INCOME TAXES

12 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The provision for income taxes is comprised of the following:

	Year Ended June 30
(In millions)	2020		2019		2018
Current:
Federal	$	128	$	180	$	334
Foreign	368		383		357
State and local	(3)		16		(3)
	493		579		688
Deferred:
Federal	(93)		(95)		135
Foreign	(49)		27		35
State and local	(1)		2		5
	(143)		(66)		175
	$	350	$	513	$	863

Earnings before income taxes include amounts contributed by the Company’s foreign operations of approximately $2,277 million, $2,021 million and $2,004 million for fiscal 2020, 2019 and 2018, respectively. A portion of these earnings is taxed in the United States.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA included broad and complex changes to the U.S. tax code that impacted the Company’s accounting and reporting for income taxes. Pursuant to Staff Accounting Bulletin No. 118 ("SAB 118"), in fiscal 2018, the Company recorded a provisional net charge of $450 million related to the enactment of the TCJA, and, in fiscal 2019, the Company recorded a charge of $5 million as an adjustment to the provisional net charge recorded in fiscal 2018.

Although the accounting related to the income tax effects of the TCJA was completed pursuant to SAB 118, certain technical aspects of the TCJA remain subject to varying degrees of uncertainty as additional technical guidance and clarification from the U.S. government is being issued over an extended period. The issuance of additional guidance and clarification from the U.S. government may result in material changes to the provision for income taxes. On July 20, 2020, the U.S. government released final and proposed regulations under the global intangible low-taxed income (“GILTI”) provisions of the TCJA. The Company is currently evaluating the impact of the GILTI regulations. The potential impact of applying the GILTI regulations, along with any impact of other guidance that may be issued by the U.S. government, would be recognized in the provision for income taxes in the period that the Company’s evaluation of such guidance is completed.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s actual effective tax rate on earnings before income taxes is as follows:

	Year Ended June 30
	2020		2019		2018
Provision for income taxes at statutory rate	21.0	%	21.0	%	28.1	%
Increase (decrease) due to:
State and local income taxes, net of federal tax benefit	(0.1)		0.6		0.5
TCJA net income tax impact(1)	—		0.2		22.8
Stock-based compensation arrangements – excess tax benefits	(7.5)		(2.7)		(2.5)
Taxation of foreign operations	11.0		1.9		(4.7)
Income tax reserve adjustments	0.4		0.5		(0.5)
Nondeductible goodwill impairment charges	8.0		0.6		—
Other, net	0.7		0.1		(0.1)
Effective tax rate(2)	33.5	%	22.2	%	43.6	%

⁽¹⁾Includes the mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries (the “Transition Tax”), the remeasurement of U.S. net deferred tax assets resulting from the statutory tax rate reduction, including the enactment date remeasurement, and the net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA.

⁽²⁾The reconciling items between the Company's U.S. federal statutory income tax rate and the Company's actual effective tax rate were materially impacted by the decrease in earnings before income taxes from fiscal 2019 to fiscal 2020.

Income tax reserve adjustments represent changes in the Company’s net liability for unrecognized tax benefits related to prior-year tax positions including the impact of tax settlements and lapses of the applicable statutes of limitations.

In fiscal 2018, the Company adopted a new accounting standard that changes the way companies account for certain aspects of share-based payments to employees. This standard requires that all excess tax benefits and tax deficiencies related to share-based compensation awards be recorded as income tax expense or benefit in the income statement. As a result of the adoption of this new standard, the Company recognized $78 million, $63 million and $50 million of excess tax benefits as a reduction to the provision for income taxes in fiscal 2020, 2019 and 2018, respectively.

The Company has approximately $5,259 million of undistributed earnings of foreign subsidiaries at June 30, 2020. Included in this amount is approximately $3,156 million of earnings considered permanently reinvested. There may be foreign tax ramifications associated with the distribution of such permanently reinvested earnings, which the Company is currently evaluating. Since the application of the relevant foreign tax laws to such distribution is largely uncertain at this time, it is not practicable to determine the amount of associated tax. Any state income taxes associated with the distribution of such earnings is not expected to be material.

