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Income Taxes | 12 Months Ended
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May 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | NOTE 12: INCOME TAXES The components of the provision for income taxes for the years ended May 31 were as follows (in millions):
|  | 2020 |  |  | 2019 |  |  | 2018 |
Current provision (benefit) |  |  |  |  |  |  |  |  |  |  |  |
Domestic: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (230 | ) |  | $ | (107 | ) |  | $ | (540 | )
State and local |  |  | 67 |  |  |  | 64 |  |  |  | 43 |
Foreign |  |  | 198 |  |  |  | 243 |  |  |  | 461 |
|  |  | 35 |  |  |  | 200 |  |  |  | (36 | )
Deferred provision (benefit) |  |  |  |  |  |  |  |  |  |  |  |
Domestic: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 475 |  |  |  | (61 | ) |  |  | 271 |
State and local |  |  | 1 |  |  |  | (7 | ) |  |  | 125 |
Foreign |  |  | (128 | ) |  |  | (17 | ) |  |  | (579 | )
|  |  | 348 |  |  |  | (85 | ) |  |  | (183 | )
|  | $ | 383 |  |  | $ | 115 |  |  | $ | (219 | )
Pre-tax earnings of foreign operations for 2020, 2019 and 2018 were $634 million, $929 million and $958 million, respectively. These amounts represent only a portion of total results associated with international shipments and do not represent our international results of operations. A reconciliation of total income tax expense and the amount computed by applying the statutory federal income tax rate (21% in 2020, 21% in 2019 and 29.2% in 2018) to income before taxes for the years ended May 31 is as follows (in millions):
|  | 2020 |  |  | 2019 |  |  | 2018 |
Taxes computed at federal statutory rate |  | $ | 350 |  |  | $ | 138 |  |  | $ | 1,271 |
(Decreases) increases in income tax from: |  |  |  |  |  |  |  |  |  |  |  |
Valuation allowance |  |  | (129 | ) |  |  | (79 | ) |  |  | 31 |
Goodwill impairment charge |  |  | 75 |  |  |  | — |  |  |  | 109 |
Benefit from U.S. tax loss carryback to prior years |  |  | (71 | ) |  |  | — |  |  |  | — |
Non-deductible expenses |  |  | 70 |  |  |  | 79 |  |  |  | 81 |
State and local income taxes, net of federal benefit |  |  | 53 |  |  |  | 44 |  |  |  | 119 |
U.S. deferred tax adjustments related to foreign operations |  |  | 51 |  |  |  | — |  |  |  | — |
Foreign operations |  |  | 38 |  |  |  | (1 | ) |  |  | 25 |
Uncertain tax positions |  |  | (14 | ) |  |  | 8 |  |  |  | 86 |
Foreign tax rate enactments |  |  | (10 | ) |  |  | 50 |  |  |  | 6 |
Benefits from share-based payments |  |  | (5 | ) |  |  | (18 | ) |  |  | (60 | )
TCJA(1) |  |  | — |  |  |  | (71 | ) |  |  | (1,354 | )
Foreign tax credits from distributions |  |  | — |  |  |  | (8 | ) |  |  | (225 | )
Corporate structuring transactions(2) |  |  | — |  |  |  | — |  |  |  | (255 | )
Other, net |  |  | (25 | ) |  |  | (27 | ) |  |  | (53 | )
Provision for income taxes (benefit) |  | $ | 383 |  |  | $ | 115 |  |  | $ | (219 | )
Effective Tax Rate |  |  | 23.0 | % |  |  | 17.6 | % |  |  | (5.0 | )%
(1) | Primary components in 2018 were a $1.15 billion benefit from the remeasurement of our net U.S. deferred tax liability and a $204 million one-time benefit from a contribution to our U.S. Pension Plans in 2018.
(2) | The 2018 net benefit consists of foreign deferred tax benefits of $434 million, which were partially offset by U.S. deferred tax expenses of $179 million.
