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Income Taxes | 12 Months Ended
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May 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 9 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2019 | 2018 | 2017
Income before income taxes: |  |  |
United States | $ | 593 |  | $ | 744 |  | $ | 1,240 |
Foreign | 4,208 |  | 3,581 |  | 3,646 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 4,801 |  | $ | 4,325 |  | $ | 4,886 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2019 | 2018 | 2017
Current: |  |  |
United States |  |  |
Federal | $ | 74 |  | $ | 1,167 |  | $ | 398 |
State | 56 |  | 45 |  | 82 |
Foreign | 608 |  | 533 |  | 439 |
Total Current | 738 |  | 1,745 |  | 919 |
Deferred: |  |  |
United States |  |  |
Federal | (33 | ) | 595 |  | (279 | )
State | (9 | ) | 25 |  | (9 | )
Foreign | 76 |  | 27 |  | 15 |
Total Deferred | 34 |  | 647 |  | (273 | )
TOTAL INCOME TAX EXPENSE | $ | 772 |  | $ | 2,392 |  | $ | 646 |
The Tax Act was signed into law on December 22, 2017 and significantly changed previous U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21% and a one-time transition tax on deemed repatriation of undistributed foreign earnings. For fiscal 2018, the change in the corporate tax rate resulted in a blended U.S. federal statutory rate for the Company of approximately 29%. Certain provisions of the Tax Act, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, were not effective for the Company until fiscal 2019. 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. Implementation of the Tax Act required the Company to record incremental provisional tax expense in fiscal 2018, which increased its effective tax rate in fiscal 2018. The Company completed its analysis of the Tax Act in the second quarter of fiscal 2019 and no adjustments were made to the provisional amounts recorded. As of May 31, 2019 and 2018, long-term income taxes payable were $902 million and $993 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| YEAR ENDED MAY 31,
| 2019 | 2018 | 2017
Federal income tax rate | 21.0 | % | 29.2 | % | 35.0 | %
State taxes, net of federal benefit | 1.2 | % | 1.2 | % | 1.1 | %
Foreign earnings | -2.1 | % | -17.5 | % | -20.7 | %
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 | -3.6 | % | -5.3 | % | — | %
Resolution of a U.S. tax matter | — | % | — | % | -3.2 | %
U.S. Research and Development tax credit | -1.1 | % | -0.6 | % | -0.6 | %
Other, net | 0.7 | % | 1.3 | % | 1.6 | %
EFFECTIVE INCOME TAX RATE | 16.1 | % | 55.3 | % | 13.2 | %
The effective tax rate for the year ended May 31, 2019 was lower than the effective tax rate for the year ended May 31, 2018 due to significant changes related to the enactment of the Tax Act in the prior year and reduction in the U.S. federal statutory rate to 21% in the current year. The foreign earnings rate impact shown above for the year ended May 31, 2019 includes 1.5% of U.S. tax on foreign earnings driven by the impact of the Tax Act. 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 year ended May 31, 2017, income tax benefit of $177 million 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. Deferred tax assets and liabilities comprise the following:
| AS OF MAY 31,
(Dollars in millions) | 2019 | 2018
Deferred tax assets: |  |
Inventories | $ | 66 |  | $ | 73 |
Sales return reserves | 128 |  | 104 |
Deferred compensation | 271 |  | 250 |
Stock-based compensation | 156 |  | 135 |
Reserves and accrued liabilities | 101 |  | 102 |
Net operating loss carry-forwards | 81 |  | 88 |
Other | 125 |  | 106 |
Total deferred tax assets | 928 |  | 858 |
Valuation allowance | (88 | ) | (95 | )
Total deferred tax assets after valuation allowance | 840 |  | 763 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (235 | ) | (155 | )
Property, plant and equipment | (188 | ) | (167 | )
Intangibles | (23 | ) | (77 | )
Other | (18 | ) | (26 | )
Total deferred tax liabilities | (464 | ) | (425 | )
NET DEFERRED TAX ASSET | $ | 376 |  | $ | 338 |
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
| AS OF MAY 31,
(Dollars in millions) | 2019 | 2018 | 2017
Unrecognized tax benefits, beginning of the period | $ | 698 |  | $ | 461 |  | $ | 506 |
Gross increases related to prior period tax positions | 85 |  | 19 |  | 31 |
Gross decreases related to prior period tax positions | (32 | ) | (12 | ) | (163 | )
Gross increases related to current period tax positions | 81 |  | 249 |  | 115 |
Settlements | — |  | — |  | (12 | )
Lapse of statute of limitations | (35 | ) | (20 | ) | (21 | )
Changes due to currency translation | 11 |  | 1 |  | 5 |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 808 |  | $ | 698 |  | $ | 461 |
As of May 31, 2019, total gross unrecognized tax benefits, excluding related interest and penalties, were $808 million, $582 million of which would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties increased by $17 million during the year ended May 31, 2019, decreased by $14 million during the year ended May 31, 2018 and decreased by $38 million during the year ended May 31, 2017. As of May 31, 2019 and 2018, accrued interest and penalties related to uncertain tax positions were $174 million and $157 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 2016, with the exception of certain transfer pricing adjustments. The Company's major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2008 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 $210 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the company's Netherlands income taxes in the future could increase. 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. As a result of the enactment of the Tax Act, in fiscal 2018 the Company reevaluated its historic indefinite reinvestment assertion 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 benefit 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 $167 million, $126 million and $187 million for the fiscal years ended May 31, 2019, 2018 and 2017, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.10, $0.08 and $0.11 for the fiscal years ended May 31, 2019, 2018 and 2017, respectively. Deferred tax assets at May 31, 2019 and 2018 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $7 million net decrease in the valuation allowance for the year ended May 31, 2019, compared to a $13 million net increase for the year ended May 31, 2018, and $30 million net increase for the year ended May 31, 2017. The Company has available domestic and foreign loss carry-forwards of $257 million at May 31, 2019. If not utilized, such losses will expire as follows:
| YEAR ENDING MAY 31,
(Dollars in millions) | 2020 | 2021 | 2022 | 2023 | 2024-2039 | INDEFINITE | TOTAL
Net operating losses | $ | 5 |  | $ | 2 |  | $ | 1 |  | $ | 26 |  | $ | 34 |  | $ | 189 |  | $ | 257 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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