INCOME TAXES

12 Months Ended

May. 31, 2015

Income Taxes [Abstract]

15. INCOME TAXES

The following is a geographical breakdown of income before the provision for income taxes:

		Year Ended May 31,
(in millions)		2015			2014			2013
Domestic		$	5,136		$	5,397		$	6,614
Foreign			7,698			8,307			7,284
Income before provision for income taxes		$	12,834		$	13,704		$	13,898

The provision for income taxes consisted of the following:

		Year Ended May 31,
(Dollars in millions)		2015			2014			2013
Current provision:
Federal		$	2,153		$	1,613		$	1,720
State			310			337			254
Foreign			981			1,047			1,116
Total current provision		$	3,444		$	2,997		$	3,090
Deferred benefit:
Federal		$	(408)		$	(68)		$	(179)
State			(46)			(100)			82
Foreign			(94)			(80)			(20)
Total deferred benefit		$	(548)		$	(248)		$	(117)
Total provision for income taxes		$	2,896		$	2,749		$	2,973
Effective income tax rate			22.6%			20.1%			21.4%

The provision for income taxes differed from the amount computed by applying the federal statutory rate to our income before provision for income taxes as follows:

		Year Ended May 31,
(in millions)		2015			2014			2013
Tax provision at statutory rate		$	4,492		$	4,796		$	4,865
Foreign earnings at other than United States rates			(1,627)			(1,790)			(1,637)
State tax expense, net of federal benefit			176			154			299
Settlements and releases from judicial decisions and statute expirations, net			(85)			(168)			(144)
Domestic production activity deduction			(188)			(174)			(155)
Other, net			128			69			255
Total provision for income taxes		$	2,896		$	2,749		$	2,973

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

		May 31,
(in millions)		2015			2014
Deferred tax liabilities:
Unrealized gain on stock		$	(130)		$	(130)
Acquired intangible assets			(1,879)			(1,804)
Unremitted earnings			(646)			(510)
Other			(11)			—
Total deferred tax liabilities		$	(2,666)		$	(2,444)
Deferred tax assets:
Accruals and allowances		$	421		$	440
Employee compensation and benefits			1,123			1,062
Differences in timing of revenue recognition			335			210
Depreciation and amortization			155			243
Tax credit and net operating loss carryforwards			2,649			2,810
Other			—			96
Total deferred tax assets		$	4,683		$	4,861
Valuation allowance		$	(1,024)		$	(1,053)
Net deferred tax assets		$	993		$	1,364

Recorded as:
Current deferred tax assets		$	663		$	914
Non-current deferred tax assets			795			837
Current deferred tax liabilities (in other current liabilities)			(85)			(129)
Non-current deferred tax liabilities (in other non-current liabilities)			(380)			(258)
Net deferred tax assets		$	993		$	1,364

We provide for United States income taxes on the undistributed earnings and the other outside basis temporary differences of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2015, the amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which United States income taxes have not been provided was approximately $38.0 billion and $8.4 billion, respectively. If these undistributed earnings were repatriated to the United States, or if the other outside basis differences were recognized in a taxable transaction, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. At May 31, 2015, assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings and other outside basis temporary differences would be approximately $11.8 billion and $2.7 billion, respectively.

Our net deferred tax assets were $993 million and $1.4 billion as of May 31, 2015 and 2014, respectively. We believe it is more likely than not that the net deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credit carryforwards. The amount of net deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.

The valuation allowance was $1.0 billion and $1.1 billion at May 31, 2015 and 2014, respectively. Substantially all of the valuation allowances as of May 31, 2015 and 2014 relate to tax assets established in purchase accounting. Any subsequent reduction of that portion of the valuation allowance and the recognition of the associated tax benefits associated with our acquisitions will be recorded to our provision for income taxes subsequent to our final determination of the valuation allowance or the conclusion of the measurement period (as defined above), whichever comes first.

At May 31, 2015, we had federal net operating loss carryforwards of approximately $958 million. These losses expire in various years between fiscal 2016 and fiscal 2034, and are subject to limitations on their utilization. We had state net operating loss carryforwards of approximately $2.9 billion at May 31, 2015, which expire between fiscal 2016 and fiscal 2034, and are subject to limitations on their utilization. We had total foreign net operating loss carryforwards of approximately $1.6 billion at May 31, 2015, which are subject to limitations on their utilization. Approximately $1.4 billion of these foreign net operating losses are not currently subject to expiration dates. The remainder of the foreign net operating losses, approximately $216 million, expire between fiscal 2016 and fiscal 2035. We had tax credit carryforwards of approximately $904 million at May 31, 2015, which are subject to limitations on their utilization. Approximately $573 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder of the tax credit carryforwards, approximately $331 million, expire in various years between fiscal 2016 and fiscal 2034.

We classify our unrecognized tax benefits as either current or non-current income taxes payable in the accompanying consolidated balance sheets. The aggregate changes in the balance of our gross unrecognized tax benefits, including acquisitions, were as follows:

		Year Ended May 31,
(in millions)		2015			2014			2013
Gross unrecognized tax benefits as of June 1		$	3,838		$	3,601		$	3,276
Increases related to tax positions from prior fiscal years			119			94			279
Decreases related to tax positions from prior fiscal years			(17)			(116)			(125)
Increases related to tax positions taken during current fiscal year			316			307			312
Settlements with tax authorities			(30)			(2)			(71)
Lapses of statutes of limitation			(54)			(53)			(71)
CTA and other, net			(134)			7			1
Total gross unrecognized tax benefits as of May 31		$	4,038		$	3,838		$	3,601

As of May 31, 2015, 2014 and 2013, $2.8 billion, $2.6 billion and $3.6 billion, respectively, of unrecognized benefits would affect our effective tax rate if recognized. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations of $102 million, $24 million and $31 million during fiscal 2015, 2014 and 2013, respectively. Interest and penalties accrued as of May 31, 2015 and 2014 were $756 million and $693 million, respectively.

Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2013. Many issues are at an advanced stage in the examination process, the most significant of which include the deductibility of certain royalty payments, transfer pricing, extraterritorial income exemptions, domestic production activity, foreign tax credits, and research and development credits taken. Other issues are related to years with expiring statutes of limitation. With all of these domestic audit issues considered in the aggregate, we believe it was reasonably possible that, as of May 31, 2015, the gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by as much as $426 million ($358 million net of offsetting tax benefits). Our U.S. federal and, with some exceptions, our state income tax returns have been examined for all years prior to fiscal 2003 and we are no longer subject to audit for those periods.

Internationally, tax authorities for numerous non-U.S. jurisdictions are also examining returns affecting our unrecognized tax benefits. We believe it was reasonably possible that, as of May 31, 2015, the gross unrecognized tax benefits, could decrease (whether by payment, release, or a combination of both) by as much as $172 million ($86 million net of offsetting tax benefits) in the next 12 months, related primarily to transfer pricing. Other issues are related to years with expiring statutes of limitation. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 1997.

We believe that we have adequately provided under U.S. GAAP for outcomes related to our tax audits. However, there can be no assurances as to the possible outcomes or any attendant financial statement effect thereof.