Income Taxes

9 Months Ended

Jun. 30, 2019

Note 12—Income Taxes

The effective income tax rates were 20% and 19% for the three and nine months ended June 30, 2019, respectively, and 17% and 20% for the three and nine months ended June 30, 2018, respectively. The effective tax rates for the three and nine months ended June 30, 2019 differ from the effective tax rates in the same prior-year periods primarily due to the effects of U.S. tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, as discussed below:


•	The Tax Act reduced the statutory federal corporate income tax rate from 35% to 21% effective January 1, 2018. In fiscal 2018, the Company’s statutory federal corporate rate was a blended rate of 24.5%. Federal tax expense for the nine months ended June 30, 2019 was determined at a 21% tax rate compared to the 24.5% tax rate in the prior-year period;


•	The Tax Act enacted a new deduction for foreign-derived intangible income (“FDII”) and a new tax on global intangible low-tax income (“GILTI”). Both FDII and GILTI became effective for the Company on October 1, 2018; and


•	The absence of the following items recorded during the nine months ended June 30, 2018:


▪	$80 million and $81 million benefits due to non-recurring audit settlements during the three months ended March 31, 2018 and June 30, 2018, respectively;


▪	a $1.1 billion non-recurring, non-cash benefit from the remeasurement of deferred tax balances recorded in the three months ended December 31, 2017, in connection with the reduction in U.S. federal tax rate enacted by the Tax Act; and


▪	a $1.1 billion one-time transition tax expense on certain untaxed foreign earnings recorded in the three months ended December 31, 2017, in connection with the requirement enacted by the Tax Act.

The Company previously recorded provisional amounts for the transition tax and the tax effects of various other tax provisions enacted by the Tax Act. As permitted by ASU 2018-05, the Company completed the determination of the accounting impacts of the transition tax and the tax effects of these various tax provisions in the three months ended December 31, 2018. The adjustments to the provisional amounts were not material. In addition, the Company adopted the accounting policy of accounting for taxes on GILTI in the period that it is subject to such tax.

During the three and nine months ended June 30, 2019, the Company’s gross unrecognized tax benefits increased by $241 million and $387 million, respectively. The Company's net unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate increased by $51 million and $134 million, respectively. The change in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. During the three and nine months ended June 30, 2019, the Company’s accrued interest related to uncertain tax positions increased by $19 million and $51 million, respectively, and there were no significant changes in penalties. During the three and nine months ended June 30, 2018, there were no significant changes in interest and penalties related to uncertain tax positions.

The Company’s tax filings are subject to examination by the U.S. federal, state and foreign taxing authorities. The timing and outcome of the final resolutions of the various ongoing income tax examinations are highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.