NOTES TO FINANCIAL STATEMENTS
NOTE 11 INCOME TAXES
The components of the provision for income taxes were as follows:
| (In millions) | |||
|---|---|---|---|
| Year Ended June 30, | 2008 | 2007 | 2006 |
| Current taxes: | |||
| U.S. Federal | $4,357 | $4,593 | $4,471 |
| U.S. State and Local | 256 | 154 | 101 |
| International | 1,007 | 957 | 882 |
| Current taxes | 5,620 | 5,704 | 5,454 |
| Deferred taxes | 513 | 332 | 209 |
| Provision for income taxes | $6,133 | $6,036 | $5,663 |
U.S. and international components of income before income taxes were as follows:
| (In millions) | |||
|---|---|---|---|
| Year Ended June 30, | 2008 | 2007 | 2006 |
| U.S. | $12,682 | $12,902 | $11,404 |
| International | 11,132 | 7,199 | 6,858 |
| Income before income taxes | $23,814 | $20,101 | $18,262 |
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
| (In millions) | |||
|---|---|---|---|
| Year Ended June 30, | 2008 | 2007 | 2006 |
| Federal statutory rate | 35.0% | 35.0% | 35.0% |
| Effect of: | |||
| Foreign earnings taxed at lower rates | (7.0)% | (5.1)% | (4.6)% |
| Examination settlements | (5.8)% | – | (0.6)% |
| European Commission fine | 2.1% | – | 0.7% |
| Other reconciling items | 1.5% | 0.1% | 0.5% |
| Effective rate | 25.8% | 30.0% | 31.0% |
In general, other reconciling items consist of interest, U.S. state income taxes, domestic production deductions, and research credits. In fiscal years 2008 and 2006, there were no individually significant other reconciling items. Other reconciling items in fiscal year 2007 included the impact of a $195 million reduction resulting from various changes in tax positions taken in prior periods, related primarily to favorable developments in an IRS position and multiple foreign audit assessments.
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) | ||
|---|---|---|
| June 30, | 2008 | 2007 |
| Deferred income tax assets: | ||
| Stock-based compensation expense | ,$2,225 | $2,859 |
| Other expense items | 1,933 | 1,735 |
| Unearned revenue | 928 | 842 |
| Impaired investments | 331 | 710 |
| Other revenue items | 91 | 58 |
| Deferred income tax assets | $5,508 | $6,204 |
| Deferred income tax liabilities: | ||
| International earnings | $(1,300) | $(1,763) |
| Unrealized gain on investments | (513) | (926) |
| Other | (729) | (227) |
| Deferred income tax liabilities | (2,542) | (2,916) |
| Net deferred income tax assets | $ ,2,966 | $))3,288 |
| Reported as: | ||
| Current deferred income tax assets | $2,017 | $1,899 |
| Long-term deferred income tax assets | 949 | 1,389 |
| Net deferred income tax assets | $2,966 | $3,288 |
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 taxes are actually paid or recovered.
We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $7.5 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the United States. The amount of unrecognized deferred tax liability associated with these temporary differences is approximately $2.2 billion.
Income taxes paid were $5.4 billion in fiscal year 2008, $5.2 billion in fiscal year 2007, and $4.8 billion in fiscal year 2006.
FIN 48
On July 1, 2007, we adopted the provisions of FIN 48 which had the following impact on our financial statements: increased current assets by $228 million, long-term assets by $1.1 billion, long-term liabilities by $2.1 billion, and retained deficit by $395 million; and decreased income taxes payable by $394 million. As of June 30, 2008, we had $3.2 billion of unrecognized tax benefits of which $2.3 billion, if recognized, would affect our effective tax rate. As of July 1, 2007, we had $7.1 billion of unrecognized tax benefits of which $5.3 billion, if recognized, would affect our effective tax rate. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest totaled $121 million in fiscal year 2008. As of June 30, 2008 and July 1, 2007, we had accrued interest related to uncertain tax positions of $324 million and $863 million, respectively, net of federal income tax benefits, on our balance sheets.
The aggregate changes in the balance of unrecognized tax benefits were as follows:
| (In millions) | |
|---|---|
| Year Ended June 30, | 2008 |
| Balance, beginning of year | $7,076 |
| Decreases related to settlements | (4,787) |
| Increases for tax positions related to the current year | 934 |
| Increases for tax positions related to prior years | 66 |
| Decreases for tax positions related to prior years | (80) |
| Reductions due to lapsed statute of limitations | (14) |
| Balance, end of year | $3,195 |
During fiscal year 2008, we reached a settlement with the Internal Revenue Service (IRS) on its 2000-2003 examination. As a result, we reduced our unrecognized tax benefits by $4.8 billion and recognized a tax provision reduction of $1.2 billion. We are under audit by the IRS for the tax years 2004-2006. 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 examination will be concluded within the next 12 months. As a result of our settlement related to the 2000-2003 examination, we paid the IRS approximately $3.1 billion during the first quarter of fiscal year 2009.
We are subject to income tax in many jurisdictions outside the United States, none of which are individually material to our financial position, cash flows, or results of operations.