Income Taxes

Provision for Income Taxes

Income (loss) before income tax expense is summarized below (in thousands):



	Fiscal Year Ended August 31,
	2019			2018			2017
Domestic⁽¹⁾	$	(415,707	)	$	(426,897	)	$	(373,690	)
Foreign⁽¹⁾	866,411			800,298			629,923
	$	450,704		$	373,401		$	256,233


⁽¹⁾	Includes the elimination of intercompany foreign dividends paid to the U.S.

Income tax expense (benefit) is summarized below (in thousands):



	Fiscal Year Ended August 31,
	2019			2018			2017
Current:
Domestic - federal	$	(23,675	)	$	69,080		$	2,436
Domestic - state	1,383			134			12
Foreign	175,993			178,790			188,872
Total current	153,701			248,004			191,320
Deferred:
Domestic - federal	(8,000		)	(24,342		)	253
Domestic - state	(2,202		)	93			30
Foreign	17,731			62,105			(62,537		)
Total deferred	7,529			37,856			(62,254		)
Total income tax expense	$	161,230		$	285,860		$	129,066

Reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is summarized below:



	Fiscal Year Ended August 31,
	2019		2018		2017
U.S. federal statutory income tax rate	21.0	%	25.7	%	35.0	%
State income taxes, net of federal tax benefit	(1.7	)	(1.5	)	(3.3	)
Impact of foreign tax rates⁽¹⁾⁽²⁾	(9.9	)	(19.3	)	(42.7	)
Permanent impact of non-deductible cost	1.8		5.9		2.9
Income tax credits⁽¹⁾	(3.1	)	(2.8	)	(6.3	)
Changes in tax rates on deferred tax assets and liabilities⁽³⁾	0.2		4.0		0.3
One-time transition tax related to the Tax Act⁽⁴⁾	(0.5	)	62.2		—
Indefinite reinvestment assertion impact⁽⁴⁾	0.9		5.8		—
Valuation allowance⁽⁵⁾	1.3		(16.4	)	14.8
Non-deductible equity compensation	1.4		5.5		4.5
Impact of intercompany charges and dividends⁽⁶⁾	10.4		7.3		38.3
Reclassification of stranded tax effects in AOCI	—		(4.0	)	—
Global Intangible Low-Taxed Income⁽⁷⁾	10.4		—		—
Other, net	3.6		4.2		6.9
Effective income tax rate	35.8	%	76.6	%	50.4	%

⁽¹⁾

The Company has been granted tax incentives for various subsidiaries in Brazil, China, Malaysia, Poland, Singapore and Vietnam, which expire at various dates through fiscal year 2031 and are subject to certain conditions with which the Company expects to comply. These tax incentives resulted in a tax benefit of approximately $67.3 million ($0.43 per basic share), $52.1 million ($0.30 per basic share) and $38.6 million ($0.22 per basic share) during the fiscal years ended August 31, 2019, 2018 and 2017, respectively.


⁽²⁾	For the fiscal years ended August 31, 2019 and 2018, the decrease in the impact of foreign tax rates was primarily due to a decrease in the U.S. federal statutory income tax rate due to the Tax Act.


⁽³⁾	For the fiscal year ended August 31, 2018, the increase in the changes in tax rates on deferred tax assets and liabilities was primarily due to the Tax Act, excluding the impact of the enacted rate change on the U.S. valuation allowance.


⁽⁴⁾	The indefinite reinvestment assertion impact for the fiscal year ended August 31, 2018 is related to the Tax Act as further discussed below.

⁽⁵⁾

The valuation allowance change for the fiscal years ended August 31, 2019 and 2018 was primarily due to utilization of domestic federal net operating losses and tax credits against the one-time transition tax and the change in enacted tax rate applied to U.S. deferred tax assets and liabilities for the fiscal year ended August 31, 2018. The increase for the fiscal year ended August 31, 2019 was partially offset by an income tax benefit of $17.5 million for the reversal of a U.S. valuation allowance due to an intangible asset reclassification from indefinite-life to finite-life.


⁽⁶⁾	For the fiscal year ended August 31, 2018, the decrease in the impact of intercompany charges and dividends was due to a change in the U.S. taxation of foreign dividends as a result of the Tax Act.


⁽⁷⁾	GILTI applied beginning in the fiscal year ended August 31, 2019 and primarily related to the utilization of current year U.S. federal operating losses.

Tax Act

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act reduced the corporate tax rate, limited or eliminated certain tax deductions, introduced Global Intangible Low-Taxed Income (“GILTI”) as a newly defined category of foreign subsidiary income which is taxable to U.S. shareholders each year, and changed the taxation of foreign earnings of U.S. multinational companies. The enacted changes included a mandatory income inclusion of the historically untaxed foreign earnings of a U.S. company’s foreign subsidiaries and effectively taxed such income at reduced tax rates (“transition tax”). As a result of the one-time transition tax, the Company has a substantial amount of previously taxed earnings that can be distributed to the U.S. without additional U.S. taxation. Additionally, the Tax Act provides for a 100% dividends received deduction for dividends received by U.S. corporations from 10-percent or more owned foreign corporations. During the fiscal year ended August 31, 2018, the Company made reasonable estimates related to certain impacts of the Tax Act and, in accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act (“SAB 118”), recorded a net provisional income tax expense (benefit). During the fiscal year ended August 31, 2019, the Company completed its accounting for the effects of the Tax Act under SAB 118 based on the analysis, interpretations and guidance available at that time. During the first quarter of fiscal year 2019, the Company elected to record the GILTI effects as a period cost.

The following table summarizes the tax expense (benefit) related to the Tax Act recognized during the SAB 118 measurement period (in millions):



	One-time transition tax, inclusive of unrecognized tax benefits ⁽¹⁾			Re-measurement of the Company's U.S. deferred tax attributes			Change in indefinite reinvestment assertion ⁽²⁾		Other			Income tax expense (benefit)
Provisional income tax expense (benefit) - recognized in fiscal year 2018	$	65.9		$	(10.5	)	$	85.0	$	1.9		$	142.3
Income tax (benefit) expense adjustment - recognized in fiscal year 2019	$	(19.7	)	$	1.6		$	—	$	(0.3	)	$	(18.4	)
Income tax expense (benefit) related to the Tax Act	$	46.2		$	(8.9	)	$	85.0	$	1.6		$	123.9

⁽¹⁾

The calculation of the one-time transition tax is based upon post-1986 earnings and profits, applicable foreign tax credits and relevant limitations, utilization of U.S. federal net operating losses and tax credits and the amount of foreign earnings held in cash and non-cash assets. The adjustments during the fiscal year ended August 31, 2019 were primarily related to further analysis of the Company’s utilization of foreign tax credits and applicable limitations.


⁽²⁾	The liability recorded for a change in the indefinite reinvestment assertion on certain earnings from the Company's foreign subsidiaries is primarily associated with foreign withholding taxes that would be incurred upon such future remittances of cash.

Deferred Tax Assets and Liabilities

Significant components of the deferred tax assets and liabilities are summarized below (in thousands):



	Fiscal Year Ended August 31,
	2019			2018
Deferred tax assets:
Net operating loss carry forward	$	183,297		$	119,259
Receivables	6,165			7,111
Inventories	9,590			7,634
Compensated absences	10,401			8,266
Accrued expenses	81,731			81,912
Property, plant and equipment, principally due to differences in depreciation and amortization	66,268			97,420
Domestic federal and state tax credits	42,464			70,153
Foreign jurisdiction tax credits	15,345			25,887
Equity compensation – Domestic	7,617			7,566
Equity compensation – Foreign	2,179			2,401
Domestic federal interest carry forward	5,853			—
Cash flow hedges	9,878			—
Unrecognized capital loss carry forward	7,799			—
Revenue recognition	19,195			—
Other	21,907			18,176
Total deferred tax assets before valuation allowances	489,689			445,785
Less valuation allowances	(287,604		)	(223,487		)
Net deferred tax assets	$	202,085		$	222,298
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries	75,387			74,654
Intangible assets	39,242			39,122
Other	4,447			4,655
Total deferred tax liabilities	$	119,076		$	118,431
Net deferred tax assets	$	83,009		$	103,867

Based on the Company’s historical operating income, projection of future taxable income, scheduled reversal of taxable temporary differences, and tax planning strategies, management believes that it is more likely than not that the Company will realize the benefit of its deferred tax assets, net of valuation allowances recorded. The net increase in the total valuation allowance for the fiscal year ended August 31, 2019 is primarily related to the increase of a net operating loss carry forward due to a release of a non-U.S. unrecognized tax benefit and the increase of deferred tax assets in sites with existing valuation allowances. The decrease in domestic federal and state tax credits is primarily related to the utilization of tax credits against the one-time transition tax.

As of August 31, 2019, the Company intends to indefinitely reinvest the remaining earnings from its foreign subsidiaries for which a deferred tax liability has not already been recorded. The accumulated earnings are the most significant component of the basis difference which is indefinitely reinvested. As of August 31, 2019, the indefinitely reinvested earnings in foreign subsidiaries upon which taxes had not been provided were approximately $1.9 billion. The estimated amount of the unrecognized deferred tax liability on these reinvested earnings was approximately $0.2 billion.

Tax Carryforwards

The amount and expiration dates of income tax net operating loss carryforwards and tax credit carryforwards, which are available to reduce future taxes, if any, as of August 31, 2019 are as follows:



(dollars in thousands)	Last Fiscal Year of Expiration	Amount
Income tax net operating loss carryforwards:⁽¹⁾
Domestic - state	2039	$	57,299
Foreign	2039 or indefinite	$	565,609
Tax credit carryforwards:⁽¹⁾
Domestic - federal	2029	$	39,784
Domestic - state	2027	$	3,313
Foreign⁽²⁾	2027 or indefinite	$	15,345


⁽¹⁾	Net of unrecognized tax benefits.


⁽²⁾	Calculated based on the deferral method and includes foreign investment tax credits.

Unrecognized Tax Benefits

Reconciliation of the unrecognized tax benefits is summarized below (in thousands):



	Fiscal Year Ended August 31,
	2019			2018			2017
Beginning balance	$	256,705		$	201,355		$	149,898
Additions for tax positions of prior years	20,158			14,465			2,155
Reductions for tax positions of prior years⁽¹⁾	(106,252		)	(21,045		)	(12,233		)
Additions for tax positions related to current year⁽²⁾	35,769			81,866			77,807
Cash settlements	—			(1,659		)	(2,298		)
Reductions from lapses in statutes of limitations	(2,570		)	(7,496		)	(10,446		)
Reductions from settlements with taxing authorities⁽³⁾	(35,582		)	(5,928		)	(6,061		)
Foreign exchange rate adjustment	(3,845		)	(4,853		)	2,533
Ending balance	$	164,383		$	256,705		$	201,355
Unrecognized tax benefits that would affect the effective tax rate (if recognized)	$	93,237		$	117,455		$	75,223


⁽¹⁾	The reductions for tax positions of prior years for the fiscal year ended August 31, 2019 are primarily related to a non-U.S. taxing authority ruling related to certain non-U.S. net operating loss carry forwards, offset with a valuation allowance and the impacts of the Tax Act.

⁽²⁾

The additions for the fiscal years ended August 31, 2019 and 2018 are primarily related to the impacts of the Tax Act and taxation of certain intercompany transactions. The additions for the fiscal year ended August 31, 2017 are primarily related to certain non-U.S. net operating loss carry forwards, previously offset with a valuation allowance, that can no longer be recognized due to an internal restructuring.


⁽³⁾	The reductions from settlements with taxing authorities for the fiscal year ended August 31, 2019 are primarily related to the settlement of a U.S. audit.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company’s accrued interest and penalties were approximately $18.9 million and $20.4 million as of August 31, 2019 and 2018, respectively. The Company recognized interest and penalties of approximately $(1.5) million, $(6.7) million and $5.2 million during the fiscal years ended August 31, 2019, 2018 and 2017, respectively.

It is reasonably possible that the August 31, 2019 unrecognized tax benefits could decrease during the next 12 months by $5.8 million, primarily related to a state settlement.

The Company is no longer subject to U.S. federal tax examinations for fiscal years before August 31, 2015. In major non-U.S. and state jurisdictions, the Company is no longer subject to income tax examinations for fiscal years before August 31, 2009.

The Internal Revenue Service (“IRS”) completed its field examination of the Company’s tax returns for fiscal years 2009 through 2011 and issued a Revenue Agent’s Report (“RAR”) on May 27, 2015, which was updated on June 22, 2016. The IRS completed its field examination of the Company’s tax returns for fiscal years 2012 through 2014 and issued an RAR on April 19, 2017. The proposed adjustments in the RAR from both examination periods relate primarily to U.S. taxation of certain intercompany transactions. On May 8, 2019, the tax return audits for fiscal years 2009 through 2014 were effectively settled when the Company agreed to the IRS Office of Appeals’ Form 870-AD (Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment) adjustments, which were substantially lower than the initial RAR proposed adjustments. The settlement did not have a material effect on the Company’s financial position, results of operations, or cash flows and no additional tax liabilities were recorded.