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Income Taxes | 12 Months Ended
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Oct. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Recent Tax Legislation The 2017 Act was enacted into law on December 22, 2017, and significantly changes existing U.S. tax law. The 2017 Act adopts a territorial tax system, imposes a mandatory one-time transition tax on earnings of foreign subsidiaries that were previously indefinitely reinvested, and reduces the U.S. federal statutory tax rate from 35% to 21%. For fiscal 2019 the Company utilized the enacted U.S. federal statutory tax rate of 21%. The 2017 Act includes several provisions that are effective for our fiscal 2019: (i) tax on global intangible low-taxed income (GILTI) of foreign subsidiaries, (ii) tax on certain payments between a U.S. corporation and its foreign subsidiaries referred to as the base erosion and anti-abuse tax (BEAT), (iii) limitation on the tax deduction for interest payments, and (iv) expanded limitation on the tax deduction for compensation paid to certain executives. The 2017 Act was effective in the first quarter of fiscal 2018. As of January 31, 2019, we completed our accounting for the tax effects of the enactment of the 2017 Act and did not recognize any material adjustments to the provisional tax expense previously recorded. The 2017 Act imposes a new tax on foreign earnings and profits in excess of a deemed return on tangible assets of foreign subsidiaries referred to as GILTI which is effective in fiscal 2019. In accordance with FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, the Company is making an accounting policy election to recognize the tax expense related to GILTI in the year the tax is incurred. The Company is no longer asserting that earnings from our foreign subsidiaries are indefinitely reinvested. The 2017 Act limits the future deductions relating to interest expense and certain executive compensation. These provisions are generally effective for the Company in 2019. Pursuant to transition rules provided in the 2017 Act, companies will be allowed tax deductions for performance-based plans in existence on or before November 2, 2017, if not materially modified after that date. We have completed our analysis of the executive compensation relating to plans in existence on or before November 2, 2017 and concluded that substantially all of those plans will meet the grandfather provisions and be fully deductible. Diverted Profits Tax (DPT) The United Kingdom enacted a Diverted Profits Tax (DPT) as of April 1, 2015 on profits of multinationals that they deemed artificially diverted from the United Kingdom. The tax rate is 25%. DPT is intended to apply in two situations: (a) where a foreign company has artificially avoided having a taxable presence in the United Kingdom; and (b) where a group adopts a structure which lacks economic substance in order to divert profits from the United Kingdom. On December 20, 2017, the U.K. Tax Authorities issued a DPT charging notice of approximately GBP 31.0 million with respect to the transfer out of the United Kingdom of certain intellectual property rights in connection with the 2014 acquisition of Sauflon Pharmaceutical Ltd. Although taxes were paid on the transfer, the U.K. Tax Authorities challenged the value assigned to such property. We subsequently settled on an additional value of US$116.0 million as a transfer pricing adjustment and on January 17, 2019, the U.K. Tax Authorities issued an amending notice to bring the DPT charge down to zero. On January 29, 2019, we received a termination letter closing the DPT review. On February 26, 2019, the Company received a refund of approximately GBP 22.1 million (USD 29.0 million) from the GBP 31.0 million (USD 42.0 million) payment made on January 19, 2018 to the U.K. Tax Authorities. Effective Tax Rate The Company’s effective tax rate (ETR) was 2.3%, 57.9% and 5.3% for fiscal 2019, 2018 and 2017, respectively. The ETR in fiscal 2019 decreased in comparison to fiscal 2018 