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INCOME TAXES | 12 Months Ended
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May 31, 2025
Income Tax Disclosure [Abstract] |
INCOME TAXES |
NOTE 7 — INCOME TAXES
Income before income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2025 | 2024 | 2023
Income before income taxes: |  |  |
United States | $ | 3,220 |  | $ | 5,588 |  | $ | 4,663 |
Foreign | 665 |  | 1,112 |  | 1,538 |
TOTAL INCOME BEFORE INCOME TAXES | $ | 3,885 |  | $ | 6,700 |  | $ | 6,201 |
The provision for income taxes is as follows:
| YEAR ENDED MAY 31,
(Dollars in millions) | 2025 | 2024 | 2023
Current: |  |  |
United States |  |  |
Federal | $ | 358 |  | $ | 782 |  | $ | 430 |
State | 121 |  | 201 |  | 184 |
Foreign | 475 |  | 514 |  | 634 |
Total Current | 954 |  | 1,497 |  | 1,248 |
Deferred: |  |  |
United States |  |  |
Federal | (135) |  | (422) |  | (162) |
State | (12) |  | (61) |  | (25) |
Foreign | (141) |  | (14) |  | 70 |
Total Deferred | (288) |  | (497) |  | (117) |
TOTAL INCOME TAX EXPENSE | $ | 666 |  | $ | 1,000 |  | $ | 1,131 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| YEAR ENDED MAY 31,
| 2025 | 2024 | 2023
Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | %
State taxes, net of federal benefit | 2.0 | % | 1.4 | % | 1.5 | %
Foreign earnings | 1.1 | % | -2.5 | % | 1.7 | %
U.S. tax regulations - foreign currency losses | -3.4 | % | 0.0 | % | 0.0 | %
Foreign-derived intangible income benefit | -5.3 | % | -4.8 | % | -6.1 | %
Stock-based compensation | 1.5 | % | -0.5 | % | -1.1 | %
Income tax audits and contingency reserves | 2.7 | % | 1.8 | % | 1.0 | %
U.S. research and development tax credit | -2.1 | % | -2.1 | % | -1.2 | %
Other, net | -0.4 | % | 0.6 | % | 1.4 | %
EFFECTIVE INCOME TAX RATE | 17.1 | % | 14.9 | % | 18.2 | %
The increase in the Company's effective tax rate for the fiscal year ended May 31, 2025 compared to the fiscal year ended May 31, 2024 was primarily due to changes in the Company's earnings mix, decreased benefits from stock-based compensation and one-time benefits recognized in fiscal 2024 including the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, non-cash deferred tax benefit recognized in the third quarter of fiscal 2025 provided by U.S. tax regulations. On December 10, 2024, the U.S. Department of Treasury published final regulations related to Internal Revenue Code (IRC) Section 987 foreign currency gains and losses derived from translation of the operations, assets and liabilities of non-US qualified business units. While these regulations are effective for the Company beginning June 1, 2025, they require computation of a pre-transition foreign currency gain or loss to be included in the determination of future taxable income or loss. Based on the Company’s analysis of the regulations and recognition of temporary differences impacting U.S. taxation of foreign earnings under Subpart F of the Internal Revenue Code, the Company recognized a non-cash deferred income tax benefit of $133 million in the third quarter of fiscal 2025 related to pre-transition foreign currency losses. The decrease in the Company's effective tax rate for the fiscal year ended May 31, 2024 compared to the fiscal year ended May 31, 2023 was primarily due to changes in the Company's earning mix and one-time benefits including the impact of temporary relief provided by the 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 fiscal 2023 tax positions in the first three months of fiscal 2024. The Organization for Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Inclusive Framework") have put forth Pillar Two proposals that ensure a minimal level of taxation. Several countries in which the Company operates, including several European Union member states, have adopted domestic legislation to implement the Inclusive Framework's global corporate minimum tax rate of fifteen percent. This legislation became effective for the Company beginning June 1, 2024. Based on the Company's analysis of Pillar Two provisions, these tax law changes did not have a material impact on the Company's financial statements for fiscal 2025. Deferred income tax assets and liabilities comprise the following as of:
| MAY 31,
(Dollars in millions) | 2025 | 2024
Deferred tax assets: |  |