The 2020 tax rate includes a benefit of $133 million from the reduction of a valuation allowance on certain foreign tax loss carryforwards due to operational changes which impacted the determination of the realizability of the deferred tax asset in that jurisdiction. The 2020 tax rate also includes a deferred income tax expense of $51 million for a change in deferred tax balances related to future foreign tax credits from our international structure as a result of changes in legal entity forecasts during the fourth quarter. The 2020 tax rate was negatively impacted by decreased earnings in certain non-U.S. jurisdictions. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to address the economic impact of the COVID-19 pandemic in the United States. Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2019 through 2021. As a result, an income tax benefit of $71 million was recorded in 2020 in connection with a tax loss generated during 2020 that the CARES Act will now allow to be carried back to 2015, a tax year when the U.S. federal income tax rate was 35%. The 2019 tax rate includes a benefit of $90 million from the reduction of a valuation allowance on tax loss carryforwards due to certain business operational changes from the integration of FedEx Express and TNT Express in a local jurisdiction, which impacted our determination of the realizability of the deferred tax asset in that jurisdiction and an expense of $50 million from the impact on our deferred taxes attributable to a lower tax rate in the Netherlands. The 2019 tax rate was also favorably impacted by the TCJA, which resulted in benefits of approximately $75 million from accelerated deductions claimed on our 2018 U.S. income tax return filed in 2019 and approximately $40 million from the lower statutory tax rate on fiscal 2019 earnings. The 2018 tax rate was favorably impacted by the TCJA, which resulted in a provisional benefit of $1.15 billion from the remeasurement of our net U.S. deferred tax liability. In addition, we recognized a one-time benefit of $204 million from a $1.5 billion contribution to our U.S. Pension Plans in 2018. Our 2018 tax rate also included a net benefit of $255 million from corporate structuring transactions as part of the ongoing integration of FedEx Express and TNT Express and a benefit of $225 million from foreign tax credits generated by distributions to the U.S. from our foreign operations. The 2018 tax rate was negatively impacted by an increase in uncertain tax positions for income tax audits. The TCJA, enacted on December 22, 2017, significantly changed the U.S. corporate income tax system by reducing our U.S. statutory federal income tax rate from 35% to 21% (due to our May 31 fiscal year-end, the lower rate was phased in, resulting in a U.S. statutory federal rate of 29.2% for 2018 and a statutory federal rate of 21% for 2019 and subsequent years). During 2019, the U.S. Treasury Department issued final regulations covering the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the TCJA. Certain guidance included in these final regulations is inconsistent with our interpretation that led to the recognition of a $233 million cumulative benefit through 2019. Notwithstanding this inconsistency, we remain confident in our interpretation of the TCJA and intend to defend this position through litigation, if necessary. However, if we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit previously recorded. In December 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance to registrants in accounting for income taxes under the TCJA. In accordance with SAB 118, we made reasonable estimates and recorded provisional amounts for the TCJA during 2018. Under the transitional provisions of SAB 118, we had a one-year measurement period to complete the accounting for the initial tax effects of the TCJA. During 2019, we completed our accounting for the tax effects of the TCJA and recorded a $4 million tax expense to adjust the $1.15 billion provisional benefit recorded in 2018. As provided for in the TCJA, our historical earnings were subject to the one-time transition tax and can now be repatriated to the U.S. with a de minimis tax cost. We continue to assert that both our historical and current earnings in our foreign subsidiaries are permanently reinvested and therefore no deferred taxes or withholding taxes have been provided, including deferred taxes on any additional outside basis difference (e.g., stock basis differences attributable to acquisition or other permanent differences). The significant components of deferred tax assets and liabilities as of May 31 were as follows (in millions):
|  | 2020 |  |  | 2019 |
|  | Deferred Tax Assets |  |  | Deferred Tax Liabilities |  |  | Deferred Tax Assets |  |  | Deferred Tax Liabilities |
Property, equipment, leases and intangibles(1) |  | $ | 3,819 |  |  | $ | 8,745 |  |  | $ | 592 |  |  | $ | 4,633 |
Employee benefits |  |  | 1,448 |  |  |  | — |  |  |  | 1,256 |  |  |  | — |
Self-insurance accruals |  |  | 647 |  |  |  | — |  |  |  | 585 |  |  |  | — |
Other |  |  | 579 |  |  |  | 375 |  |  |  | 510 |  |  |  | 340 |
Net operating loss/credit carryforwards |  |  | 1,262 |  |  |  | — |  |  |  | 1,139 |  |  |  | — |
Valuation allowances |  |  | (450 | ) |  |  | — |  |  |  | (590 | ) |  |  | — |
|  | $ | 7,305 |  |  | $ | 9,120 |  |  | $ | 3,492 |  |  | $ | 4,973 |
(1) | Includes impact from adoption of the new lease accounting standard in 2020. See Note 7 for additional information.