primarily due to the net charge related to the enactment of the 2017 Act which was recorded in fiscal 2018, tax benefits from audit settlements in fiscal 2019, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions that became effective in fiscal 2019. The ETR in fiscal 2018 increased in comparison to fiscal 2017 primarily due to the net charge related to the enactment of the 2017 Act which was partially offset by a shift in the geographic mix of income. The ETR for 2019 was less than the U.S. federal statutory tax rate primarily due to a majority of our taxable income being earned in foreign jurisdictions with lower tax rates, discrete tax benefits from settling income tax audits, excess tax benefits from share-based compensation, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions. The ETR for 2018 was greater than the U.S. federal statutory tax rate primarily due to the tax expense related to the enactment of the 2017 Act. The ETR for 2017 was less than the U.S. federal statutory tax rate because a majority of our taxable income was earned in foreign jurisdictions with lower tax rates and excess tax benefits from share-based compensation. The ratio of domestic income to worldwide income significantly impacted our overall tax rate due to the fact that the tax rates in some of the foreign jurisdictions where we operate are significantly lower than the statutory rate in the United States. The foreign jurisdictions with lower tax rates compared to the U.S. federal statutory tax rate that had the most significant impact on our provision for foreign income taxes in the fiscal years presented include the United Kingdom, Barbados and Puerto Rico. The components of income before income taxes and the income tax provision related to income from all operations in our Consolidated Statements of Income consist of:
Years Ended October 31, (In millions) | 2019 |  | 2018 |  | 2017
Income before income taxes: |  |  |  |  |
United States | $ | (32.8 | ) |  | $ | (122.8 | ) |  | $ | 7.8 |
Foreign | 510.2 |  |  | 454.7 |  |  | 386.2 |
| $ | 477.4 |  |  | $ | 331.9 |  |  | $ | 394.0 |
Income tax provision | $ | 10.7 |  |  | $ | 192.0 |  |  | $ | 21.1 |
The income tax provision (benefit) related to income in our Consolidated Statements of Income consists of:
Years Ended October 31, (In millions) | 2019 |  | 2018 |  | 2017
Current: |  |  |  |  |
Federal | $ | 9.2 |  |  | $ | 165.6 |  |  | $ | 6.9 |
State | 1.6 |  |  | 0.5 |  |  | 1.8 |
Foreign | 15.8 |  |  | 23.0 |  |  | 19.5 |
| 26.6 |  |  | 189.1 |  |  | 28.2 |
Deferred: |  |  |  |  |
Federal | (8.1 | ) |  | 16.1 |  |  | (3.9 | )
State | (0.9 | ) |  | 1.0 |  |  | 1.4 |
Foreign | (6.9 | ) |  | (14.2 | ) |  | (4.6 | )
| (15.9 | ) |  | 2.9 |  |  | (7.1 | )
Income tax provision | $ | 10.7 |  |  | $ | 192.0 |  |  | $ | 21.1 |
We reconcile the provision for income taxes attributable to income from operations and the amount computed by applying the statutory federal income tax rate of 21% for 2019, 23.34% for 2018, and 35% for 2017 to income before income taxes as follows:
Years Ended October 31, (In millions) | 2019 |  | 2018 |  | 2017
Computed expected provision for taxes | $ | 100.3 |  |  | $ | 77.5 |  |  | $ | 137.9 |
(Decrease) increase in taxes resulting from: |  |  |  |  |
Income earned outside the United States subject to different tax rates | (85.6 | ) |  | (97.5 | ) |  | (114.6 | )
State taxes, net of federal income tax benefit | 0.4 |  |  | (4.9 | ) |  | 3.9 |
Foreign source income subject to United States tax | 16.1 |  |  | — |  |  | — |
Research and development credit | (0.9 | ) |  | (0.7 | ) |  | (0.7 | )
U.S. tax reform | (5.8 | ) |  | 214.6 |  |  | — |
Incentive stock option compensation and non-deductible employee compensation | (7.8 | ) |  | (11.1 | ) |  | (12.9 | )
Tax accrual adjustment | (4.7 | ) |  | 10.1 |  |  | 5.0 |
Other, net | (1.3 | ) |  | 4.0 |  |  | 2.5 |
Actual provision for income taxes | $ | 10.7 |  |  | $ | 192.0 |  |  | $ | 21.1 |
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are:
Years Ended October 31, (In millions) | 2019 |  | 2018
