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Income Taxes | 12 Months Ended
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May 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 7 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2023 | 2022 | 2021
Income before income taxes: |  |  |
United States | $ | 4,663 |  | $ | 6,020 |  | $ | 5,723 |
Foreign | 1,538 |  | 631 |  | 938 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 6,201 |  | $ | 6,651 |  | $ | 6,661 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2023 | 2022 | 2021
Current: |  |  |
United States |  |  |
Federal | $ | 430 |  | $ | 231 |  | $ | 328 |
State | 184 |  | 98 |  | 134 |
Foreign | 634 |  | 926 |  | 857 |
Total Current | 1,248 |  | 1,255 |  | 1,319 |
Deferred: |  |  |
United States |  |  |
Federal | (162) |  | (522) |  | (371) |
State | (25) |  | (16) |  | (34) |
Foreign | 70 |  | (112) |  | 20 |
Total Deferred | (117) |  | (650) |  | (385) |
TOTAL INCOME TAX EXPENSE | $ | 1,131 |  | $ | 605 |  | $ | 934 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| YEAR ENDED MAY 31,
| 2023 | 2022 | 2021
Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | %
State taxes, net of federal benefit | 1.5 | % | 1.4 | % | 1.3 | %
Foreign earnings | 1.7 | % | -1.8 | % | 0.2 | %
Subpart F deferred tax benefit | 0.0 | % | -4.7 | % | 0.0 | %
Foreign-derived intangible income benefit | -6.1 | % | -4.1 | % | -3.7 | %
Excess tax benefits from stock-based compensation | -1.1 | % | -4.9 | % | -4.5 | %
Income tax audits and contingency reserves | 1.0 | % | 1.5 | % | 1.5 | %
U.S. research and development tax credit | -1.2 | % | -1.0 | % | -0.9 | %
Other, net | 1.4 | % | 1.7 | % | -0.9 | %
EFFECTIVE INCOME TAX RATE | 18.2 | % | 9.1 | % | 14.0 | %
On December 22, 2017, the U.S. 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, 2023 was higher than the effective tax rate for the fiscal year ended May 31, 2022. The increase was primarily due to decreased benefits from stock-based compensation and the prior year recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property. During the fourth quarter of fiscal 2022, the Company onshored certain non-U.S. intangible property ownership rights and implemented changes in the Company's legal entity structure. The tax restructuring increases the possibility that foreign earnings in future periods will be subject to tax in the U.S. due to Subpart F of the Internal Revenue Code. The Company recognized a deferred tax asset and corresponding non-cash deferred income tax benefit of 4.7%, to establish the deferred tax deduction that is expected to reduce taxable income in future periods. The effective tax rate for the fiscal year ended May 31, 2022 was lower than the effective tax rate for the fiscal year ended May 31, 2021. The decrease was primarily due to a shift in the Company's earnings mix and recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property. Deferred tax assets and liabilities comprise the following as of:
| MAY 31,
(Dollars in millions) | 2023 | 2022
Deferred tax assets: |  |
Inventories(1) | $ | 79 |  | $ | 136 |
Sales return reserves(1) | 89 |  | 109 |
Deferred compensation(1) | 321 |  | 313 |
Stock-based compensation | 261 |  | 195 |
Reserves and accrued liabilities(1) | 144 |  | 145 |
Operating lease liabilities | 511 |  | 508 |
Intangibles | 255 |  | 275 |
Capitalized research and development expenditures | 548 |  | 353 |
Net operating loss carry-forwards | 15 |  | 8 |
Subpart F deferred tax | 374 |  | 313 |
Foreign tax credit carry-forward | — |  | 103 |
Other(1) | 183 |  | 148 |
Total deferred tax assets | 2,780 |  | 2,606 |
Valuation allowance | (22) |  | (19) |
Total deferred tax assets after valuation allowance | 2,758 |  | 2,587 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (186) |  | (146) |
Property, plant and equipment(1) | (276) |  | (247) |
Right-of-use assets | (441) |  | (437) |
Other(1) | (56) |  | (92) |
Total deferred tax liabilities | (959) |  | (922) |
NET DEFERRED TAX ASSET (2) | $ | 1,799 |  | $ | 1,665 |
(1)The above amounts exclude deferred taxes held-for-sale as of May 31, 2022. See Note 18 — Acquisitions and Divestitures for additional information. (2)Of the total $1,799 million net deferred tax asset for the period ended May 31, 2023, $2,026 million was included within Deferred income taxes and other assets and $(227) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Of the total $1,665 million net deferred tax asset for the period ended May 31, 2022, $1,891 million was included within Deferred income taxes and other assets and $(226) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of:
| MAY 31,
(Dollars in millions) | 2023 | 2022 | 2021
Unrecognized tax benefits, beginning of the period | $ | 848 |  | $ | 896 |  | $ | 771 |
Gross increases related to prior period tax positions | 95 |  | 71 |  | 77 |
Gross decreases related to prior period tax positions | (17) |  | (145) |  | (22) |
Gross increases related to current period tax positions | 50 |  | 62 |  | 59 |
Settlements | (18) |  | (17) |  | (5) |
Lapse of statute of limitations | (7) |  | (10) |  | (6) |
Changes due to currency translation | (15) |  | (9) |  | 22 |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 936 |  | $ | 848 |  | $ | 896 |
As of May 31, 2023, total gross unrecognized tax benefits, excluding related interest and penalties, were $936 million, of which $651 million 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 $20 million during the fiscal year ended May 31, 2023, increased by $45 million during the fiscal year ended May 31, 2022, and increased by $45 million during the fiscal year ended May 31, 2021. As of May 31, 2023 and 2022, accrued interest and penalties related to uncertain tax positions were $268 million and $248 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. As of May 31, 2023 and 2022, long-term income taxes payable were $373 million and $535 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 U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. 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 2011 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 prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase. 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, before taking into consideration other U.S. indirect tax provisions, was $263 million, $221 million and $238 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.17, $0.14 and $0.15 for the fiscal years ended May 31, 2023, 2022 and 2021, respectively. Deferred tax assets as of May 31, 2023 and 2022, were reduced by a valuation allowance. For the fiscal year ended May 31, 2023, 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, 2022, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. There was a $3 million net increase in the valuation allowance for the fiscal year ended May 31, 2023, compared to a $7 million net increase for the fiscal year ended May 31, 2022, and $14 million net decrease for the fiscal year ended May 31, 2021. The Company has available domestic and foreign loss carry-forwards of $61 million as of May 31, 2023. If not utilized, $33 million of losses will expire in the periods between fiscal 2028 and 2043.

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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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://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 https://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 https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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