Tax Disclosure

INCOME TAXES (In millions)

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

Current Taxes	2015	2014	2013
U.S. federal	$3,661	$3,738	$3,131
U.S. state and local	364	266	332
Foreign	2,065	2,073	1,745
Current taxes	6,090	6,077	5,208

Deferred Taxes	2015	2014	2013
Deferred taxes	224	(331)	(19)
Provision for income taxes	$6,314	$5,746	$5,189

U.S. and foreign components of income before income taxes were as follows:	2015	2014	2013
U.S.	$7,363	$7,127	$6,674
Foreign	11,144	20,693	20,378
Income before income taxes	$18,507	$27,820	$27,052

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:	2015	2014	2013
Federal statutory rate	35.0%	35.0%	35.0%
Effect of:
Foreign earnings taxed at lower rates	(20.9)%	(17.1)%	(17.5)%
Phone Hardware valuation allowance	19.1%	0.9%	0%
Domestic production activities deduction	(2.4)%	(1.0)%	(1.2)%
Other reconciling items, net	3.3%	2.9%	2.9%
Effective rate	34.1%	20.7%	19.2%

The reduction from the federal statutory rate is primarily due to foreign earnings taxed at lower rates resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2015, this reduction was mostly offset by losses in foreign jurisdictions for which we may not realize a tax benefit, primarily as a result of impairment and restructuring charges. Excluding these losses, our foreign earnings, which are taxed at rates lower than the U.S. rate and are generated from our regional operating centers, were 73%, 81%, and 79% of our foreign income before tax in fiscal years 2015, 2014, and 2013, respectively. In general, other reconciling items consist of interest, U.S. state income taxes, and credits. In fiscal years 2015, 2014, and 2013, there were no individually significant other reconciling items.

The components of the deferred income tax assets and liabilities were as follows: (In millions)	2015	2014
Deferred Income Tax Assets	-	-
Stock-based compensation expense	$884	$903
Other expense items	1,531	1,112
Restructuring charges	211	0
Unearned revenue	520	520
Impaired investments	257	272
Loss carryforwards	1,158	922
Depreciation and amortization	798	0
Other revenue items	56	64
Deferred income tax assets	5,415	3,793
Less valuation allowance	(2,265)	(903)
Deferred income tax assets (net)	$3,150	$ 2,890

Deferred Income Tax Liabilities	2015	2014
Foreign earnings	$(1,280)	$(1,140)
Unrealized gain on investments and debt	(2,223)	(1,974)
Depreciation and amortization	(685)	(470)
Other	(29)	(87)
Deferred income tax liabilities	(4,217)	(3,671)
Net deferred tax assets (liabilities)	$(1,067)	$(781)

Reported As	2015	2014
Current deferred income tax assets	$1,915	$1,941
Other current liabilities	(211)	(125)
Other long-term assets	64	131
Long-term deferred income tax liabilities	(2,835)	(2,728)
Net deferred income tax assets (liabilities)	$(1,067)	$(781)

As of June 30, 2015, we had net operating loss carryforwards of $4.6 billion, including $1.8 billion of foreign net operating loss carryforwards acquired through our acquisition of Skype, and $545 million through our acquisition of NDS. The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other future deductible net deferred tax assets that may not be realized.

Income taxes paid were $4.4 billion, $5.5 billion, and $3.9 billion in fiscal years 2015, 2014, and 2013, respectively.

During 2015, Microsoft Corp. recognized certain stock-based compensation expenses in their income statement that were not permitted as a deduction for tax purposes.

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