Deferred tax assets: |  |  |
Accounts receivable, principally due to allowances for doubtful accounts | $ | 3.6 |  |  | $ | 4.0 |
Inventories | 3.5 |  |  | 3.8 |
Litigation settlements | 0.1 |  |  | 0.2 |
Accrued liabilities, reserves and compensation accruals | 55.1 |  |  | 38.8 |
Foreign deferred tax assets | 52.5 |  |  | 51.8 |
Restricted stock and stock option expenses | 26.1 |  |  | 25.6 |
Net operating loss carryforwards | 8.3 |  |  | 6.7 |
Intangible assets | 11.1 |  |  | 3.1 |
Research and experimental expenses - Section 59(e) | 2.5 |  |  | 2.5 |
Tax credit carryforwards | 1.3 |  |  | 1.3 |
Total gross deferred tax assets | 164.1 |  |  | 137.8 |
Less valuation allowance | (41.5 | ) |  | (39.1 | )
Deferred tax assets | 122.6 |  |  | 98.7 |
Deferred tax liabilities: |  |  |
Tax deductible goodwill | (25.0 | ) |  | (22.4 | )
Plant and equipment | (14.3 | ) |  | (8.2 | )
Deferred tax on foreign earnings | (5.9 | ) |  | (8.9 | )
Transaction costs | (0.7 | ) |  | (0.5 | )
Foreign deferred tax liabilities | (27.6 | ) |  | (31.3 | )
Total gross deferred tax liabilities | (73.5 | ) |  | (71.3 | )
Net deferred tax assets | $ | 49.1 |  |  | $ | 27.4 |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at October 31, 2019. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. A valuation allowance of $41.5 million and $39.1 million was recorded against our gross deferred tax asset balance as of October 31, 2019, and October 31, 2018, respectively. The increase relates to state net operating losses and tax credits in our foreign operations. At October 31, 2019, we had federal net operating loss carryforwards of $23.1 million, state net operating loss carryforwards of $37.5 million. Additionally, we had $1.7 million of California research credits. Federal net operating losses of $18.6 million expire on various dates between 2022 and 2037 and $4.5 million carry forward indefinitely. The state net operating loss carryforwards expire on various dates between 2020 through 2038, and the California research credits carry forward indefinitely. The aggregated changes in the balance of unrecognized tax benefits (UTB) were as follows:
(In millions) |
Balance at October 31, 2017 | $ | 59.9 |
Increase from prior year's UTB's | 4.2 |
Increase from current year's UTB's | 9.4 |
UTB (decrease) from expiration of statute of limitations | (4.6 | )
Balance at October 31, 2018 | 68.9 |
Decrease from prior year's UTB's | (11.8 | )
Increase from current year's UTB's | 8.3 |
UTB (decrease) from tax authorities' settlements | (14.1 | )
UTB (decrease) from expiration of statute of limitations | (1.6 | )
Balance at October 31, 2019 | $ | 49.7 |
As of October 31, 2019, 2018, and 2017 we had unrecognized tax benefits of $49.7 million, $68.9 million, and $59.9 million, respectively. If recognized, these tax benefits would affect our effective tax rates for 2019, 2018, and 2017, by $41.7 million, $46.6 million, and $38.1 million, respectively. It is our policy to recognize interest and penalties directly related to incomes tax as additional income tax expense. As of October 31, 2019, 2018, and 2017, we had accrued gross interest and penalties related to uncertain tax positions of $3.9 million, $4.4 million, and $3.6 million, respectively. Included in the balance of unrecognized tax benefits at October 31, 2019, is $21.7 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. We are required to file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions. As of October 31, 2019, the tax years for which we remain subject to U.S. federal income tax assessment upon examination are 2015 through 2019, as well as other major tax jurisdictions including the United Kingdom, Japan and France. We remain subject to income tax examinations in Australia for the tax years 2014 through 2019. The Company is currently under audit in the U.S. for 2015 and 2016 and the U.K. for 2015 through 2018.

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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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