cisco-annual-report-2021
As a result of certain employment and capital investment actions, our income in certain foreign countries was subject to reducedtax rates. The tax incentives expired at the end of fiscal 2019. As of the end of fiscal 2019, the gross income tax benefitsattributable to tax incentives were estimated to be $0.3 billion ($0.08 per diluted share). The gross income tax benefits werepartially offset by accruals of U.S. income taxes on foreign earnings.Unrecognized Tax BenefitsThe aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):Years Ended July 31, 2021 July 25, 2020 July 27, 2019Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,518 $ 1,925 $ 2,000Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . 224 188 185Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618 554 84Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122) (136) (283)Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93) (4) (38)Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) (9) (23)Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,106 $ 2,518 $ 1,925As of July 31, 2021, $2.3 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2021,we recognized $74 million of net interest expense and increased our unrecognized tax benefits for prior year tax positions by$618 million to reflect expected settlement positions in on-going U.S. federal, state, and foreign income tax return examinations.We recognized net interest expense of $104 million during fiscal 2020 and $30 million during fiscal 2019. Our net penaltyexpense for fiscal 2021, 2020, and 2019 was not material. Our total accrual for interest and penalties was $444 million, $340million, and $220 million as of the end of fiscal 2021, 2020, and 2019, respectively. We are no longer subject to U.S. federalincome tax audit for returns covering tax years through fiscal 2013. We are no longer subject to foreign or state income tax auditsfor returns covering tax years through fiscal 2003 and fiscal 2008, respectively.We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Webelieve it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months.Specific positions that may be resolved include issues involving transfer pricing and various other matters. We estimate that theunrecognized tax benefits at July 31, 2021 could be reduced by $800 million in the next 12 months.(b) Deferred Tax Assets and LiabilitiesThe following table presents the breakdown for net deferred tax assets (in millions):July 31, 2021 July 25, 2020Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,360 $ 3,990Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (134) (81)Total net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,226 $ 3,90996
The following table presents the components of the deferred tax assets and liabilities (in millions):July 31, 2021 July 25, 2020ASSETSAllowance for accounts receivable and returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68 $ 110Sales-type and direct-financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 179Inventory write-downs and capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 350Deferred foreign income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 253IPR&D and purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,195 1,289Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526 1,182Credits and net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,264 1,105Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 135Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 353Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 240Capitalized research expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 223Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 348Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,256 5,767Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (771) (700)Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,485 5,067LIABILITIESGoodwill and purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (686) (577)Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (164) (179)Unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112) (119)ROU lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260) (222)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (61)Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,259) (1,158)Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,226 $ 3,909As of July 31, 2021, our federal, state, and foreign net operating loss carryforwards for income tax purposes were $540 million,$1.1 billion, and $617 million, respectively. A significant amount of the net operating loss carryforwards relates to acquisitionsand, as a result, is limited in the amount that can be recognized in any one year. If not utilized, the federal, state, and foreignnet operating loss carryforwards will begin to expire in fiscal 2022. We have provided a valuation allowance of $104 million fordeferred tax assets related to foreign net operating losses that are not expected to be realized.As of July 31, 2021, our federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $31million, $1.4 billion, and $7 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2023. Themajority of state and foreign tax credits can be carried forward indefinitely. We have provided a valuation allowance of $595million for deferred tax assets related to state and foreign tax credits carryforwards that are not expected to be realized.19. Segment Information and Major Customers(a) Revenue and Gross Margin by SegmentWe conduct business globally and are primarily managed on a geographic basis consisting of three segments: the Americas,EMEA, and APJC. Our management makes financial decisions and allocates resources based on the information it receives fromour internal management system. Sales are attributed to a segment based on the ordering location of the customer. We do notallocate research and development, sales and marketing, or general and administrative expenses to our segments in this internalmanagement system because management does not include the information in our measurement of the performance of theoperating segments. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, sharebasedcompensation expense, significant litigation settlements and other contingencies, charges related to asset impairmentsand restructurings, and certain other charges to the gross margin for each segment because management does not include thisinformation in our measurement of the performance of the operating segments.97
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The following table presents the components of the deferred tax assets and liabilities (in millions):
July 31, 2021 July 25, 2020
ASSETS
Allowance for accounts receivable and returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68 $ 110
Sales-type and direct-financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 179
Inventory write-downs and capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 350
Deferred foreign income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 253
IPR&D and purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,195 1,289
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526 1,182
Credits and net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,264 1,105
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 135
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 353
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 240
Capitalized research expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 223
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 348
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,256 5,767
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (771) (700)
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,485 5,067
LIABILITIES
Goodwill and purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (686) (577)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (164) (179)
Unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112) (119)
ROU lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260) (222)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (61)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,259) (1,158)
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,226 $ 3,909
As of July 31, 2021, our federal, state, and foreign net operating loss carryforwards for income tax purposes were $540 million,
$1.1 billion, and $617 million, respectively. A significant amount of the net operating loss carryforwards relates to acquisitions
and, as a result, is limited in the amount that can be recognized in any one year. If not utilized, the federal, state, and foreign
net operating loss carryforwards will begin to expire in fiscal 2022. We have provided a valuation allowance of $104 million for
deferred tax assets related to foreign net operating losses that are not expected to be realized.
As of July 31, 2021, our federal, state, and foreign tax credit carryforwards for income tax purposes were approximately $31
million, $1.4 billion, and $7 million, respectively. The federal tax credit carryforwards will begin to expire in fiscal 2023. The
majority of state and foreign tax credits can be carried forward indefinitely. We have provided a valuation allowance of $595
million for deferred tax assets related to state and foreign tax credits carryforwards that are not expected to be realized.
19. Segment Information and Major Customers
(a) Revenue and Gross Margin by Segment
We conduct business globally and are primarily managed on a geographic basis consisting of three segments: the Americas,
EMEA, and APJC. Our management makes financial decisions and allocates resources based on the information it receives from
our internal management system. Sales are attributed to a segment based on the ordering location of the customer. We do not
allocate research and development, sales and marketing, or general and administrative expenses to our segments in this internal
management system because management does not include the information in our measurement of the performance of the
operating segments. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, sharebased
compensation expense, significant litigation settlements and other contingencies, charges related to asset impairments
and restructurings, and certain other charges to the gross margin for each segment because management does not include this
information in our measurement of the performance of the operating segments.
97
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