Western Digital 2014 Annual Report Download - page 89

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective Tax Rate
Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows for the three
years ended June 27, 2014:
2014 2013 2012
U.S. Federal statutory rate ............................................. 35% 35% 35%
Tax rate differential on international income ............................... (28) (19) (29)
Tax effect of U.S. permanent differences .................................. 2 — 3
State income tax, net of federal tax ....................................... — 8 1
Income tax credits ................................................... (1) (4) (2)
Effective tax rate .................................................... 8% 20% 8%
Tax Holidays and Carryforwards
A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines, Singapore and
Thailand operate under various tax holidays and tax incentive programs which will expire in whole or in part at vari-
ous dates from 2015 through 2025. Certain of the holidays may be extended if specific conditions are met. The net
impact of these tax holidays and tax incentives was to increase the Company’s net earnings by $905 million ($3.74 per
diluted share), $899 million ($3.65 per diluted share), and $729 million ($2.98 per diluted share) in 2014, 2013 and
2012, respectively.
As of June 27, 2014, the Company had federal and state NOL carryforwards of $440 million and $480 million,
respectively. In addition, as of June 27, 2014, the Company had various federal and state tax credit carryforwards of
$331 million combined. The NOL carryforwards available to offset future federal and state taxable income expire at
various dates from 2020 to 2032 and 2017 to 2032, respectively. Approximately $50 million of the credit carryfor-
wards available to offset future taxable income expire at various dates from 2016 to 2033. The remaining amount is
available indefinitely. NOLs and credits relating to Komag, Incorporated (“Komag”), which was acquired by the
Company on September 5, 2007, HGST, sTec and Virident are subject to limitations under Sections 382 and 383 of
the Internal Revenue Code. The Company does not expect these limitations to result in a reduction in the total
amount of Komag, sTec or Virident’s NOLs and credits ultimately realized. The Company expects the total amount of
HGST’s NOLs and credits ultimately realized will be reduced by $39 million and $25 million, respectively. Because
the Company expects the amount of HGST’s NOLs and credits ultimately realized will be reduced, the Company has
adjusted goodwill accordingly.
Uncertain Tax Positions
The Company recognizes liabilities for uncertain tax positions based on a two-step process. First, the tax position
is evaluated for recognition by determining if it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. If the tax position is deemed more-likely-than-
not to be sustained, the tax position is then assessed to determine the amount of benefit to be recognized in the finan-
cial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50%
likelihood of being realized upon ultimate settlement. With the exception of certain unrecognized tax benefits that
are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Company’s
balance sheet. Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for
uncertain tax positions and are recorded in the provision for income taxes. As of June 27, 2014, such interest and
penalties were not material. As of June 27, 2014, the Company had $300 million of unrecognized tax benefits.
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