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Income Taxes | 12 Months Ended
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May 31, 2021
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 9 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2021 | 2020 | 2019
Income before income taxes: |  |  |
United States | $ | 5,723 |  | $ | 2,954 |  | $ | 593 |
Foreign | 938 |  | (67) |  | 4,208 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 6,661 |  | $ | 2,887 |  | $ | 4,801 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2021 | 2020 | 2019
Current: |  |  |
United States |  |  |
Federal | $ | 328 |  | $ | (109) |  | $ | 74 |
State | 134 |  | 81 |  | 56 |
Foreign | 857 |  | 756 |  | 608 |
Total Current | 1,319 |  | 728 |  | 738 |
Deferred: |  |  |
United States |  |  |
Federal | (371) |  | (231) |  | (33) |
State | (34) |  | (47) |  | (9) |
Foreign | 20 |  | (102) |  | 76 |
Total Deferred | (385) |  | (380) |  | 34 |
TOTAL INCOME TAX EXPENSE | $ | 934 |  | $ | 348 |  | $ | 772 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| YEAR ENDED MAY 31,
| 2021 | 2020 | 2019
Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | %
State taxes, net of federal benefit | 1.3 | % | 0.8 | % | 1.0 | %
Foreign earnings | 0.2 | % | 5.9 | % | -1.1 | %
Foreign-derived intangible income benefit | -3.7 | % | -8.1 | % | — | %
Excess tax benefits from share-based compensation | -4.5 | % | -7.2 | % | -3.6 | %
Income tax audits and contingency reserves | 1.5 | % | -1.4 | % | 1.3 | %
U.S. research and development tax credit | -0.9 | % | -1.8 | % | -1.0 | %
Other, net | -0.9 | % | 2.9 | % | -1.5 | %
EFFECTIVE INCOME TAX RATE | 14.0 | % | 12.1 | % | 16.1 | %
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law and included a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. The Company recognizes taxes due under the GILTI provision as a current period expense. The effective tax rate for the fiscal year ended May 31, 2021, was higher than the effective tax rate for the fiscal year ended May 31, 2020, due to a change in the proportion of earnings taxed in the U.S., related to the recovery from the impact of the COVID-19 pandemic and less favorable impacts from discrete items such as stock-based compensation. Income tax audit and contingency reserves for the fiscal year ended May 31, 2021, reflects recognition of a reserve of 1.2% related to Altera Corp. v. Commissioner, where the taxpayer was denied a hearing before the U.S. Supreme Court on June 22, 2020, thereby ratifying the Ninth Circuit Court's decision and requiring the inclusion of stock-based compensation in intercompany cost-sharing arrangements, and other matters of 0.3%. 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%. Deferred tax assets and liabilities comprise the following as of:
| MAY 31,
(Dollars in millions) | 2021 | 2020
Deferred tax assets: |  |
Inventories(1) | $ | 78 |  | $ | 84 |
Sales return reserves(1) | 100 |  | 115 |
Deferred compensation(1) | 350 |  | 295 |
Stock-based compensation | 175 |  | 168 |
Reserves and accrued liabilities(1) | 96 |  | 120 |
Operating lease liabilities | 499 |  | 491 |
Intangibles | 187 |  | — |
Capitalized research and development expenditures | 349 |  | 189 |
Net operating loss carry-forwards(1) | 15 |  | 21 |
Other(1) | 178 |  | 127 |
Total deferred tax assets | 2,027 |  | 1,610 |
Valuation allowance(1) | (12) |  | (26) |
Total deferred tax assets after valuation allowance | 2,015 |  | 1,584 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (182) |  | (165) |
Property, plant and equipment(1) | (255) |  | (232) |
Right-of-use assets | (431) |  | (423) |
Other(1) | (14) |  | (32) |
Total deferred tax liabilities | (882) |  | (852) |
NET DEFERRED TAX ASSET | $ | 1,133 |  | $ | 732 |
(1)The above amounts exclude deferred taxes held-for-sale as of May 31, 2021 and 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) | 2021 | 2020 | 2019
Unrecognized tax benefits, beginning of the period | $ | 771 |  | $ | 808 |  | $ | 698 |
Gross increases related to prior period tax positions | 77 |  | 181 |  | 85 |
Gross decreases related to prior period tax positions | (22) |  | (171) |  | (32) |
Gross increases related to current period tax positions | 59 |  | 50 |  | 81 |
Settlements | (5) |  | (58) |  | — |
Lapse of statute of limitations | (6) |  | (28) |  | (35) |
Changes due to currency translation | 22 |  | (11) |  | 11 |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 896 |  | $ | 771 |  | $ | 808 |
As of May 31, 2021, total gross unrecognized tax benefits, excluding related interest and penalties, were $896 million, $609 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 $45 million during the year ended May 31, 2021, decreased by $16 million during the fiscal year ended May 31, 2020, and increased by $17 million during the fiscal year ended May 31, 2019. As of May 31, 2021 and 2020, accrued interest and penalties related to uncertain tax positions were $203 million and $158 million, respectively (excluding federal benefit). As of May 31, 2021 and 2020, long-term income taxes payable were $640 million and $757 million, respectively, and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. 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 2010 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 $40 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 certain 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 $10.3 billion of undistributed earnings of these foreign subsidiaries as of May 31, 2021. Withholding taxes of approximately $1.5 billion would be payable upon the remittance of these undistributed earnings as of May 31, 2021. A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031. 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, $238 million and $167 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.15, $0.15 and $0.10 for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. Deferred tax assets as of May 31, 2021 and 2020, were reduced by a valuation allowance. For the fiscal year ended May 31, 2021, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. For the fiscal year ended May 31, 2020, a valuation allowance was provided for U.S. foreign tax credit carryforwards and on tax benefits generated by certain entities with operating losses. There was a $14 million net decrease in the valuation allowance for the fiscal year ended May 31, 2021, compared to a $62 million net decrease for the fiscal year ended May 31, 2020, and $7 million net decrease for the year ended May 31, 2019. The Company has available domestic and foreign loss carry-forwards of $65 million as of May 31, 2021. If not utilized, such losses will expire as follows:
| YEAR ENDING MAY 31,
(Dollars in millions) | 2022 | 2023 | 2024 | 2025 | 2026-2041 | INDEFINITE | TOTAL
Net operating losses | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 42 |  | $ | 23 |  | $ | 65 |

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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