NOTE 10   INCOME TAXES

The components of the provision for income taxes were as follows:

(In millions)
Year Ended June 30	2007)		2006)		2005)
Current taxes:
U.S. Federal	$4,593		$4,471		$3,401
U.S. State and Local	154		101		152
International	957		882		911
Current taxes	5,704		5,454		4,464
Deferred taxes (benefits)	332		209		(90)
Provision for income taxes	$6,036		$5,663		$4,374

U.S. and international components of income before income taxes were as follows:

(In millions)
Year Ended June 30	2007		2006		2005
U.S.	$12,902		$11,404		$09,806
International	7,199		6,858		6,822
Income before income taxes	$20,101		$18,262		$16,628

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:

Year Ended June 30	2007		2006		2005
Federal statutory rate	35.0%		35.0%		35.0%
Effect of:
Foreign earnings taxed at lower rates	(5.1)%		(4.6)%		(3.1)%
Examination settlements	–		(0.6)%		(4.7)%
Other reconciling items	0.1%		1.2%		(0.9)%
Effective rate	30.0%		31.0%		26.3%

The 2007 other reconciling items includes 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 2006 other reconciling item includes the impact of the $351 million non-deductible European Commission fine. The 2005 other reconciling items include a $179 million repatriation tax benefit under the American Jobs Creation Act of 2004.

The components of the deferred tax assets and liabilities were as follows:

(In millions)
June 30	2007)		2006
Deferred income tax assets:
Stock-based compensation expense	$2,859)		$3,630)
Other expense items	1,735)		1,451)
Unearned revenue	842)		1,028)
Impaired investments	710)		989)
Other revenue items	58)		102)
Deferred income tax assets	$6,204)		$7,200)
Deferred income tax liabilities:
International earnings	$(1,763)		$(1,715)
Unrealized gain on investments	(926)		(801)
Other	(227)		(133)
Deferred income tax liabilities	(2,916)		(2,649)
Net deferred income tax assets	$ 3,288)		$ 4,551)
Reported as:
Current deferred tax assets	$1,899)		$1,940)
Long-term deferred tax assets	1,389)		2,611)
Net deferred income tax assets	$3,288)		$4,551)

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 $6.10 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 $1.77 million.

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 dividends from controlled foreign corporations. Under these provisions, we repatriated approximately $780 million in dividends subject to the elective 85% dividends received deduction and we recorded a corresponding tax provision benefit of $179 million from the reversal of previously provided U.S. deferred tax liabilities on these unremitted foreign subsidiary earnings in 2005. The dividend was paid in June 2006.

Tax Contingencies.  We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies.

Although we believe we have appropriate support for the positions taken on our tax returns, we have recorded a liability for our best estimate of the probable loss on certain of these positions, the non-current portion of which is included in other long-term liabilities. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result primarily from inter-company transfer pricing, restructuring of foreign operations, tax benefits from the Foreign Sales Corporation and Extra Territorial Income tax rules, the amount of research and experimentation tax credits claimed, state income taxes, and certain other matters. Although we believe our recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although we believe that the estimates and assumptions supporting our assessments are reasonable, the final determination of tax audit settlements and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. If we were to settle an audit or a matter under litigation, it could have a material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made. Due to the complexity involved we are not able to estimate the range of reasonably possible losses in excess of amounts recorded.

The Internal Revenue Service (“IRS”) has completed and closed its audits of our consolidated federal income tax returns through 1999. The IRS is currently conducting audits of our consolidated federal income tax return for tax years 2000 through 2006.