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Income Taxes | 12 Months Ended
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May 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 9 — Income Taxes
Income before income taxes is as follows:
|  | Year Ended May 31,
(In millions) |  | 2018 |  | 2017 |  | 2016
Income before income taxes: |  |  |  |  |  |
United States |  | $ | 744 |  |  | $ | 1,240 |  |  | $ | 956 |
Foreign |  | 3,581 |  |  | 3,646 |  |  | 3,667 |
TOTAL INCOME BEFORE INCOME TAXES |  | $ | 4,325 |  |  | $ | 4,886 |  |  | $ | 4,623 |
The provision for income taxes is as follows:
|  | Year Ended May 31,
(In millions) |  | 2018 |  | 2017 |  | 2016
Current: |  |  |  |  |  |
United States |  |  |  |  |  |
Federal |  | $ | 1,167 |  |  | $ | 398 |  |  | $ | 304 |
State |  | 45 |  |  | 82 |  |  | 71 |
Foreign |  | 533 |  |  | 439 |  |  | 568 |
Total |  | 1,745 |  |  | 919 |  |  | 943 |
Deferred: |  |  |  |  |  |
United States |  |  |  |  |  |
Federal |  | 595 |  |  | (279 | ) |  | (57 | )
State |  | 25 |  |  | (9 | ) |  | (16 | )
Foreign |  | 27 |  |  | 15 |  |  | (7 | )
Total |  | 647 |  |  | (273 | ) |  | (80 | )
TOTAL INCOME TAX EXPENSE |  | $ | 2,392 |  |  | $ | 646 |  |  | $ | 863 |
On December 22, 2017, the United States enacted the Tax Act, which significantly changes previous U.S. tax laws, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, a reduction in the corporate tax rate from 35% to 21%, as well as other changes. Under U.S. GAAP, accounting for the effect of tax legislation is required in the period of enactment. For fiscal 2018, the change in the corporate tax rate, effective January 1, 2018, results in a blended U.S. federal statutory rate for the Company of approximately 29%. The Tax Act also includes provisions not yet effective for the Company, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, which will be effective for the Company beginning June 1, 2018. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
|  | Year Ended May 31,
|  | 2018 |  | 2017 |  | 2016
Federal income tax rate |  | 29.2 | % |  | 35.0 | % |  | 35.0 | %
State taxes, net of federal benefit |  | 1.2 | % |  | 1.1 | % |  | 1.1 | %
Foreign earnings |  | -18.4 | % |  | -20.7 | % |  | -18.2 | %
Transition tax related to the Tax Act |  | 43.3 | % |  | — | % |  | — | %
Remeasurement of deferred tax assets and liabilities related to the Tax Act |  | 3.7 | % |  | — | % |  | — | %
Excess tax benefits from share-based compensation |  | -5.3 | % |  | — | % |  | — | %
Resolution of a U.S. tax matter |  | — | % |  | -3.2 | % |  | — | %
Other, net |  | 1.6 | % |  | 1.0 | % |  | 0.8 | %
EFFECTIVE INCOME TAX RATE |  | 55.3 | % |  | 13.2 | % |  | 18.7 | %
The effective tax rate for the year ended May 31, 2018 was higher than the effective tax rate for the year ended May 31, 2017 primarily due to the enactment of the Tax Act, which included provisional expense of $1,875 million for the one-time transition tax on the deemed repatriation of undistributed foreign earnings, and $158 million due to the remeasurement of deferred tax assets and liabilities. The remaining provisions of the Tax Act, which were a net benefit to the effective tax rate, did not have a material impact on the Company’s Consolidated Financial Statements during fiscal 2018. Additionally, the increase in the effective tax rate was partially offset by the tax benefit from share-based compensation in the current period as a result of the adoption of ASU 2016-09 in the first quarter of fiscal 2018. During the years ended May 31, 2017 and 2016, income tax benefits of $177 million and $281 million, respectively, attributable to employee share-based compensation were allocated to Total shareholders’ equity. As a result of the adoption of ASU 2016-09, beginning in fiscal 2018, income tax benefits from share-based compensation are reported in the Consolidated Statements of Income. The effective tax rate for the year ended May 31, 2017 was 550 basis points lower than the effective tax rate for the year ended May 31, 2016 primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States. In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”), the provisional amounts recorded represent reasonable estimates of the effects of the Tax Act for which the analysis is not yet complete. As the Company completes its analysis of the Tax Act, including collecting, preparing and analyzing necessary information, performing and refining calculations and obtaining additional guidance from the IRS, U.S. Treasury Department, FASB or other standard setting and regulatory bodies on the Tax Act, it may record adjustments to the provisional amounts, which may be material. In accordance with SAB 118, the Company’s accounting for the tax effects of the Tax Act will be completed during the measurement period, which should not extend beyond one year from the enactment date. At May 31, 2018, there were no provisions for which the Company was unable to record a reasonable estimate of the impact. Transition Tax During the third quarter of fiscal 2018, the Company recorded a provisional expense of $2,010 million related to the one-time transition tax on the deemed repatriation of undistributed foreign earnings. During the fourth quarter of fiscal 2018, as a result of further analysis of the provisions of the Tax Act and additional guidance, this provisional tax expense decreased by $135 million. The transition tax is based on the Company’s estimated total post-1986 undistributed foreign earnings at a tax rate of 15.5% for foreign cash and certain other specified assets, and 8% on the remaining earnings. The Company expects to pay the transition tax in installments over an eight-year period. Accordingly, the non-current portion of the provisional expense for the transition tax of $1,078 million, net of applicable foreign tax credits the Company expects to utilize, has been recorded in Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Impact of Changes in the Tax Rate As a result of the reduction in the corporate tax rate from 35% to 21%, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to be realized. The total provisional expense recorded during the period for the remeasurement of deferred tax assets and liabilities was $158 million. Deferred tax assets and liabilities comprise the following:
