and credits. In fiscal years 2011, 2010, and 2009, there were no individually significant other reconciling items. The I.R.S. settlement is discussed below.
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) | |||
| June 30, | 2011 | 2010 | |
| Deferred Income Tax Assets | |||
| Stock-based compensation expense | $ 1,079 | $ 1,329 | |
| Other expense items | 1,411 | 1,696 | |
| Unearned revenue | 463 | 556 | |
| Impaired investments | 424 | 289 | |
| Other revenue items | 69 | 80 | |
| Deferred income tax assets | $ 3,446 | $ 3,950 | |
| Deferred Income Tax Liabilities | |||
| International earnings | $ (1,266 ) | $ (1,056 ) | |
| Unrealized gain on investments | (904 ) | (674 ) | |
| Other | (265 ) | (265 ) | |
| Deferred income tax liabilities | (2,435 ) | (1,995 ) | |
| Net deferred income tax assets | $ 1,011 | $ 1,955 | |
| Reported As | |||
| Current deferred income tax assets | $ 2,467 | $ 2,184 | |
| Long-term deferred income tax liabilities | (1,456 ) | (229 ) | |
| Net deferred income tax assets | $ 1,011 | $ 1,955 |
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 $44.8 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 $14.2 billion.
Income taxes paid were $5.3 billion, $4.1 billion, and $6.6 billion in fiscal years 2011, 2010, and 2009, respectively.
Uncertain Tax Positions
As of June 30, 2011, we had $6.9 billion of unrecognized tax benefits of which $5.9 billion, if recognized, would affect our effective tax rate. As of June 30, 2010, we had $6.5 billion of unrecognized tax benefits of which $5.6 billion, if recognized, would have affected our effective tax rate.
Interest on unrecognized tax benefits was $38 million, $193 million, and $230 million in fiscal years 2011, 2010, and 2009, respectively. As of June 30, 2011, 2010, and 2009, we had accrued interest related to uncertain tax positions of $785 million, $747 million, and $554 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, | 2011 | 2010 | 2009 | ||
| Balance, beginning of year | $ 6,542 | $ 5,403 | $ 3,195 | ||
| Decreases related to settlements | (632 ) | (57 ) | (82 ) | ||
| Increases for tax positions related to the current year | 739 | 1,012 | 2,203 | ||
| Increases for tax positions related to prior years | 405 | 364 | 239 | ||
| Decreases for tax positions related to prior years | (119 ) | (166 ) | (132 ) | ||
| Decreases due to lapsed statute of limitations | 0 | (14 ) | (20 ) | ||
| Balance, end of year | $ 6,935 | $ 6,542 | $ 5,403 | ||
During the third quarter of fiscal year 2011, we reached a partial settlement agreement with the I.R.S. on tax years 2004 to 2006 and recorded a $461 million income tax provision benefit. During the fourth quarter of fiscal year 2011, the I.R.S. completed its examination and issued a Revenue Agent's Report ("RAR") for the remaining unresolved items. We do not agree with the adjustments in the RAR, and we have filed a protest to initiate the administrative appeals process. The proposed adjustments are primarily related to transfer pricing and could have a significant impact on our financial statements if not resolved favorably. 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 appeals process will be concluded within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2010.
We are subject to income tax in many jurisdictions outside the U.S., and certain jurisdictions remain subject to examination and are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.
