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Income Taxes | 12 Months Ended
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May 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 9 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2020 | 2019 | 2018
Income before income taxes: |  |  |
United States | $ | 2,954 |  | $ | 593 |  | $ | 744 |
Foreign | (67 | ) | 4,208 |  | 3,581 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 2,887 |  | $ | 4,801 |  | $ | 4,325 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2020 | 2019 | 2018
Current: |  |  |
United States |  |  |
Federal | $ | (109 | ) | $ | 74 |  | $ | 1,167 |
State | 81 |  | 56 |  | 45 |
Foreign | 756 |  | 608 |  | 533 |
Total Current | 728 |  | 738 |  | 1,745 |
Deferred: |  |  |
United States |  |  |
Federal | (231 | ) | (33 | ) | 595 |
State | (47 | ) | (9 | ) | 25 |
Foreign | (102 | ) | 76 |  | 27 |
Total Deferred | (380 | ) | 34 |  | 647 |
TOTAL INCOME TAX EXPENSE | $ | 348 |  | $ | 772 |  | $ | 2,392 |
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”) which 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%. As of May 31, 2020 and 2019, long-term income taxes payable were $757 million and $902 million, respectively, and were included within Deferred income taxes and other assets 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,
| 2020 | 2019 | 2018
Federal income tax rate | 21.0 | % | 21.0 | % | 29.2 | %
State taxes, net of federal benefit | 0.8 | % | 1.0 | % | 0.8 | %
Foreign earnings | 5.9 | % | -1.1 | % | -19.2 | %
Foreign-derived intangible income benefit related to the Tax Act | -8.1 | % | — | % | — | %
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 | -7.2 | % | -3.6 | % | -5.3 | %
Income tax audits and contingency reserves | -1.4 | % | 1.3 | % | 2.9 | %
U.S. research and development tax credit | -1.8 | % | -1.0 | % | -0.6 | %
Other, net | 2.9 | % | -1.5 | % | 0.5 | %
EFFECTIVE INCOME TAX RATE | 12.1 | % | 16.1 | % | 55.3 | %
The effective tax rate for the fiscal year ended May 31, 2020 was lower than the effective tax rate for the fiscal year ended May 31, 2019 due to increased benefits from discrete items such as stock-based compensation. The foreign earnings rate impact shown above for the fiscal year ended May 31, 2020 includes withholding taxes of 6.5% and held for sale accounting items of 2.9%, offset by a benefit for statutory rate differences and other items of 3.5%. The foreign derived intangible income benefit reflects U.S. tax benefits introduced by the Tax Act for companies serving foreign markets. This benefit became available to the Company as a result of a restructuring of its intellectual property interests. Income tax audit and contingency reserves reflect benefits associated with the modification of the treatment of certain research and development expenditures of 2.9% offset by an increase related to the resolution of an audit by the U.S. Internal Revenue Service ("IRS") and other matters of 1.5%. Included in other is the deferral of income tax effects related to intra-entity transfers of inventory of 2.3% and other items of 0.6%. The effective tax rate for the year fiscal ended May 31, 2019 was lower than the effective tax rate for the fiscal year ended May 31, 2018 due to significant changes related to the enactment of the Tax Act in fiscal year 2018 and reduction in the U.S. federal statutory rate to 21% in fiscal year 2019. Deferred tax assets and liabilities comprise the following as of:
| MAY 31,
(Dollars in millions) | 2020 | 2019
Deferred tax assets: |  |
Inventories | $ | 84 |  | $ | 66 |
Sales return reserves | 115 |  | 128 |
Deferred compensation | 295 |  | 271 |
Stock-based compensation | 168 |  | 156 |
Reserves and accrued liabilities | 120 |  | 101 |
Operating lease liabilities | 491 |  | — |
Capitalized research and development expenditures | 189 |  | — |
Net operating loss carry-forwards | 21 |  | 81 |
Other | 127 |  | 125 |
Total deferred tax assets | 1,610 |  | 928 |
Valuation allowance | (26 | ) | (88 | )
Total deferred tax assets after valuation allowance | 1,584 |  | 840 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (165 | ) | (235 | )
Property, plant and equipment | (232 | ) | (188 | )
Right-of-use assets | (423 | ) | — |
Other | (32 | ) | (41 | )
Total deferred tax liabilities | (852 | ) | (464 | )
NET DEFERRED TAX ASSET | $ | 732 |  | $ | 376 |
The above amounts exclude deferred taxes of the Company's Brazil, Argentina, Chile and Uruguay operations which are classified as held-for-sale on the Consolidated Balance Sheets as of May 31, 2020. See Note 20 — Acquisitions and Divestitures for additional information. The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of:
