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INCOME TAXES | 12 Months Ended
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May 31, 2016
Income Taxes [Abstract] |
INCOME TAXES | 15. INCOME TAXES The following is a geographical breakdown of income before the provision for income taxes:
|  | Year Ended May 31,
(in millions) |  | 2016 |  | 2015 |  | 2014
Domestic |  | $ | 4,033 |  | $ | 5,136 |  | $ | 5,397
Foreign |  |  | 7,409 |  |  | 7,698 |  |  | 8,307
Income before provision for income taxes |  | $ | 11,442 |  | $ | 12,834 |  | $ | 13,704
The provision for income taxes consisted of the following:
|  | Year Ended May 31,
(Dollars in millions) |  | 2016 |  | 2015 |  | 2014
Current provision: |  |  |  |  |  |  |  |  |
Federal |  | $ | 1,301 |  | $ | 2,153 |  | $ | 1,613
State |  |  | 271 |  |  | 310 |  |  | 337
Foreign |  |  | 1,074 |  |  | 981 |  |  | 1,047
Total current provision |  | $ | 2,646 |  | $ | 3,444 |  | $ | 2,997
Deferred benefit: |  |  |  |  |  |  |  |  |
Federal |  | $ | (123) |  | $ | (408) |  | $ | (68)
State |  |  | (21) |  |  | (46) |  |  | (100)
Foreign |  |  | 39 |  |  | (94) |  |  | (80)
Total deferred benefit |  | $ | (105) |  | $ | (548) |  | $ | (248)
Total provision for income taxes |  | $ | 2,541 |  | $ | 2,896 |  | $ | 2,749
Effective income tax rate |  |  | 22.2% |  |  | 22.6% |  |  | 20.1%
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) |  | 2016 |  | 2015 |  | 2014
Tax provision at statutory rate |  | $ | 4,005 |  | $ | 4,492 |  | $ | 4,796
Foreign earnings at other than United States rates |  |  | (1,284) |  |  | (1,627) |  |  | (1,790)
State tax expense, net of federal benefit |  |  | 176 |  |  | 176 |  |  | 154
Settlements and releases from judicial decisions and statute expirations, net |  |  | (150) |  |  | (85) |  |  | (168)
Domestic production activity deduction |  |  | (155) |  |  | (188) |  |  | (174)
Other, net |  |  | (51) |  |  | 128 |  |  | (69)
Total provision for income taxes |  | $ | 2,541 |  | $ | 2,896 |  | $ | 2,749
The components of our deferred tax liabilities and assets were as follows:
|  | May 31,
(in millions) |  | 2016 |  | 2015
Deferred tax liabilities: |  |  |  |  |  |
Unrealized gain on stock |  | $ | (130) |  | $ | (130)
Acquired intangible assets |  |  | (1,482) |  |  | (1,879)
Unremitted earnings |  |  | (987) |  |  | (646)
Other |  |  | (33) |  |  | (11)
Total deferred tax liabilities |  | $ | (2,632) |  | $ | (2,666)
Deferred tax assets: |  |  |  |  |  |
Accruals and allowances |  | $ | 492 |  | $ | 421
Employee compensation and benefits |  |  | 1,149 |  |  | 1,123
Differences in timing of revenue recognition |  |  | 351 |  |  | 335
Depreciation and amortization |  |  | 9 |  |  | 155
Tax credit and net operating loss carryforwards |  |  | 2,935 |  |  | 2,649
Total deferred tax assets |  | $ | 4,936 |  | $ | 4,683
Valuation allowance |  | $ | (1,173) |  | $ | (1,024)
Net deferred tax assets |  | $ | 1,131 |  | $ | 993
Recorded as: |  |  |  |  |  |
Non-current deferred tax assets |  |  | 1,291 |  |  | 1,458
Non-current deferred tax liabilities (in other non-current liabilities) |  |  | (160) |  |  | (465)
Net deferred tax assets |  | $ | 1,131 |  | $ | 993
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, 2016, 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 $42.6 billion and $8.3 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, 2016, 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 $13.3 billion and $2.7 billion, respectively. Our net deferred tax assets were $1.1 billion and $993 million as of May 31, 2016 and 2015, 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 $1.2 billion and $1.0 billion at May 31, 2016 and 2015, respectively. Substantially all of the valuation allowances as of May 31, 2016 and 2015 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, 2016, we had federal net operating loss carryforwards of approximately $758 million. These losses expire in various years between fiscal 2017 and fiscal 2035 and are subject to limitations on their utilization. We had state net operating loss carryforwards of approximately $2.7 billion at May 31, 2016, which expire between fiscal 2017 and fiscal 2035 and are subject to limitations on their utilization. We had total foreign net operating loss carryforwards of approximately $1.6 billion at May 31, 2016, 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 $240 million, expire between fiscal 2017 and fiscal 2036. We had tax credit carryforwards of approximately $1.2 billion at May 31, 2016, which are subject to limitations on their utilization. Approximately $652 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder of the tax credit carryforwards, approximately $541 million, expire in various years between fiscal 2017 and fiscal 2035. 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) |  | 2016 |  | 2015 |  | 2014
Gross unrecognized tax benefits as of June 1 |  | $ | 4,038 |  | $ | 3,838 |  | $ | 3,601
Increases related to tax positions from prior fiscal years |  |  | 350 |  |  | 119 |  |  | 94
Decreases related to tax positions from prior fiscal years |  |  | (111) |  |  | (17) |  |  | (116)
Increases related to tax positions taken during current fiscal year |  |  | 461 |  |  | 316 |  |  | 307
Settlements with tax authorities |  |  | (73) |  |  | (30) |  |  | (2)
Lapses of statutes of limitation |  |  | (73) |  |  | (54) |  |  | (53)
Cumulative translation adjustments and other, net |  |  | (31) |  |  | (134) |  |  | 7
Total gross unrecognized tax benefits as of May 31 |  | $ | 4,561 |  | $ | 4,038 |  | $ | 3,838
As of May 31, 2016, 2015 and 2014, $3.1 billion, $2.8 billion and $2.6 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 $26 million, $102 million and $24 million during fiscal 2016, 2015 and 2014, respectively. Interest and penalties accrued as of May 31, 2016 and 2015 were $765 million and $756 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 2015. 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, 2016, 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 $228 million ($176 million net of offsetting tax benefits). Our U.S. federal income tax returns have been examined for all years prior to fiscal 2007 and we are no longer subject to audit for those periods. Our U.S. state income tax returns, with some exceptions, have been examined for all years prior to fiscal 2004 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, 2016, the gross unrecognized tax benefits, could decrease (whether by payment, release, or a combination of both) by as much as $199 million ($74 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 GAAP for outcomes related to our tax audits. However, there can be no assurances as to the possible outcomes or any related financial statement effect thereof. On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision has yet to be issued by the U.S. Tax Court due to other outstanding issues related to the case. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. We have reviewed this case and its impact on Oracle and concluded that no adjustment to the consolidated financial statements is appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements. We are under audit by the IRS and various other domestic and foreign tax authorities with regards to income tax and indirect tax matters and are involved in various challenges and litigation in a number of countries, including, in particular, India, Brazil, and Korea, where the amounts under controversy are significant. In some, although not all, cases, we have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by, or any negotiated agreements with, these tax authorities or final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it would result in a further charge to expense.

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