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Income Taxes | 12 Months Ended
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Jun. 30, 2021
Income Tax Disclosure [Abstract] |
Income Taxes | 8. Income Taxes Earnings/(Loss) before Income Taxes and Provision for/(Benefit From) Income Taxes The following table summarizes earnings/(loss) before income taxes:
(in millions) | 2021 |  | 2020 |  | 2019
U.S. operations | $ | (47) |  |  | $ | (4,056) |  |  | $ | 1,478 |
Non-U.S. operations | 370 |  |  | 284 |  |  | 273 |
Earnings/(loss) before income taxes | $ | 323 |  |  | $ | (3,772) |  |  | $ | 1,751 |
The following table summarizes the components of provision for/(benefit from) income taxes:
(in millions) | 2021 |  | 2020 |  | 2019
Current: |  |  |  |  |
Federal | $ | (989) |  |  | $ | 659 |  |  | $ | 295 |
State and local | 92 |  |  | 154 |  |  | 89 |
Non-U.S. | 112 |  |  | 69 |  |  | 85 |
Total current | $ | (785) |  |  | $ | 882 |  |  | $ | 469 |
Deferred: |  |  |  |  |
Federal | $ | 539 |  |  | $ | (822) |  |  | $ | (28) |
State and local | (28) |  |  | (127) |  |  | (37) |
Non-U.S. | (15) |  |  | (12) |  |  | (18) |
Total deferred | 496 |  |  | (961) |  |  | (83) |
Provision for/(benefit from) income taxes | $ | (289) |  |  | $ | (79) |  |  | $ | 386 |
Tax Effects of Self-Insurance Pre-Tax Loss During fiscal 2021, our wholly-owned insurance subsidiary recorded a self-insurance pre-tax loss in its fiscal 2020 statutory financial statements primarily related to opioid litigation. This self-insurance pre-tax loss, which did not impact our pre-tax consolidated results, was deducted on our fiscal 2020 consolidated federal income tax return and contributed to a significant net operating loss for tax purposes. The net operating loss was carried back and applied to adjust our taxable income for fiscal 2015, 2016, 2017, and 2018 as permitted under the Coronavirus Aid, Relief and Economic Security ("CARES") Act enacted by the United States Congress in March 2020. Accordingly, our provision for income taxes during fiscal 2021 included a $424 million benefit from the net operating loss carryback primarily to reflect the difference between the federal statutory income tax rate during the fiscal years from 2015 to 2018 (35 percent for fiscal 2015, 2016, and 2017 and 28 percent for fiscal 2018) and the current federal statutory income tax rate of 21 percent. We have filed for a U.S. federal income tax refund of $974 million as a result of the net operating loss carryback under the CARES Act, which we expect to receive within 12 months, and accordingly have recorded a current asset on our consolidated balance sheet at June 30, 2021. We also increased our non-current deferred tax liability by approximately $700 million during fiscal 2021 related to this matter. We have recorded these amounts based on management's judgment and our current understanding of tax law; however, it is possible that the tax authorities could challenge these tax benefits or that the tax law could change. The actual amount of the tax benefit may differ materially from these estimates. Tax Effects of Opioid Litigation Charges In connection with the $1.17 billion and $5.63 billion pre-tax charges for the opioid litigation, during fiscal 2021 and 2020, we recorded a tax benefit of $228 million and $488 million, respectively. Our tax benefits are estimates, which reflect our current assessment of the estimated future deductibility of the amount that may be paid under the accrual taken in connection with the opioid litigation and are net of unrecognized tax benefits of $219 million and $469 million, respectively. We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the Tax Act; however, these estimates require significant judgment since the U.S. tax law governing deductibility was changed by the U.S. Tax Cuts and Jobs Act ("Tax Act"). Further, it is possible Congress or the tax authorities could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of the tax benefit may differ materially from these estimates. Effective Tax Rate The following table presents a reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate:
| 2021 (1) |  | 2020 (1) |  | 2019 (1)
Provision at Federal statutory rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
State and local income taxes, net of federal benefit | 3.2 |  |  | 2.5 |  |  | 0.9 |
Tax effect of foreign operations | 0.7 |  |  | — |  |  | (0.7) |
Nondeductible/nontaxable items (2) | 1.6 |  |  | 0.2 |  |  | 0.8 |
Cordis Disposition | 7.0 |  |  | — |  |  | — |
Withholding Taxes (2) | 9.0 |  |  | (0.3) |  |  | 0.7 |
Change in Valuation Allowances | (1.4) |  |  | 1.5 |  |  | 4.5 |
US Taxes on International Income (2)(3) | (6.7) |  |  | 0.2 |  |  | 0.7 |
Impact of Resolutions with IRS and other related matters (2) | (13.6) |  |  | (0.4) |  |  | (0.1) |
Legal Entity Reorganization | — |  |  | — |  |  | (3.6) |
Opioid litigation | 17.7 |  |  | (23.2) |  |  | — |
Loss Carryback Claims | (129.9) |  |  | — |  |  | — |
Other (2) | 1.7 |  |  | 0.6 |  |  | (2.1) |
Effective income tax rate | (89.7) | % |  | 2.1 | % |  | 22.1 | %
(1) The table represents the following: fiscal 2021 is pretax income with tax benefit, fiscal 2020 is pretax loss with tax benefit, and fiscal 2019 is pretax income with tax expense. (2) Certain prior year amounts have been reclassified to conform to current year presentation. (3) Includes the tax impact of Global Intangible Low-Taxed Income ("GILTI") tax, the Foreign-Derived Intangible Income deduction and other foreign income that is taxable under the U.S. tax code. The income tax benefit rate was 89.7% and 2.1% in fiscal 2021 and fiscal 2020 compared to an income tax expense rate of 22.1% in fiscal 2019. Fluctuations in the effective tax rates are primarily due to the impact of opioid litigation in fiscal 2021 and 2020, as well as the impact of the carryback claim filed in accordance with the CARES Act provision in fiscal year 2021. Our effective tax rate has benefits from negotiated lower than statutory tax rates in select foreign jurisdictions which individually are not material to our effective tax rate but in aggregate have a favorable tax impact of approximately $20 million during fiscal 2021. As of June 30, 2021, foreign earnings of approximately $825 million are considered indefinitely reinvested for working capital and other offshore investment needs. The computation of tax required if those earnings are repatriated is not practicable. For amounts not considered indefinitely reinvested, we have recorded an immaterial amount of income tax expense in our financial statements in fiscal 2021. Deferred Income Taxes Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The following table presents the components of the deferred income tax assets and liabilities at June 30:
