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INCOME TAXES | 12 Months Ended
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May 31, 2024
Income Tax Disclosure [Abstract] |
INCOME TAXES |
NOTE 7 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2024 | 2023 | 2022
Income before income taxes: |  |  |
United States | $ | 5,588 |  | $ | 4,663 |  | $ | 6,020 |
Foreign | 1,112 |  | 1,538 |  | 631 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 6,700 |  | $ | 6,201 |  | $ | 6,651 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2024 | 2023 | 2022
Current: |  |  |
United States |  |  |
Federal | $ | 782 |  | $ | 430 |  | $ | 231 |
State | 201 |  | 184 |  | 98 |
Foreign | 514 |  | 634 |  | 926 |
Total Current | 1,497 |  | 1,248 |  | 1,255 |
Deferred: |  |  |
United States |  |  |
Federal | (422) |  | (162) |  | (522) |
State | (61) |  | (25) |  | (16) |
Foreign | (14) |  | 70 |  | (112) |
Total Deferred | (497) |  | (117) |  | (650) |
TOTAL INCOME TAX EXPENSE | $ | 1,000 |  | $ | 1,131 |  | $ | 605 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| YEAR ENDED MAY 31,
| 2024 | 2023 | 2022
Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | %
State taxes, net of federal benefit | 1.4 | % | 1.5 | % | 1.4 | %
Foreign earnings | -2.5 | % | 1.7 | % | -1.8 | %
Subpart F deferred tax benefit | 0.0 | % | 0.0 | % | -4.7 | %
Foreign-derived intangible income benefit | -4.8 | % | -6.1 | % | -4.1 | %
Excess tax benefits from stock-based compensation | -0.5 | % | -1.1 | % | -4.9 | %
Income tax audits and contingency reserves | 1.8 | % | 1.0 | % | 1.5 | %
U.S. research and development tax credit | -2.1 | % | -1.2 | % | -1.0 | %
Other, net | 0.6 | % | 1.4 | % | 1.7 | %
EFFECTIVE INCOME TAX RATE | 14.9 | % | 18.2 | % | 9.1 | %
The effective tax rate for the fiscal year ended May 31, 2024 was lower than the effective tax rate for the fiscal year ended May 31, 2023. The decrease in the Company's effective tax rate was primarily due to changes in the Company's earning mix and one-time benefits including the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. On July 21, 2023, the IRS issued Notice 2023-55 which specifically delayed the application of certain U.S. foreign tax credit regulations that had previously limited the Company's ability to claim credits on certain foreign taxes for the fiscal year ended May 31, 2023. As a result of this new guidance, the Company recognized a one-time tax benefit related to prior year tax positions in the first three months of fiscal 2024. 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 recognition of a non-cash, one-time benefit related to the onshoring of the Company's non-U.S. intangible property in fiscal 2022. 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. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that included, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which was effective for the Company beginning June 1, 2023. Based on the Company's current analysis of the provisions, these tax law changes did not have a material impact on the Company's Consolidated Financial Statements for fiscal 2024. Deferred income tax assets and liabilities comprise the following as of:
| MAY 31,
(Dollars in millions) | 2024 | 2023
Deferred tax assets: |  |
Inventories | $ | 69 |  | $ | 79 |
Sales return reserves | 125 |  | 89 |
Deferred compensation | 347 |  | 321 |
Stock-based compensation | 290 |  | 261 |
Reserves and accrued liabilities | 113 |  | 144 |
Operating lease liabilities | 474 |  | 511 |
Intangibles | 236 |  | 255 |
Capitalized research and development expenditures | 878 |  | 548 |
Net operating loss carry-forwards | 21 |  | 15 |
Subpart F deferred tax | 409 |  | 374 |
Other | 214 |  | 183 |
Total deferred tax assets | 3,176 |  | 2,780 |
Valuation allowance | (29) |  | (22) |
Total deferred tax assets after valuation allowance | 3,147 |  | 2,758 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (131) |  | (186) |
Property, plant and equipment | (290) |  | (276) |
Right-of-use assets | (397) |  | (441) |
Other | (9) |  | (56) |
Total deferred tax liabilities | (827) |  | (959) |
NET DEFERRED TAX ASSET (1) | $ | 2,320 |  | $ | 1,799 |
(1)Of the total $2,320 million net deferred tax asset for the period ended May 31, 2024, $2,465 million was included within Deferred income taxes and other assets and $(145) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. 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. Deferred tax assets as of May 31, 2024 and 2023, were reduced by a valuation allowance. For the fiscal years ended May 31, 2024 and 2023, a valuation allowance was provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of:
| MAY 31,
(Dollars in millions) | 2024 | 2023 | 2022
Unrecognized tax benefits, beginning of the period | $ | 936 |  | $ | 848 |  | $ | 896 |
Gross increases related to prior period tax positions | 35 |  | 95 |  | 71 |
Gross decreases related to prior period tax positions | (13) |  | (17) |  | (145) |
Gross increases related to current period tax positions | 77 |  | 50 |  | 62 |
Settlements | (22) |  | (18) |  | (17) |
Lapse of statute of limitations | (24) |  | (7) |  | (10) |
Changes due to currency translation | 1 |  | (15) |  | (9) |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 990 |  | $ | 936 |  | $ | 848 |
As of May 31, 2024, total gross unrecognized tax benefits, excluding related interest and penalties, were $990 million, of which $699 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. As of May 31, 2024 and 2023, accrued interest and penalties related to uncertain tax positions were $332 million and $268 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. As of May 31, 2024 and 2023, long-term income taxes payable unrelated to unrecognized tax benefits were $266 million and $373 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 $35 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 $338 million, $263 million and $221 million for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. The benefit of the tax holiday on diluted earnings per common share, before taking into consideration other U.S. indirect tax provisions, was $0.22, $0.17 and $0.14 for the fiscal years ended May 31, 2024, 2023 and 2022, respectively.

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