Broadcom Ltd

Income Taxes

Components of Income (Loss) from Continuing Operations Before Income Taxes

Since we are incorporated in Singapore, domestic income reflects the results of operations based in Singapore. The following table presents the components of income (loss) from continuing operations before income taxes for financial reporting purposes:



	Fiscal Year
	2017			2016			2015
	(In millions)
Domestic income	$	2,102		$	1,365		$	1,580
Foreign loss	(277		)	(2,472		)	(113		)
Income (loss) from continuing operations before income taxes	$	1,825		$	(1,107	)	$	1,467

Components of Provision for Income Taxes

We have obtained several tax incentives from the Singapore Economic Development Board, an agency of the Government of Singapore, which provide that qualifying income we earn in Singapore are subject to tax holidays or reduced rates of Singapore income tax. Each such tax incentive is separate and distinct from the others, and may be granted, withheld, extended, modified, truncated, complied with or terminated independently without any effect on the other incentives. Subject to our compliance with the conditions specified in these incentives and legislative developments, the Singapore tax incentives are presently expected to expire at various dates generally between 2020 and 2021, subject in certain cases to potential extensions, which we may or may not be able to obtain.

We also have tax incentives on our qualifying income in Malaysia, which are scheduled to expire between2018 and 2028. The tax incentives that we have negotiated in Malaysia are also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with the conditions specified in these incentives, we will lose the related tax benefits and we could be required to refund previously realized material tax benefits.

The effect of all these tax incentives, in the aggregate, was to reduce the overall provision for income taxes by approximately $237 million, $169 million and $207 million, for fiscal years 2017, 2016 and 2015, respectively, increase diluted net income per share by $0.56 and $0.74 for fiscal years 2017 and 2015, respectively, and reduce diluted net loss per share by $0.44 for fiscal year 2016.

Significant components of the provision for income taxes are as follows:



	Fiscal Year
	2017			2016		2015
	(In millions)
Current tax expense:
Domestic	$	112		$	59	$	59
Foreign	158			165		237
	270			224		296
Deferred tax expense (benefit):
Domestic	(1		)	9		4
Foreign	(234		)	409		(224		)
	(235		)	418		(220		)
Total provision for income taxes	$	35		$	642	$	76

The provision for income taxes in fiscal year 2017 was primarily due to an increase in profit before tax and a discrete expense of $76 million resulting from entity reorganizations partially offset by the recognition of $273 million of excess tax benefits from share-based awards that vested or were exercised during fiscal year 2017 and, to a lesser extent, the recognition of previously unrecognized tax benefits primarily as a result of audit settlements.

The income tax provision for the fiscal year 2016 was primarily the result of an increase in tax associated with our undistributed earnings, partially offset by income tax benefits from losses from continuing operations and the recognition of previously unrecognized tax benefits as a result of audit settlements.

Rate Reconciliation



	Fiscal Year
	2017		2016		2015
Statutory tax rate in Singapore	17.0	%	17.0	%	17.0	%
Foreign income taxed at different rates	(0.8	)	(89.7	)	1.8
Tax holidays and concessions	(13.0	)	15.3		(14.1	)
Other, net	(1.3	)	(0.6	)	0.2
Valuation allowance	—		—		0.3
Actual tax rate on income (loss) before income taxes	1.9	%	(58.0	)%	5.2	%

Summary of Deferred Income Taxes



	October 29, 2017			October 30, 2016
	(In millions)
Deferred income tax assets:
Depreciation and amortization	$	8		$	15
Inventory	6			6
Trade accounts	22			6
Employee benefits	145			216
Employee share awards	180			90
Net operating loss carryovers and credit carryovers	2,356			1,773
Other deferred income tax assets	42			172
Gross deferred income tax assets	2,759			2,278
Less valuation allowance	(1,447		)	(1,003		)
Deferred income tax assets	1,312			1,275
Deferred income tax liabilities:
Depreciation and amortization	96			263
Other deferred income tax liabilities	12			37
Foreign earnings not indefinitely reinvested	11,202			10,954
Deferred income tax liabilities	11,310			11,254

Net deferred income tax liabilities	$	(9,998	)	$	(9,979	)

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of net operating losses and tax credit carryforwards.