Significant components of the Company’s deferred income tax assets and liabilities were as follows:

	June 30
(In millions)	2020		2019
Deferred tax assets:
Compensation-related expenses	$	142	$	179
Inventory obsolescence and other inventory related reserves	75		64
Retirement benefit obligations	71		71
Various accruals not currently deductible	212		206
Net operating loss, credit and other carryforwards	98		41
Unrecognized state tax benefits and accrued interest	12		12
Lease liabilities	585		—
Other differences between tax and financial statement values	217		125
	1,412		698
Valuation allowance for deferred tax assets	(107)		(48)
Total deferred tax assets	1,305		650
Deferred tax liabilities:
Depreciation and amortization(1)	(563)		(286)
ROU assets	(504)		—
Other differences between tax and financial statement values(2)	(194)		(69)
Total deferred tax liabilities	(1,261)		(355)
Total net deferred tax assets	$	44	$	295

⁽¹⁾Includes deferred tax liabilities associated with book-to-tax basis differences related to the Company's non-taxable acquisitions.

⁽²⁾Includes the deferred tax liability of $117 million associated with the gain on a previously held equity method investment.

As of June 30, 2020 and 2019, the Company had net deferred tax assets of $44 million and $295 million, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets.

As of June 30, 2020 and 2019, certain subsidiaries had net operating loss and other carryforwards for tax purposes of approximately $352 million and $162 million, respectively. With the exception of approximately $303 million of net operating loss and other carryforwards with an indefinite carryforward period as of June 30, 2020, these carryforwards expire at various dates through fiscal 2032. Deferred tax assets, net of valuation allowances, in the amount of $14 million and $3 million as of June 30, 2020 and 2019, respectively, have been recorded to reflect the tax benefits of the carryforwards not utilized to date.

A full valuation allowance has been provided for those deferred tax assets for which, in the opinion of management, it is more-likely-than-not that the deferred tax assets will not be realized.

As of June 30, 2020 and 2019, the Company had gross unrecognized tax benefits of $70 million and $67 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $56 million.

The Company classifies applicable interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The total gross accrued interest and penalty expense recorded during fiscal 2020 and fiscal 2019 in the accompanying consolidated statement of earnings was $3 million and $4 million, respectively . The total gross accrued interest and penalties in the accompanying consolidated balance sheets at June 30, 2020 and 2019 were $13 million and $12 million, respectively. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

	June 30
(In millions)	2020		2019
Beginning of the year balance of gross unrecognized tax benefits	$	67	$	60
Gross amounts of increases as a result of tax positions taken during a prior period	11		12
Gross amounts of decreases as a result of tax positions taken during a prior period	(9)		(6)
Gross amounts of increases as a result of tax positions taken during the current period	7		9
Amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities	(4)		(7)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations	(2)		(1)
End of year balance of gross unrecognized tax benefits	$	70	$	67

Earnings from the Company’s global operations are subject to tax in various jurisdictions both within and outside the United States. The Company participates in the U.S. Internal Revenue Service (the “IRS”) Compliance Assurance Program (“CAP”). The objective of CAP is to reduce taxpayer burden and uncertainty while assuring the IRS of the accuracy of income tax returns prior to filing, thereby reducing or eliminating the need for post-filing examinations.

Subsequent to June 30, 2020, the Company formally concluded the compliance process with respect to fiscal 2019 under the IRS CAP, which did not impact the Company’s consolidated financial statements. As of June 30, 2020, the compliance process was ongoing with respect to fiscal 2020.

The Company is currently undergoing income tax examinations and controversies in several state, local and foreign jurisdictions. These matters are in various stages of completion and involve complex multi-jurisdictional issues common among multinational enterprises, including transfer pricing, which may require an extended period of time for resolution.

During fiscal 2020, the Company concluded various state, local and foreign income tax audits and examinations while several other matters, including those noted above, were initiated or remained pending. On the basis of the information available in this regard as of June 30, 2020 it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 million within 12 months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

The tax years subject to examination vary depending on the tax jurisdiction. As of June 30, 2020, the following tax years remain subject to examination by the major tax jurisdictions indicated:

Major Jurisdiction	Open Fiscal Years
Belgium	2018 – 2020
Canada	2015 – 2020
China	2016 – 2020
France	2016 – 2020
Germany	2013 – 2020
Hong Kong	2014 – 2020
Italy	2016 – 2020
Japan	2020
Korea	2019 - 2020
Russia	2017 – 2020
Spain	2016 – 2020
Switzerland	2018 – 2020
United Kingdom	2019 – 2020
United States	2019 – 2020
State of California	2013 – 2020
State and City of New York	2015 – 2020

The Company is also subject to income tax examinations in numerous other state, local and foreign jurisdictions. The Company believes that its tax reserves are adequate for all years subject to examination.