Google 2015 Annual Report Download - page 96

Table of Contents Alphabet Inc. and Google Inc.
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The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows (in millions):
Year Ended December 31,
2013 2014 2015
Expected provision at federal statutory tax rate (35%) $ 5,567 $ 6,041 $ 6,878
State taxes, net of federal benefit 133 132 (291)
Change in valuation allowance (641) (164) (65)
Foreign rate differential (2,482) (2,109) (2,624)
Federal research credit (433) (318) (407)
Basis difference in investment of Arris 644 0 0
Other adjustments (49) 57 (188)
Provision for income taxes $ 2,739 $ 3,639 $ 3,303
A retroactive and permanent reinstatement of the federal research credit was signed into law on December 18,
2015 in accordance with the Protecting Americans from Tax Hikes Act of 2015. As such, our effective tax rate for 2015
reflects the benefit of the 2015 federal research and development tax credit.
A retroactive extension of the 2012 federal research and development credit was signed into law on January 2,
2013 in accordance with The American Taxpayer Act of 2012. The benefit of $189 million related to the 2012 federal
research and development credit is included in the year ended December 31, 2013.
Our effective tax rate for 2015 included a discrete tax benefit related to refunds and reductions in uncertain tax
positions due to the resolution of a multi-year tax audit in the U.S.
Our effective tax rate is impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than
the federal statutory tax rate. Substantially all of the income from foreign operations was earned by an Irish subsidiary.
We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign
subsidiaries as of December 31, 2015 because we intend to permanently reinvest such earnings outside the U.S. If
these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign
income taxes previously paid on these earnings. As of December 31, 2015, the cumulative amount of earnings upon
which U.S. income taxes have not been provided is approximately $58.3 billion. Determination of the amount of
unrecognized deferred tax liability related to these earnings is not practicable.
On July 27, 2015, the United States Tax Court, in an opinion in Altera Corp. v. Commissioner, invalidated the
portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing
arrangement to share stock-based compensation costs. The U.S. Tax Court issued the final decision on December
28, 2015. The government has 90 days from the final decision date to file a notice of appeal. At this time, the U.S.
Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. We have
evaluated the opinion and have recorded a tax benefit of $3.5 billion related to reimbursement of cost share payments
for the previously shared stock-based compensation costs. In addition, we have recorded a tax liability of $3.5 billion
for the U.S. tax cost of potential repatriation of the associated contingent foreign earnings because at this time we
cannot reasonably conclude that the Company has the ability and the intent to indefinitely reinvest these contingent
earnings. The net impact to our consolidated financial statements is not material. We will continue to monitor
developments related to the case and the potential impact on our consolidated financial statements.
Deferred Income Taxes
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components
of our deferred tax assets and liabilities are as follows (in millions):