The following table presents net deferred income tax assets (liabilities) as reflected on the consolidated balance sheets:



	October 29, 2017			October 30, 2016
	(In millions)
Other long-term assets	$	21		$	308
Other long-term liabilities	(10,019		)	(10,287		)
Net long-term income tax liabilities	$	(9,998	)	$	(9,979	)

The increase in the valuation allowance from $1,003 million in fiscal year 2016 to $1,447 million in fiscal year 2017 was primarily due to foreign losses not expected to be realized.

As of October 29, 2017, we had U.S. federal net operating loss carryforwards of $575 million, U.S. state net operating loss carryforwards of $3,067 million and other foreign net operating loss carryforwards of $1,702 million. U.S. federal and state net operating loss carryforwards begin to expire in fiscal year 2018. The other foreign net operating losses expire in various fiscal years beginning 2018. As of October 29, 2017, we had $1,494 million and $1,212 million of U.S. federal and state research and development tax credits, respectively, which if not utilized, begin to expire in fiscal year 2018.

The U.S. Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in the case of an “ownership change” of a corporation or separate return loss year limitations. Any ownership changes, as defined, may restrict utilization of carryforwards. As of October 29, 2017, we had approximately $575 million and $1,222 million of federal net operating loss and tax credit carryforwards, respectively, in the U.S. subject to an annual limitation. We do not expect these limitations to result in any permanent loss of our tax benefits.

During fiscal year 2017, we early adopted an accounting standards update issued by the FASB that simplifies the accounting for certain aspects of stock-based payments to employees. As a result of adoption, we recognized a tax benefit of $273 million as a discrete item for fiscal year 2017, a $47 million cumulative-effect adjustment to reduce our accumulated deficit and a $3 million cumulative-effect adjustment to increase our noncontrolling interest for previously unrecognized excess tax benefits as of October 30, 2016.

Uncertain Tax Positions

Gross unrecognized tax benefits increased by $273 million during fiscal year 2017, resulting in gross unrecognized tax benefits of $2,256 million as of October 29, 2017. The increase in gross unrecognized tax benefits was primarily a result of restructuring activities in fiscal year 2017. During fiscal year 2017, we recognized $121 million of previously unrecognized tax benefits as a result of the audit settlement with taxing authorities, and $12 million as a result of the expiration of the statute of limitations for certain audit periods. During fiscal year 2016, gross unrecognized tax benefits increased by $1,454 million resulting from the Broadcom Merger.

We recognize interest and penalties related to unrecognized tax benefits within provision for income taxes in the accompanying consolidated statements of operations. We recognized approximately $30 million of expense related to interest and penalties in fiscal year 2017. Accrued interest and penalties were included within other long-term liabilities on the consolidated balance sheets. As of October 29, 2017 and October 30, 2016, the combined amount of cumulative accrued interest and penalties was approximately $132 million and $102 million, respectively. The increase in cumulative accrued interest and penalties was primarily a result of an increase in interest accrual from various unrecognized tax benefit items .

The following table reconciles the beginning and ending balance of gross unrecognized tax benefits:



	Fiscal Year
	2017			2016			2015
	(In millions)
Beginning balance	$	1,983		$	578		$	487
Lapse of statute of limitations	(12		)	(8		)	(10		)
Increases in balances related to tax positions taken during prior periods (including those related to acquisitions made during the year)	47			1,325			94
Decreases in balances related to tax positions taken during prior periods	(32		)	(1		)	(40		)
Increases in balances related to tax positions taken during current period	391			138			47
Decreases in balances related to settlement with taxing authorities	(121		)	(49		)	—
Ending balance	$	2,256		$	1,983		$	578

A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of October 29, 2017, approximately $2,388 million of the unrecognized tax benefits including accrued interest and penalties would affect our effective tax rate. As of October 30, 2016, approximately $2,085 million of the unrecognized tax benefits including accrued interest and penalties would have affected our effective tax rate.

We are subject to Singapore income tax examination for fiscal years 2012 and later. Certain of our acquired companies are subject to tax examinations in major jurisdictions outside Singapore for fiscal years 2010 and later. It is possible that we may recognize up to $8 million of our existing unrecognized tax benefits within the next 12 months as a result of lapses of statute of limitations for certain audit periods.