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Income Taxes | 12 Months Ended
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May 31, 2021
Income Tax Disclosure [Abstract] |
Income Taxes | NOTE 13: INCOME TAXES The components of the provision for income taxes for the years ended May 31 were as follows (in millions):
|  | 2021 |  |  | 2020 |  |  | 2019 |
Current provision (benefit) |  |  |  |  |  |  |  |  |  |  |  |
Domestic: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 199 |  |  | $ | (230 | ) |  | $ | (107 | )
State and local |  |  | 158 |  |  |  | 67 |  |  |  | 64 |
Foreign |  |  | 284 |  |  |  | 198 |  |  |  | 243 |
|  |  | 641 |  |  |  | 35 |  |  |  | 200 |
Deferred provision (benefit) |  |  |  |  |  |  |  |  |  |  |  |
Domestic: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 667 |  |  |  | 475 |  |  |  | (61 | )
State and local |  |  | 70 |  |  |  | 1 |  |  |  | (7 | )
Foreign |  |  | 65 |  |  |  | (128 | ) |  |  | (17 | )
|  |  | 802 |  |  |  | 348 |  |  |  | (85 | )
|  | $ | 1,443 |  |  | $ | 383 |  |  | $ | 115 |
Pre-tax earnings of foreign operations for 2021, 2020 and 2019 were $1.8 billion, $634 million and $929 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 to income before income taxes for the years ended May 31 is as follows (dollars in millions):
|  | 2021 |  |  | 2020 |  |  | 2019 |
Taxes computed at federal statutory rate |  | $ | 1,401 |  |  | $ | 350 |  |  | $ | 138 |
(Decreases) increases in income tax from: |  |  |  |  |  |  |  |  |  |  |  |
Benefit from U.S. tax loss carryback to prior years |  |  | (279 | ) |  |  | (71 | ) |  |  | — |
State and local income taxes, net of federal benefit |  |  | 179 |  |  |  | 53 |  |  |  | 44 |
Foreign operations |  |  | 138 |  |  |  | 38 |  |  |  | (1 | )
Benefits from share-based payments |  |  | (69 | ) |  |  | (5 | ) |  |  | (18 | )
Uncertain tax positions |  |  | 65 |  |  |  | (14 | ) |  |  | 8 |
Foreign tax rate enactments |  |  | (61 | ) |  |  | (10 | ) |  |  | 50 |
Non-deductible expenses |  |  | 53 |  |  |  | 70 |  |  |  | 79 |
Valuation allowance |  |  | 14 |  |  |  | (129 | ) |  |  | (79 | )
Goodwill impairment charges |  |  | — |  |  |  | 75 |  |  |  | — |
U.S. deferred tax adjustments related to foreign operations |  |  | — |  |  |  | 51 |  |  |  | — |
Tax Cuts and Jobs Act (“TCJA”) |  |  | — |  |  |  | — |  |  |  | (71 | )
Foreign tax credits from distributions |  |  | — |  |  |  | — |  |  |  | (8 | )
Other, net |  |  | 2 |  |  |  | (25 | ) |  |  | (27 | )
Provision for income taxes |  | $ | 1,443 |  |  | $ | 383 |  |  | $ | 115 |
Effective Tax Rate |  |  | 21.6 | % |  |  | 23.0 | % |  |  | 17.6 | %
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. The 2021 tax provision includes a benefit of $279 million from an increase in our 2020 tax loss that the CARES Act allows to be carried back to 2015, when the U.S. federal income tax rate was 35%. The increase in our estimated 2020 tax loss is attributable to our Application for Change in Accounting Method discussed below, voluntary contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) and other accelerated deductions claimed on the 2020 tax return filed in 2021. The 2021 tax provision also includes a benefit of $66 million from a tax rate increase in the Netherlands applied to our deferred tax asset balances and was unfavorably impacted by an increase in uncertain tax positions for matters in multiple jurisdictions. We filed an application with the Internal Revenue Service (“IRS”) in 2020 requesting approval to change our accounting method for depreciation to allow retroactive application of tax regulations issued during 2020 on certain assets placed in service during 2018 and 2019. During 2021, the IRS issued guidance granting automatic approval to change the method of accounting for these assets resulting in an income tax benefit of $130 million. The 2020 tax provision includes a benefit of $133 million from the reduction of a valuation allowance on certain foreign tax loss carryforwards and a benefit of $71 million in connection with our estimated 2020 tax loss that the CARES Act allows to be carried back to 2015, a tax year when the U.S. federal income tax rate was 35%. The 2020 tax provision 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 effective tax rate was negatively impacted by decreased earnings in certain non-U.S. jurisdictions. The 2019 tax provision 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 a tax rate decrease in the Netherlands applied to our deferred tax balances. The 2019 tax provision was also favorably impacted by the TCJA, which resulted in benefits of approximately $75 million from accelerated deductions claimed at a federal rate of 29.2% on our 2018 U.S. income tax return filed in 2019. Due to our May 31 fiscal year-end, our U.S. statutory rate reduction from 35% to 21% under the TCJA 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. 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):
