Our effective tax rates for each of the periods presented are the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Our provision for income taxes for fiscal 2020 varied from the tax computed at the U.S. federal statutory income tax rate primarily due to earnings in foreign operations, state taxes, the U.S. research and development tax credit, settlements with tax authorities, the tax effects of stock-based compensation, the Foreign Derived Intangible Income deduction and the tax effect of Global Intangible Low-Taxed Income (GILTI). During fiscal 2019, we recorded a net benefit of $389 million in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118) related to adjustments in our estimates of the one-time transition tax on certain foreign subsidiary earnings, and the remeasurement of our net deferred tax assets and liabilities affected by the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act). Our provision for income taxes for fiscal 2019 varied from the 21% U.S. statutory rate imposed by the Tax Act primarily due to earnings in foreign operations, state taxes, the U.S. research and development tax credit, settlements with tax authorities, the tax effects of stock-based compensation, the Foreign Derived Intangible Income deduction, GILTI, and the aforementioned $389 million net reduction to our transition tax recorded consistent with the provision of SAB 118. Our provision for income taxes for fiscal 2018 varied from the 21% U.S. statutory rate imposed by the Tax Act primarily due to the impacts of the Tax Act upon our adoption date of January 1, 2018 including the impacts of the transition tax, state taxes, the U.S. research and development tax credit, settlements with tax authorities, the tax effects of stock-based compensation and the U.S. domestic production activity deduction.

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

	Year Ended May 31,
(in millions)	2020		2019		2018
Domestic	$	3,890	$	3,774	$	3,366
Foreign		8,173		8,494		9,058
Income before provision for income taxes	$	12,063	$	12,268	$	12,424

	Year Ended May 31,
(Dollars in millions)	2020			2019			2018
Current provision:
Federal	$	1,616		$	979		$	8,320
State		19			300			264
Foreign		1,144			1,097			1,100
Total current provision	$	2,779		$	2,376		$	9,684
Deferred benefit:
Federal	$	(983	)	$	483		$	(827	)
State		50			(28	)		(26	)
Foreign		82			(1,646	)		6
Total deferred benefit	$	(851	)	$	(1,191	)	$	(847	)
Total provision for income taxes	$	1,928		$	1,185		$	8,837
Effective income tax rate	16.0%			9.7%			71.1%

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 (certain prior year amounts have been reclassified to conform to the current year’s presentation):

	Year Ended May 31,
(Dollars in millions)	2020			2019			2018
U.S. federal statutory tax rate	21.0%			21.0%			29.2%
Tax provision at statutory rate	$	2,533		$	2,576		$	3,629
Impact of the Tax Act of 2017:
One-time transition tax		—			(529	)		7,781
Deferred tax effects		—			140			(911	)
Foreign earnings at other than United States rates		(496	)		(1,053	)		(1,132	)
State tax expense, net of federal benefit		172			163			121
Settlements and releases from judicial decisions and statute expirations, net		(137	)		(132	)		(252	)
Tax contingency interest accrual, net		163			245			105
Domestic production activity deduction		—			—			(87	)
Federal research and development credit		(151	)		(159	)		(174	)
Stock-based compensation		(166	)		(201	)		(302	)
Other, net		10			135			59
Total provision for income taxes	$	1,928		$	1,185		$	8,837

	May 31,
(in millions)	2020			2019
Deferred tax assets:
Accruals and allowances	$	469		$	541
Employee compensation and benefits		638			646
Differences in timing of revenue recognition		524			322
Lease liabilities		253			—
Basis of property, plant and equipment and intangible assets		1,115			1,238
Tax credit and net operating loss carryforwards		3,871			3,717
Total deferred tax assets		6,870			6,464
Valuation allowance		(1,359	)		(1,266	)
Total deferred tax assets, net		5,511			5,198
Deferred tax liabilities:
Unrealized gain on stock		(78	)		(78	)
Acquired intangible assets		(561	)		(973	)
GILTI deferred		(1,108	)		(1,515	)
ROU assets		(241	)		—
Withholding taxes on foreign earnings		(171	)		(91	)
Other		(141	)		(109	)
Total deferred tax liabilities		(2,300	)		(2,766	)
Net deferred tax assets	$	3,211		$	2,432
Recorded as:
Non-current deferred tax assets	$	3,252		$	2,696
Non-current deferred tax liabilities (in other non-current liabilities)		(41	)		(264	)
Net deferred tax assets	$	3,211		$	2,432

We provide for taxes on the undistributed earnings of foreign subsidiaries. We do not provide for taxes on other outside basis temporary differences of foreign subsidiaries as they are considered indefinitely reinvested outside the U.S. At May 31, 2020, the amount of temporary differences related to other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was approximately $7.9 billion. 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. At May 31, 2020, assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these other outside basis temporary differences would be approximately $1.5 billion.

