Cisco 2015 Annual Report Download - page 125

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U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not
provided for on a cumulative total of $58.0 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal
2015. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to
the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise
transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for 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 incentives expired at the end of fiscal 2015.
The majority of the remaining tax incentives will expire at the end of fiscal 2025. The gross income tax benefit attributable to tax
incentives was estimated to be $1.4 billion ($0.28 per diluted share) in fiscal 2015, of which approximately $0.5 billion ($0.10 per
diluted share) is based on tax incentives that expired at the end of fiscal 2015. As of the end of fiscal 2014 and fiscal 2013, the
gross income tax benefits attributable to tax incentives were estimated to be $1.3 billion and $1.4 billion ($0.25 and $0.26 per
diluted share) for 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 25, 2015 July 26, 2014 July 27, 2013
Beginning balance ........................................................... $ 1,938 $ 1,775 $ 2,819
Additions based on tax positions related to the current year ................... 276 262 138
Additions for tax positions of prior years ..................................... 137 64 187
Reductions for tax positions of prior years .................................... (30) (13) (1,027)
Settlements .................................................................. (165) (17) (199)
Lapse of statute of limitations ................................................ (127) (133) (143)
Ending balance ............................................................... $ 2,029 $ 1,938 $ 1,775
As of July 25, 2015, $1.7 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2015
the Company recognized $27 million of net interest expense and $3 million of penalties. 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. The Company’s total accrual for interest and penalties was $274
million, $304 million, and $268 million as of the end of fiscal 2015, 2014, and 2013, 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 25, 2015 could be reduced by approximately $900 million in the
next 12 months, a portion of which could increase earnings.
(b) Deferred Tax Assets and Liabilities
The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):
July 25, 2015 July 26, 2014
Deferred tax assets—current .................................................................. $ 2,915 $ 2,808
Deferred tax liabilities—current ............................................................... (212) (134)
Deferred tax assets—noncurrent ............................................................... 1,648 1,700
Deferred tax liabilities—noncurrent ........................................................... (246) (369)
Total net deferred tax assets .............................................................. $ 4,105 $ 4,005
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