INCOME TAXES

12 Months Ended

May 31, 2012

Income Taxes [Abstract]

INCOME TAXES

15. INCOME TAXES

The following is a geographical breakdown of income before the provision for income taxes:

	Year Ended May 31,
(in millions)	2012		2011		2010
Domestic	$	6,284	$	6,378	$	4,282
Foreign		6,678		5,033		3,961
Income before provision for income taxes	$	12,962	$	11,411	$	8,243

The provision for income taxes consisted of the following:

	Year Ended May 31,
(Dollars in millions)	2012		2011		2010
Current provision:
Federal	$	1,611	$	1,817	$	1,307
State		257		263		299
Foreign		1,104		1,037		1,013
Total current provision		2,972		3,117		2,619
Deferred provision (benefit):
Federal		267		(179)		(380)
State		14		14		(76)
Foreign		(272)		(88)		(55)
Total deferred provision (benefit)		9		(253)		(511)
Total provision for income taxes	$	2,981	$	2,864	$	2,108
Effective income tax rate		23.0%		25.1%		25.6%

The provision for income taxes differed from the amount computed by applying the federal statutory rate to our income before provision for income taxes as follows:

	Year Ended May 31,
(in millions)	2012		2011		2010
Tax provision at statutory rate	$	4,537	$	3,994	$	2,885
Foreign earnings at other than United States rates		(1,474)		(1,125)		(672)
State tax expense, net of federal benefit		171		188		161
Settlements and releases from judicial decisions and statute expirations, net		(132)		(53)		(315)
Domestic production activity deduction		(178)		(206)		(95)
Other, net		57		66		144
Total provision for income taxes	$	2,981	$	2,864	$	2,108

The components of our deferred tax liabilities and assets were as follows:

	May 31,
(in millions)	2012		2011
Deferred tax liabilities:
Unrealized gain on stock	$	(130)	$	(130)
Acquired intangible assets		(1,974)		(1,816)
Unremitted earnings		(322)		(44)
Total deferred tax liabilities	$	(2,426)	$	(1,990)
Deferred tax assets:
Accruals and allowances	$	609	$	543
Employee compensation and benefits		905		742
Differences in timing of revenue recognition		196		305
Depreciation and amortization		253		483
Tax credit and net operating loss carryforwards		2,537		2,675
Other		50		119
Total deferred tax assets	$	4,550	$	4,867
Valuation allowance	$	(728)	$	(772)
Net deferred tax assets	$	1,396	$	2,105
Recorded as:
Current deferred tax assets	$	877	$	1,189
Non-current deferred tax assets		595		1,076
Current deferred tax liabilities (in other current liabilities)		(28)		(101)
Non-current deferred tax liabilities (in other non-current liabilities)		(48)		(59)
Net deferred tax assets	$	1,396	$	2,105

We provide for United States income taxes on the undistributed earnings and the other outside basis temporary differences of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. During the third quarter of fiscal 2012, we increased the number of foreign subsidiaries in countries with lower statutory rates than the United States, the earnings of which we consider to be indefinitely reinvested outside the United States. If these subsidiaries generate sufficient earnings in the future, our provision for income taxes may continue to be favorably affected to a meaningful extent, although any such favorable effects could be significantly reduced under a variety of circumstances. At May 31, 2012, the amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which United States income taxes have not been provided was approximately $20.9 billion and $4.3 billion, respectively. If these undistributed earnings were repatriated to the United States, or if the other outside basis differences were recognized in a taxable transaction, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings and other outside basis temporary differences would be approximately $6.3 billion and $1.4 billion, respectively.

Our net deferred tax assets were $1.4 billion and $2.1 billion as of May 31, 2012 and May 31, 2011, respectively. We believe it is more likely than not that the net deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credit carryforwards. The amount of net deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.

The valuation allowance was $728 million at May 31, 2012 and $772 million at May 31, 2011. Substantially all of the valuation allowances as of May 31, 2012 and 2011 relate to tax assets established in purchase accounting. Any subsequent reduction of that portion of the valuation allowance and the recognition of the associated tax benefits associated with our acquisitions will be recorded to our provision for income taxes subsequent to our final determination of the valuation allowance or the conclusion of the measurement period (as defined above), whichever comes first.

At May 31, 2012, we had federal net operating loss carryforwards of approximately $726 million. These losses expire in various years between fiscal 2016 and fiscal 2031, and are subject to limitations on their utilization. We had state net operating loss carryforwards of approximately $2.9 billion, which expire between fiscal 2013 and fiscal 2031, and are subject to limitations on their utilization. We had total foreign net operating loss carryforwards of approximately $1.8 billion, which are subject to limitations on their utilization. Approximately $1.5 billion of these net operating losses are not currently subject to expiration dates. The remainder, approximately $302 million, expire between fiscal 2013 and fiscal 2032. We had tax credit carryforwards of approximately $1.0 billion, which are subject to limitations on their utilization. Approximately $346 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder, approximately $691 million, expire in various years between fiscal 2013 and fiscal 2029.

We classify our unrecognized tax benefits as either current or non-current income taxes payable in the accompanying consolidated balance sheets. The aggregate changes in the balance of our gross unrecognized tax benefits, including acquisitions, were as follows:

	Year Ended May 31,
(in millions)	2012		2011		2010
Gross unrecognized tax benefits as of June 1	$	3,160	$	2,527	$	2,262
Increases related to tax positions from prior fiscal years		99		128		94
Decreases related to tax positions from prior fiscal years		(169)		(102)		(491)
Increases related to tax positions taken during current fiscal year		522		639		813
Settlements with tax authorities		(187)		(23)		(88)
Lapses of statutes of limitation		(84)		(53)		(48)
Other, net		(65)		44		(15)
Total gross unrecognized tax benefits as of May 31	$	3,276	$	3,160	$	2,527

As of May 31, 2012, $3.3 billion of unrecognized benefits would affect our effective tax rate if recognized. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations of $46 million, $22 million and $3 million during fiscal 2012, 2011 and 2010, respectively. Interest and penalties accrued as of May 31, 2012 and 2011 were $683 million and $669 million, respectively.

During fiscal 2010, the provision for income taxes was reduced due to judicial decisions, including the March 2010 U.S. Court of Appeals Ninth Circuit ruling in Xilinx v. Commissioner, and settlements with various worldwide tax authorities.

Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2010. Many issues are at an advanced stage in the examination process, the most significant of which include the deductibility of certain royalty payments, issues related to certain capital gains and losses, extraterritorial income exemptions, domestic production activity deductions, stewardship deductions, stock-based compensation and foreign tax credits taken. Other issues are related to years with expiring statutes of limitation. With all of these domestic audit issues considered in the aggregate, we believe it was reasonably possible that, as of May 31, 2012, the gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by as much as $518 million ($423 million net of offsetting tax benefits). Our U.S. federal and, with some exceptions, our state income tax returns have been examined for all years prior to fiscal 2000 and we are no longer subject to audit for those periods.

Internationally, tax authorities for numerous non-U.S. jurisdictions are also examining returns affecting our unrecognized tax benefits. We believe it was reasonably possible that, as of May 31, 2012, the gross unrecognized tax benefits, could decrease (whether by payment, release, or a combination of both) by as much as $189 million ($123 million net of offsetting tax benefits) in the next 12 months, related primarily to transfer pricing. Other issues are related to years with expiring statutes of limitation. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 1998.

We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial position or results of operations. However, there can be no assurances as to the possible outcomes.

We previously negotiated three successive unilateral Advance Pricing Agreements with the IRS that cover many of our intercompany transfer pricing issues and preclude the IRS from making a transfer pricing adjustment within the scope of these agreements. These agreements were effective for fiscal years through May 31, 2006. We have reached final agreement with the IRS for renewal of this Advance Pricing Agreement for the years ending May 31, 2007 through May 31, 2013. However, these agreements do not cover substantial elements of our transfer pricing and do not bind tax authorities outside the United States. We have finalized bilateral Advance Pricing Agreements, which are effective for the years ending May 31, 2002 through May 31, 2006 and May 31, 2007 through May 31, 2013.