Our net deferred tax assets were $3.2 billion and $2.4 billion as of May 31, 2020 and 2019, respectively. We believe that 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 $1.4 billion and $1.3 billion as of May 31, 2020 and 2019, respectively. A majority of the valuation allowances as of May 31, 2020 and 2019 related to tax assets established in purchase accounting and other tax credits. 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, 2020, we had federal net operating loss carryforwards of approximately $597 million, which are subject to limitation on their utilization. Approximately $537 million of these federal net operating losses expire in various years between fiscal 2021 and fiscal 2038. Approximately $60 million of these federal net operating losses are not currently subject to expiration dates. We had state net operating loss carryforwards of approximately $2.0 billion at May 31, 2020, which expire between fiscal 2021 and fiscal 2038 and are subject to limitations on their utilization. We had total foreign net operating loss carryforwards of approximately $1.9 billion at May 31, 2020, which are subject to limitations on their utilization. Approximately $1.7 billion of these foreign net operating losses are not currently subject to expiration dates. The remainder of the foreign net operating losses, approximately $133 million, expire between fiscal 2021 and fiscal 2040. We had tax credit carryforwards of approximately $1.1 billion at May 31, 2020, which are subject to limitations on their utilization. Approximately $741 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder of the tax credit carryforwards, approximately $357 million, expire in various years between fiscal 2021 and fiscal 2038.

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)	2020			2019			2018
Gross unrecognized tax benefits as of June 1	$	6,348		$	5,592		$	4,919
Increases related to tax positions from prior fiscal years		624			772			200
Decreases related to tax positions from prior fiscal years		(298	)		(135	)		(65	)
Increases related to tax positions taken during current fiscal year		628			540			840
Settlements with tax authorities		(177	)		(153	)		(42	)
Lapses of statutes of limitation		(116	)		(202	)		(273	)
Cumulative translation adjustments and other, net		(37	)		(66	)		13
Total gross unrecognized tax benefits as of May 31	$	6,972		$	6,348		$	5,592

As of May 31, 2020, 2019 and 2018, $4.3 billion, $4.2 billion and $4.2 billion, respectively, of unrecognized tax 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 $202 million, $312 million and $127 million during fiscal 2020, 2019 and 2018, respectively. Interest and penalties accrued as of May 31, 2020 and 2019 were $1.4 billion and $1.3 billion, respectively.

Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2017. Many issues are at an advanced stage in the examination process, the most significant of which include the deductibility of certain royalty payments, transfer pricing, extraterritorial income exemptions, domestic production activity, foreign tax credits, and research and development credits taken. With all of these domestic audit issues considered in the aggregate, we believe that it was reasonably possible that, as of May 31, 2020, 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 $1.1 billion ($1.0 billion net of offsetting tax benefits). Our U.S. federal income tax returns have been examined for all years prior to fiscal 2010 and we are no longer subject to audit for those periods. Our U.S. state income tax returns, with

some exceptions, have been examined for all years prior to fiscal 2007 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 that it was reasonably possible that, as of May 31, 2020, the gross unrecognized tax benefits could decrease (whether by payment, release, or a combination of both) by as much as $105 million ($42 million net of offsetting tax benefits) in the next 12 months related primarily to transfer pricing. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 2001.

We believe that we have adequately provided under GAAP for outcomes related to our tax audits. However, there can be no assurances as to the possible outcomes or any related financial statement effect thereof. On June 22, 2020 the U.S. Supreme Court declined a Writ of Certiorari in the case of Altera Corp vs Commissioner challenging a decision by the Ninth Circuit Court of Appeals (which itself reversed a previous decision of the U.S. Tax Court) holding that the U.S. Treasury Department’s regulations requiring the inclusion of stock-based compensation expense in a taxpayer’s cost-sharing calculations were valid. Our consolidated financial statements have been prepared consistent with this outcome, and accordingly no adjustments will be required as the result of this development.

We are under audit by the IRS and various other domestic and foreign tax authorities with regards to income tax and indirect tax matters and are involved in various challenges and litigation in a number of countries, including, in particular, Australia, Brazil, Canada, India, Indonesia, Israel, South Korea, Mexico, Pakistan, Saudi Arabia and Spain, where the amounts under controversy are significant. In some, although not all cases, we have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by, or any negotiated agreements with, these tax authorities or final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense.