Microsoft 2005 Annual Report Download - page 51

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PAGE 50
U.S. and international components of income before income taxes are as follows:
(In millions)
Y
ear Ended June 30 2003 2004 2005
U.S. $ 7,674 $ 8,088 $ 9,806
International 3,380 4,108 6,822
Income before income taxes $11,054 $12,196 $16,628
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for
income taxes are as follows:
Y
ear Ended June 30 2003 2004 2005
Federal statutory rate 35.0% 35.0% 35.0%
Effect of:
IRS examination settlemen
t
– – (4.7)
Foreign earnings taxed at lower rates (1.3) (1.7) (3.1)
Extraterritorial income exclusion (1.6) (0.9) (1.3)
Other reconciling items – 0.6 0.4
Effective rate 32.1% 33.0% 26.3%
The 2005 other reconciling items include a $179 million repatriation tax benefit. The 2004 other reconciling items include the
$208 million benefit from the resolution of the issue remanded by the Ninth Circuit Court of Appeals and the impact of the $605
million non-deductible European Commission fine.
The components of the deferred tax assets and liabilities are as follows:
(In millions)
June 30 2004 2005
Deferred income tax assets:
Unearned revenue $ 1,746 $ 915
Impaired investments 1,246 861
Stock-based compensation expense 3,749 3,994
Other revenue items 286 213
Other expense items 1,308 1,751
Other – 173
Deferred income tax assets $ 8,335 $ 7,907
Deferred income tax liabilities:
Unrealized gain on investments $(1,087) $(1,169)
International earnings (1,327)
(1,393)
Other (16)
(23)
Deferred income tax liabilities (2,430) (2,585)
Net deferred income tax assets $ 5,905 $ 5,322
Reported as:
Current deferred tax assets $ 2,097 $ 1,701
Lon
g
-
t
erm deferred tax assets 3,808 3,621
Net deferred income tax assets $ 5,905 $ 5,322
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 for U.S. deferred income taxes or foreign withholding taxes on $4.1 billion of our undistributed
earnings for certain non-U.S. subsidiaries, all of which relate to fiscal 2002 through 2005 earnings, because these earnings are
intended to be permanently reinvested in operations outside the United States.
The American Jobs Creation Act of 2004 (the “Act”) was enacted in October 2004. The Act creates a temporary incentive for
U.S. corporations to repatriate foreign subsidiary earnings by providing an elective 85% dividends received deduction for certain