|  | 2021 |  |  | 2020 |
|  | Deferred Tax Assets |  |  | Deferred Tax Liabilities |  |  | Deferred Tax Assets |  |  | Deferred Tax Liabilities |
Property, equipment, leases and intangibles |  | $ | 4,248 |  |  | $ | 9,731 |  |  | $ | 3,819 |  |  | $ | 8,745 |
Employee benefits |  |  | 1,178 |  |  |  | — |  |  |  | 1,448 |  |  |  | — |
Self-insurance accruals |  |  | 799 |  |  |  | — |  |  |  | 647 |  |  |  | — |
Other |  |  | 497 |  |  |  | 52 |  |  |  | 579 |  |  |  | 375 |
Net operating loss/credit carryforwards |  |  | 934 |  |  |  | — |  |  |  | 1,262 |  |  |  | — |
Valuation allowances |  |  | (382 | ) |  |  | — |  |  |  | (450 | ) |  |  | — |
|  | $ | 7,274 |  |  | $ | 9,783 |  |  | $ | 7,305 |  |  | $ | 9,120 |
The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions):
|  | 2021 |  |  | 2020 |
Noncurrent deferred tax assets(1) |  | $ | 1,418 |  |  | $ | 1,347 |
Noncurrent deferred tax liabilities |  |  | (3,927 | ) |  |  | (3,162 | )
|  | $ | (2,509 | ) |  | $ | (1,815 | )
(1) | Noncurrent deferred tax assets are included in the line item “Other Assets” in our accompanying consolidated balance sheets.
We have approximately $3.0 billion of net operating loss carryovers in various foreign jurisdictions, $1.2 billion of state operating loss carryovers and $100 million of U.S. federal operating loss carryovers. The valuation allowances primarily represent amounts reserved for operating loss carryforwards, which expire over varying periods starting in 2022. 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. The reduction in the valuation allowance balance includes a decrease of $70 million from the integration of certain foreign FedEx Express and TNT Express legal entities which did not impact current year tax expense due to an offsetting decrease in related deferred tax assets. See Note 1 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. We are currently under examination by the IRS for the 2016 through 201 9 tax years. 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. However, we believe we have recorded adequate amounts of tax, including interest and penalties, for any adjustments expected to occur. During 2021, we filed suit in U.S. District Court for the Western District of Tennessee challenging the validity of a tax regulation related to the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the TCJA. Our lawsuit seeks to have the court declare this regulation invalid and order the refund of overpayments of U.S. federal income taxes for 2018 and 2019 attributable to the denial of foreign tax credits under the regulation. We have recorded a cumulative benefit of $233 million through 2019 attributable to our interpretation of the TCJA and the Internal Revenue Code. We continue to pursue this lawsuit; however, if we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit previously recorded. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|  | 2021 |  |  | 2020 |  |  | 2019 |
Balance at beginning of year |  | $ | 129 |  |  | $ | 164 |  |  | $ | 161 |
Increases for tax positions taken in the current year |  |  | 3 |  |  |  | 3 |  |  |  | — |
Increases for tax positions taken in prior years |  |  | 69 |  |  |  | 4 |  |  |  | 31 |
Decreases for tax positions taken in prior years |  |  | (6 | ) |  |  | (10 | ) |  |  | (4 | )
Settlements |  |  | (6 | ) |  |  | (31 | ) |  |  | (21 | )
Changes due to currency translation |  |  | 3 |  |  |  | (1 | ) |  |  | (3 | )
Balance at end of year |  | $ | 192 |  |  | $ | 129 |  |  | $ | 164 |
Our liabilities recorded for uncertain tax positions include $190 million at May 31, 2021 and $127 million at May 31, 2020 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 $61 million on May 31, 2021 and $41 million on May 31, 2020. Our consolidated statements of income for 2021 include $20 million of interest expense associated with our uncertain tax positions. Interest for 2020 and 2019 as well as 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. 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. However, estimates of the amounts or ranges for individual matters where a material change is reasonably possible cannot be made. We believe we have recorded adequate amounts of tax reserves, including interest and penalties, for any adjustments that may occur.

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