Cisco 2014 Annual Report Download - page 126

foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability
related to these earnings is not practicable.
As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject
to reduced tax rates and in some cases is wholly exempt from taxes. A portion of these tax incentives will expire at the end of
fiscal 2015, and the majority of the remaining balance will expire at the end of fiscal 2025. The gross income tax benefit
attributable to tax incentives was estimated to be $1.3 billion ($0.25 per diluted share) in fiscal 2014, of which approximately
$0.5 billion ($0.10 per diluted share) is based on tax incentives that will expire at the end of fiscal 2015. As of the end of fiscal
2013 and fiscal 2012, the gross income tax benefits attributable to tax incentives were estimated to be $1.4 billion and $1.3
billion ($0.26 and $0.24 per diluted share) for each of the respective years. The gross income tax benefits were partially offset
by accruals of U.S. income taxes on undistributed earnings.
Unrecognized Tax Benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):
Years Ended July 26, 2014 July 27, 2013 July 28, 2012
Beginning balance ........................................... $1,775 $ 2,819 $2,948
Additions based on tax positions related to the current year ........... 262 138 155
Additions for tax positions of prior years .......................... 64 187 54
Reductions for tax positions of prior years ........................ (13) (1,027) (226)
Settlements ................................................. (17) (199) (41)
Lapse of statute of limitations .................................. (133) (143) (71)
Ending balance .............................................. $1,938 $ 1,775 $2,819
As of July 26, 2014, $1.7 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal
2014 the Company recognized $29 million of net interest expense and $8 million of penalties. During fiscal 2013, the
Company recognized $115 million of net interest expense and $2 million of penalties. During fiscal 2012, the Company
recognized $146 million of net interest expense and $21 million of penalties. The Company’s total accrual for interest and
penalties was $304 million, $268 million, and $381 million as of the end of fiscal 2014, 2013, and 2012, respectively. The
Company is no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2007. With limited
exceptions, the Company is no longer subject to foreign, state, or local income tax audits for returns covering tax years
through fiscal 2002.
The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various
jurisdictions. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be
concluded in the next 12 months. Specific positions that may be resolved include issues involving transfer pricing and various
other matters. The Company estimates that the unrecognized tax benefits at July 26, 2014 could be reduced by approximately
$300 million in the next 12 months.
(b) Deferred Tax Assets and Liabilities
The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):
July 26, 2014 July 27, 2013
Deferred tax assets—current ......................................................... $2,808 $2,616
Deferred tax liabilities—current ...................................................... (134) (114)
Deferred tax assets—noncurrent ...................................................... 1,700 1,539
Deferred tax liabilities—noncurrent ................................................... (369) (399)
Total net deferred tax assets ..................................................... $4,005 $3,642
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