The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions):
|  | 2020 |  |  | 2019 |
Noncurrent deferred tax assets(1) |  | $ | 1,347 |  |  | $ | 1,340 |
Noncurrent deferred tax liabilities |  |  | (3,162 | ) |  |  | (2,821 | )
|  | $ | (1,815 | ) |  | $ | (1,481 | )
(1) | Noncurrent deferred tax assets are included in the line item “Other Assets” in our accompanying consolidated balance sheets.
We have approximately $3.6 billion of net operating loss carryovers in various foreign jurisdictions and $1.1 billion of state operating loss carryovers. The valuation allowances primarily represent amounts reserved for operating loss carryforwards, which expire over varying periods starting in 2021. Therefore, we establish valuation allowances if it is more likely than not that deferred income tax assets will not be realized. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets in our consolidated balance sheets. See Note 1 above for more information on our policy for assessing the recoverability of deferred tax assets and valuation allowances. We are subject to taxation in the U.S. and various U.S. state, local and foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently auditing our 2016 and 2017 tax returns. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. During 2020, the IRS closed the audit of our 2014 and 2015 income tax returns. The settlement of this audit did not have a material impact to our consolidated financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|  | 2020 |  |  | 2019 |  |  | 2018 |
Balance at beginning of year |  | $ | 164 |  |  | $ | 161 |  |  | $ | 67 |
Increases for tax positions taken in the current year |  |  | 3 |  |  |  | — |  |  |  | 3 |
Increases for tax positions taken in prior years |  |  | 4 |  |  |  | 31 |  |  |  | 103 |
Increase for business acquisition |  |  | — |  |  |  | — |  |  |  | — |
Decreases for tax positions taken in prior years |  |  | (10 | ) |  |  | (4 | ) |  |  | (10 | )
Settlements |  |  | (31 | ) |  |  | (21 | ) |  |  | (2 | )
Decreases from lapse of statute of limitations |  |  | — |  |  |  | — |  |  |  | — |
Changes due to currency translation |  |  | (1 | ) |  |  | (3 | ) |  |  | — |
Balance at end of year |  | $ | 129 |  |  | $ | 164 |  |  | $ | 161 |
Our liabilities recorded for uncertain tax positions include $127 million at May 31, 2020 and $141 million at May 31, 2019 associated with positions that, if favorably resolved, would provide a benefit to our income tax expense. We classify interest related to income tax liabilities as interest expense and, if applicable, penalties are recognized as a component of income tax expense. The balance of accrued interest and penalties was $41 million on May 31, 2020 and $38 million on May 31, 2019. Total interest and penalties included in our consolidated statements of income are immaterial. It is difficult to predict the ultimate outcome or the timing of resolution for tax positions. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign tax jurisdictions, or from the resolution of various proceedings between U.S. and foreign tax authorities. Our liability for uncertain tax positions includes no matters that are individually or collectively material to us. It is reasonably possible that the amount of the benefit with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months, but an estimate of the range of the reasonably possible changes cannot be made. However, we do not expect that the resolution of any of our uncertain tax positions will have a material effect on us.

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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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