|  | As of May 31,
(In millions) |  | 2018 |  | 2017
Deferred tax assets: |  |  |  |
Inventories |  | $ | 73 |  |  | $ | 90 |
Sales return reserves |  | 104 |  |  | 130 |
Deferred compensation |  | 250 |  |  | 348 |
Stock-based compensation |  | 135 |  |  | 225 |
Reserves and accrued liabilities |  | 102 |  |  | 88 |
Net operating loss carry-forwards |  | 88 |  |  | 84 |
Foreign tax credit carry-forwards |  | — |  |  | 208 |
Undistributed earnings of foreign subsidiaries |  | — |  |  | 173 |
Other |  | 106 |  |  | 106 |
Total deferred tax assets |  | 858 |  |  | 1,452 |
Valuation allowance |  | (95 | ) |  | (82 | )
Total deferred tax assets after valuation allowance |  | 763 |  |  | 1,370 |
Deferred tax liabilities: |  |  |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries |  | (155 | ) |  | — |
Property, plant and equipment |  | (167 | ) |  | (254 | )
Intangibles |  | (77 | ) |  | (90 | )
Other |  | (26 | ) |  | (2 | )
Total deferred tax liabilities |  | (425 | ) |  | (346 | )
NET DEFERRED TAX ASSET |  | $ | 338 |  |  | $ | 1,024 |
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
|  | As of May 31,
(In millions) |  | 2018 |  | 2017 |  | 2016
Unrecognized tax benefits, beginning of the period |  | $ | 461 |  |  | $ | 506 |  |  | $ | 438 |
Gross increases related to prior period tax positions |  | 19 |  |  | 31 |  |  | 49 |
Gross decreases related to prior period tax positions |  | (12 | ) |  | (163 | ) |  | (20 | )
Gross increases related to current period tax positions |  | 249 |  |  | 115 |  |  | 81 |
Settlements |  | — |  |  | (12 | ) |  | (13 | )
Lapse of statute of limitations |  | (20 | ) |  | (21 | ) |  | (17 | )
Changes due to currency translation |  | 1 |  |  | 5 |  |  | (12 | )
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD |  | $ | 698 |  |  | $ | 461 |  |  | $ | 506 |
As of May 31, 2018, total gross unrecognized tax benefits, excluding related interest and penalties, were $698 million, $478 million of which would affect the Company’s effective tax rate if recognized in future periods. The Company recognizes interest and penalties related to income tax matters in Income tax expense. The liability for payment of interest and penalties decreased by $14 million during the year ended May 31, 2018, decreased by $38 million during the year ended May 31, 2017 and increased by $45 million during the year ended May 31, 2016. As of May 31, 2018 and 2017, accrued interest and penalties related to uncertain tax positions were $157 million and $171 million, respectively (excluding federal benefit). The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2014, with the exception of certain transfer pricing adjustments. The Company is currently under audit by the IRS for fiscal years 2015 and 2016. The Company’s major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2007 and fiscal 2012, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $163 million within the next 12 months. The Company historically provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outside the United States. At May 31, 2017, the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes had not been provided were approximately $12.2 billion. These undistributed foreign earnings were subject to the U.S. one-time mandatory transition tax and are eligible to be repatriated to the U.S. without additional U.S. tax under the Tax Act. The Company has reevaluated its historic indefinite reinvestment assertion as a result of the enactment of the Tax Act and determined that any historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. A portion of the Company’s foreign operations are benefiting from a tax holiday, which is set to expire in 2021. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $126 million, $187 million and $173 million for the fiscal years ended May 31, 2018, 2017 and 2016, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.08, $0.11 and $0.10 for the fiscal years ended May 31, 2018, 2017 and 2016, respectively. Deferred tax assets at May 31, 2018 and 2017 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $13 million net increase in the valuation allowance for the year ended May 31, 2018, compared to a $30 million net increase for the year ended May 31, 2017 and $43 million net increase for the year ended May 31, 2016. The Company no longer has recorded deferred tax assets for foreign tax credit carry-forwards; the $208 million recorded at May 31, 2017 was fully utilized to offset the impacts of transition tax. The Company has available domestic and foreign loss carry-forwards of $289 million at May 31, 2018. Such losses will expire as follows:
|  | Year Ending May 31,
(In millions) |  | 2019 |  | 2020 |  | 2021 |  | 2022 |  | 2023-2039 |  | Indefinite |  |  | Total |
Net operating losses |  | $ | 1 |  |  | $ | 5 |  |  | $ | 2 |  |  | $ | 1 |  |  | $ | 91 |  |  | $ | 189 |  |  | $ | 289 |

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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