Inventories | $ | 98 |  | $ | 69 |
Sales return reserves | 205 |  | 125 |
Deferred compensation | 387 |  | 347 |
Stock-based compensation | 285 |  | 290 |
Reserves and accrued liabilities | 143 |  | 113 |
Operating lease liabilities | 458 |  | 474 |
Intangibles | 217 |  | 236 |
Capitalized research and development expenditures | 923 |  | 878 |
Net operating loss carry-forwards | 75 |  | 21 |
Subpart F deferred tax | 315 |  | 409 |
Other | 212 |  | 214 |
Total deferred tax assets | 3,318 |  | 3,176 |
Valuation allowance | (51) |  | (29) |
Total deferred tax assets after valuation allowance | 3,267 |  | 3,147 |
Deferred tax liabilities: |  |
Foreign withholding tax on undistributed earnings of foreign subsidiaries | (119) |  | (131) |
Property, plant and equipment | (225) |  | (290) |
Right-of-use assets | (377) |  | (397) |
Other | (4) |  | (9) |
Total deferred tax liabilities | (725) |  | (827) |
NET DEFERRED TAX ASSET (1) | $ | 2,542 |  | $ | 2,320 |
(1)Of the total $2,542 million net deferred tax asset for the period ended May 31, 2025, $2,668 million was included within Deferred income taxes and other assets and $(126) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. 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. Deferred tax assets as of May 31, 2025 and 2024, were reduced by a valuation allowance provided for U.S. capital loss carryforwards and on tax benefits generated by certain entities with operating losses. The Company has available pre-tax effected domestic and foreign loss carry-forwards of $261 million as of May 31, 2025. If not utilized, $135 million of losses will expire in the periods between fiscal 2028 and 2044. Approximately $126 million of losses do not expire. On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 which includes, among other provisions, changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions are effective for the Company beginning fiscal 2026. The Company is evaluating the future impact of these tax law changes on its financial statements. The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of:
| MAY 31,
(Dollars in millions) | 2025 | 2024 | 2023
Unrecognized tax benefits, beginning of the period | $ | 990 |  | $ | 936 |  | $ | 848 |
Gross increases related to prior period tax positions | 11 |  | 35 |  | 95 |
Gross decreases related to prior period tax positions | (10) |  | (13) |  | (17) |
Gross increases related to current period tax positions | 81 |  | 77 |  | 50 |
Settlements | (5) |  | (22) |  | (18) |
Lapse of statute of limitations | (45) |  | (24) |  | (7) |
Changes due to currency translation | 4 |  | 1 |  | (15) |
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 1,026 |  | $ | 990 |  | $ | 936 |
As of May 31, 2025, total gross unrecognized tax benefits, excluding related interest and penalties, were $1,026 million, of which $738 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits were long-term in nature and were 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, 2025 and 2024, accrued interest and penalties related to uncertain tax positions were $376 million and $332 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, long-term income taxes payable unrelated to unrecognized tax benefits were $266 million and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. As of May 31, 2025 these amounts were included within Income taxes payable 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. In certain major foreign jurisdictions, tax years after 2011 remain subject to examination. 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 $249 million within the next 12 months primarily as a result of the expected resolution with the IRS of certain U.S. federal income tax matters for fiscal years 2017 through 2019 related to transfer pricing adjustments, research and development credits and other items. 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 $271 million, $338 million and $263 million for the fiscal years ended May 31, 2025, 2024 and 2023, respectively. The benefit of the tax holiday on diluted earnings per common share, before taking into consideration other U.S. indirect tax provisions, was $0.18, $0.22 and $0.17 for the fiscal years ended May 31, 2025, 2024 and 2023, respectively.

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