| MAY 31,
(Dollars in millions) | 2020 | 2019 | 2018
Unrecognized tax benefits, beginning of the period | $ | 808 |  | $ | 698 |  | $ | 461 |
Gross increases related to prior period tax positions | 181 |  | 85 |  | 19 |
Gross decreases related to prior period tax positions | (171 | ) | (32 | ) | (12 | )
Gross increases related to current period tax positions | 50 |  | 81 |  | 249 |
Settlements | (58 | ) | — |  | — |
Lapse of statute of limitations | (28 | ) | (35 | ) | (20 | )
Changes due to currency translation | (11 | ) | 11 |  | 1 |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 771 |  | $ | 808 |  | $ | 698 |
As of May 31, 2020, total gross unrecognized tax benefits, excluding related interest and penalties, were $771 million, $536 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 assets 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 decreased by $16 million during the year ended May 31, 2020, increased by $17 million during the fiscal year ended May 31, 2019 and decreased by $14 million during the fiscal year ended May 31, 2018. As of May 31, 2020 and 2019, accrued interest and penalties related to uncertain tax positions were $158 million and $174 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 is currently under audit by the IRS for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. Tax years after 2009 remain open in certain major foreign jurisdictions. 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 $50 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. Effective January 1, 2020, however, the tax law in the Netherlands, one of the Company's major jurisdictions, changed. As a result of the change in law, the Company's undistributed earnings in the Netherlands are subject to withholding tax upon distribution. It is the Company's intention to indefinitely reinvest the historical earnings of its foreign subsidiaries outside North America prior to May 31, 2020 to ensure there is sufficient working capital to expand operations outside the United States. Accordingly, the Company has not recorded a deferred tax liability related to foreign withholding taxes on approximately $8.1 billion of undistributed earnings of these foreign subsidiaries as of May 31, 2020. Withholding taxes of approximately $1.2 billion would be payable upon the remittance of these undistributed earnings as of May 31, 2020. 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 $238 million, $167 million and $126 million for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.15, $0.10 and $0.08 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. Deferred tax assets at May 31, 2020 and 2019 were reduced by a valuation allowance. For the fiscal year ended May 31, 2020, a valuation allowance was provided for U.S. foreign tax credit carry-forwards and on tax benefits generated by entities with operating losses. For the fiscal year ended May 31, 2019, the valuation allowance provided primarily related to tax benefits generated by certain entities with operating losses. There was a $62 million net decrease in the valuation allowance for the fiscal year ended May 31, 2020, compared to a $7 million net decrease for the fiscal year ended May 31, 2019, and $13 million net increase for the year ended May 31, 2018. The decrease in the Company's net valuation allowance for the fiscal year ended May 31, 2020 is primarily related to the classification of the Company's Brazil and Argentina operations as held-for-sale on the Consolidated Balance Sheets as of May 31, 2020. See Note 20 — Acquisitions and Divestitures for additional information. The Company has recorded deferred tax assets of $15 million at May 31, 2020 for U.S. foreign tax credit carry-forwards which will begin to expire in 2030. The Company has available domestic and foreign loss carry-forwards of $83 million at May 31, 2020. If not utilized, such losses will expire as follows:
| YEAR ENDING MAY 31,
(Dollars in millions) | 2021 | 2022 | 2023 | 2024 | 2025-2040 | INDEFINITE | TOTAL
Net operating losses | $ | — |  | $ | 3 |  | $ | 2 |  | $ | 2 |  | $ | 59 |  | $ | 17 |  | $ | 83 |
The above amounts at May 31, 2020 exclude net operating loss carry-forwards of the Company's Brazil, Argentina and Chile operations which are included in assets held-for-sale on the Consolidated Balance Sheets at May 31, 2020. See Note 20 — Acquisitions and Divestitures for additional information.

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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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