(in millions) | 2021 |  | 2020
Deferred income tax assets: |  |  |
Receivable basis difference | $ | 40 |  |  | $ | 39 |
Accrued liabilities | 874 |  |  | 607 |
Share-based compensation | 38 |  |  | 38 |
Loss and tax credit carryforwards | 805 |  |  | 589 |
Deferred tax assets related to uncertain tax positions | 35 |  |  | 52 |
Other | 16 |  |  | 87 |
Total deferred income tax assets | 1,808 |  |  | 1,412 |
Valuation allowance for deferred income tax assets | (515) |  |  | (470) |
Net deferred income tax assets | $ | 1,293 |  |  | $ | 942 |
Deferred income tax liabilities: |  |  |
Inventory basis differences | $ | (1,119) |  |  | $ | (1,083) |
Property-related | (375) |  |  | (327) |
Goodwill and other intangibles | (733) |  |  | (751) |
Self-Insurance | (975) |  |  | — |
Other | (23) |  |  | — |
Total deferred income tax liabilities | $ | (3,225) |  |  | $ | (2,161) |
Net deferred income tax liability | $ | (1,932) |  |  | $ | (1,219) |
Deferred income tax assets and liabilities in the preceding table, after netting by taxing jurisdiction and for uncertain tax positions, are in the following captions in the consolidated balance sheets at June 30:
(in millions) | 2021 |  | 2020
Noncurrent deferred income tax asset (1) | 52 |  |  | 39 |
Noncurrent deferred income tax liability (2) | (1,981) |  |  | (1,258) |
Noncurrent deferred income tax liability transferred to held for sale | (3) |  |  | — |
Net deferred income tax liability | $ | (1,932) |  |  | $ | (1,219) |
(1)Included in other assets in the consolidated balance sheets. (2)Included in deferred income taxes and other liabilities in the consolidated balance sheets. At June 30, 2021 we had gross federal, state and international loss and credit carryforwards of $272 million, $3.9 billion and $2.3 billion, respectively, the tax effect of which is an aggregate deferred tax asset of $805 million. Substantially all of these carryforwards are available for at least three years. Approximately $477 million of the valuation allowance at June 30, 2021 applies to certain federal, state and international loss carryforwards that, in our opinion, are more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance would reduce income tax expense. Unrecognized Tax Benefits We had $932 million, $998 million and $456 million of unrecognized tax benefits at June 30, 2021, 2020 and 2019, respectively. The June 30, 2021, 2020 and 2019 balances include $849 million, $753 million and $303 million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits would not affect our effective tax rate. We include the full amount of unrecognized tax benefits in deferred income taxes and other liabilities in the consolidated balance sheets. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
(in millions) | 2021 |  | 2020 |  | 2019
Balance at beginning of fiscal year | $ | 998 |  |  | $ | 456 |  |  | $ | 423 |
Additions for tax positions of the current year | 121 |  |  | 500 |  |  | 24 |
Additions for tax positions of prior years | 223 |  |  | 78 |  |  | 39 |
Reductions for tax positions of prior years | (138) |  |  | (27) |  |  | (5) |
Settlements with tax authorities | (271) |  |  | (6) |  |  | (25) |
Expiration of the statute of limitations | (1) |  |  | (3) |  |  | — |
Balance at end of fiscal year | $ | 932 |  |  | $ | 998 |  |  | $ | 456 |
It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the U.S. Internal Revenue Service ("IRS") or other taxing authorities, possible settlement of audit issues, reassessment of existing unrecognized tax benefits or the expiration of statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is a net decrease of $0 million to $20 million, exclusive of penalties and interest. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. At June 30, 2021, 2020 and 2019, we had $49 million, $146 million and $122 million, respectively, accrued for the payment of interest and penalties. These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the consolidated balance sheets. As a result of our IRS audit settlements and carryback claim, an immaterial amount of interest was recorded in fiscal 2021. During fiscal 2020 and 2019, we recognized $16 million and $8 million of expense for interest and penalties in income tax expense, respectively. Other Tax Matters We file income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal years 2015 through the current fiscal year. We are a party to a tax matters agreement with CareFusion Corporation ("CareFusion"), which has been acquired by Becton, Dickinson and Company. Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to our fiscal 2010 spin-off of CareFusion. The indemnification receivable was $72 million and $176 million at June 30, 2021 and 2020, respectively, and is included in other assets in the consolidated balance sheets. As a result of the acquisition of the Patient Recovery Business, Medtronic plc is obligated to indemnify us for certain tax exposures and transaction taxes related to periods prior to the acquisition under the purchase agreement. The indemnification receivable was $12 million and $19 million at June 30, 2021 and 2020, respectively, and is included in other assets in the consolidated balance sheets.

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