Cisco 2013 Annual Report Download - page 125

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 $48.0 billion of undistributed earnings for certain foreign subsidiaries as of the end of
fiscal 2013. 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 tax incentives will expire during the
second half 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 were estimated to be $1.4 billion ($0.26 per diluted share) in fiscal 2013, of which
approximately $0.5 billion ($0.10 per diluted share) is based on tax incentives that will expire during the second half of fiscal
2015. As of the end of fiscal 2012 and fiscal 2011, the gross income tax benefits attributable to tax incentives were estimated
to be $1.3 billion ($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 27,
2013
July 28,
2012
July 30,
2011
Beginning balance ...................................................... $ 2,819 $2,948 $2,677
Additions based on tax positions related to the current year ...................... 138 155 374
Additions for tax positions of prior years ..................................... 187 54 93
Reductions for tax positions of prior years ................................... (1,027) (226) (60)
Settlements ............................................................ (199) (41) (56)
Lapse of statute of limitations ............................................. (143) (71) (80)
Ending balance ......................................................... $ 1,775 $2,819 $2,948
As a result of the IRS tax settlement related to the federal income tax returns for fiscal years ended July 27, 2002 through
July 28, 2007, the amount of gross unrecognized tax benefits was reduced by approximately $1.0 billion. The Company also
reduced the amount of accrued interest by $230 million.
As of July 27, 2013, $1.5 billion of the unrecognized tax benefits would affect the effective tax rate if realized. 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. During fiscal 2011, the Company
recognized $38 million of net interest expense and $9 million of penalties. The Company’s total accrual for interest and
penalties was $268 million, $381 million, and $214 million as of the end of fiscal 2013, 2012, and 2011, 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 2001.
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 27, 2013 could be reduced by approximately
$200 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 27, 2013 July 28, 2012
Deferred tax assets—current ......................................................... $2,616 $2,294
Deferred tax liabilities—current ...................................................... (114) (123)
Deferred tax assets—noncurrent ...................................................... 1,539 2,270
Deferred tax liabilities—noncurrent ................................................... (399) (133)
Total net deferred tax assets ..................................................... $3,642 $4,308
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