Income Taxes

We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes:



	2017		2018		2019
United States	$	806	$	747	$	863
Foreign	127		230		179
	$	933	$	977	$	1,042

The income shown above was determined according to GAAP. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above.

Total income tax expense for a year includes the tax associated with the current tax return (current tax expense) and the change in the net deferred tax asset or liability (deferred tax expense). Our total income tax expense for each of the last three years was as follows:



	2017			2018			2019
Current:
U.S. federal	$	226		$	265		$	107
Foreign	40			47			34
State and local	8			17			28
	274			329			169
Deferred:
U.S. federal	(1		)	(48		)	37
Foreign	(9		)	(13		)	4
State and local	—			(8		)	(3		)
	(10		)	(69		)	38
	$	264		$	260		$	207

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revised the future, ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. Because we have an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for fiscal 2019 and subsequent fiscal years. For the year ended April 30, 2019, the reduction of the U.S. statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of $115.

There were also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, we adjusted our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $43 for the year ended April 30, 2018, composed of a provisional repatriation U.S. tax charge of $91 and a provisional net deferred tax benefit of $48. In the fiscal year ended April 30, 2019, we recorded a benefit of $4 as an adjustment to the provisional repatriation tax.

The changes included in the Tax Act are broad and complex. The U.S. Securities and Exchange Commission issued rules that allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of April 30, 2019, the amounts recorded for the Tax Act for the one-time repatriation tax and the adjustment to our U.S. deferred tax assets and liabilities have been finalized and are no longer deemed to be provisional.

The Tax Act also established new tax provisions that impact our financial statements beginning in fiscal 2019. These new provisions include (a) Global Intangible Low-Tax Income (GILTI), a new inclusion rule affecting non-routine income earned by foreign subsidiaries; (b) Base Erosion Anti-Abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII), a new preferential tax rate for domestic income earned from serving foreign markets; (d) repeal of the domestic production activity deduction; and (e) limitations on the deductibility of certain executive compensation. For the fiscal year ended April 30, 2019, the net impact of these provisions was $12 of additional tax.

As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions. The FASB allows an accounting policy election to recognize deferred taxes for temporary differences expected to reverse as GILTI either in future years (deferred method) or as a current period expense when incurred (period cost method). We have elected to account for GILTI using the period cost method.

As of April 30, 2019, we had approximately $1,266 of undistributed earnings from our foreign subsidiaries ($1,270 at April 30, 2018). Most of these earnings have been previously subject to tax, primarily as a result of the one-time repatriation tax on foreign earnings required by the Tax Act. Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. During fiscal 2019, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries (but not for its other outside basis differences) and repatriated $120 of cash to the United States from this subsidiary. No incremental taxes were due on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. In addition, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for additional select foreign subsidiaries (but not other outside basis differences). Although these earnings are no longer indefinitely reinvested and may now be distributed within our foreign entity structure, they remain indefinitely reinvested outside the United States. No deferred taxes have been recorded, because any applicable income taxes would be insignificant and no withholding taxes would be due on their distribution. We have not changed the indefinite reinvestment assertion on the undistributed earnings or other outside basis differences of any of our other remaining foreign subsidiaries, and no deferred taxes have been provided. If the undistributed earnings were not considered permanently reinvested, deferred tax liabilities would have been provided for any applicable income taxes and withholding taxes payable in various countries, which would not be significant. A determination of the unrecognized deferred tax liabilities on the other outside basis differences reinvested indefinitely at April 30, 2019, is not practicable due to the complexities in the calculations. The other outside basis differences are primarily related to differences between U.S. GAAP and tax basis that arose through purchase accounting. These basis differences could reverse through sales of foreign subsidiaries or other transactions, none of which are considered probable as of April 30, 2019.

Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions with no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States:



	Percent of Income Before Taxes
	2017		2018		2019
U.S. federal statutory rate	35.0	%	30.4	%	21.0	%
State taxes, net of U.S. federal tax benefit	0.9	%	0.8	%	2.1	%
Income taxed at other than U.S. federal statutory rate	(1.7	%)	(3.4	%)	(0.1	%)
Tax benefit from foreign-derived sales	—	%	—	%	(1.7	%)
Adjustments related to prior years	(0.7	%)	(0.9	%)	(1.2	%)
Tax benefit from U.S. manufacturing	(2.4	%)	(2.5	%)	—	%
Amortization of deferred tax benefit from intercompany transactions	(1.7	%)	(1.6	%)	—	%
Excess tax benefits from stock-based awards	(1.0	%)	(1.8	%)	(0.7	%)
Impact of Tax Act	—	%	2.5	%	(0.4	%)
Other, net	(0.1	%)	3.1	%	0.8	%
Effective rate	28.3	%	26.6	%	19.8	%

Deferred tax assets and liabilities as of the end of each of the last two years were as follows:



April 30,	2018			2019
Deferred tax assets:
Postretirement and other benefits	$	89		$	87
Accrued liabilities and other	36			23
Inventories	48			34
Loss and credit carryforwards	51			55
Valuation allowance	(29		)	(25		)
Total deferred tax assets, net	195			174
Deferred tax liabilities:
Intangible assets	(199		)	(218		)
Property, plant, and equipment	(64		)	(73		)
Other	(1		)	(12		)
Total deferred tax liabilities	(264		)	(303		)
Net deferred tax liability	$	(69	)	$	(129	)

Details of the loss and credit carryforwards and related valuation allowances as of the end of each of the last two years are as follows:



	April 30, 2018							April 30, 2019
	Gross Amount		Deferred Tax Asset		Valuation Allowance			Gross Amount		Deferred Tax Asset		Valuation Allowance			Expiration (as of April 30, 2019)
Finland net operating losses	$	94	$	19	$	—		$	105	$	21	$	—		2024-2029
Brazil net operating losses	48		16		(16		)	42		14		(14		)	None
United Kingdom non-trading losses	29		6		(6		)	27		5		(5		)	None
Various state net operating losses and credits	34		2		—			68		6		—			Various¹
Other	41		8		(7		)	54		9		(6		)	Various²
	$	246	$	51	$	(29	)	$	296	$	55	$	(25	)

¹As of April 30, 2019, the net deferred tax asset amount includes credit carryforwards of $2 that do not expire and loss and credit carryforwards of $4 that expire in varying amounts from 2023 to 2039.

²As of April 30, 2019, the gross amount includes loss carryforwards of $32 that do not expire and $22 that expire in varying amounts over the next 10 years.

Although the losses in Brazil can be carried forward indefinitely, it is uncertain whether we will realize sufficient taxable income to allow us to use these losses. The non-trading losses in the United Kingdom can also be carried forward indefinitely. However, we know of no significant transactions that will let us use them.

During fiscal 2014, we deferred a tax benefit of $95 that resulted primarily from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets, composed primarily of an intangible asset. We amortized the deferred benefit to tax expense over approximately six years for financial reporting purposes, in accordance with Accounting Standard Codification (ASC) 740-10-25-3(e) (Income Taxes) and ASC 810-45-8 (Consolidation), resulting in a cumulative tax benefit of $68 through April 30, 2018. The remaining balance of the deferred benefit, which is included in “other liabilities” on the accompanying consolidated balance sheet as of April 30, 2018, was $27. As discussed in Note 2, revised accounting guidance (ASU 2016-16) requires the recognition of income tax consequences of intercompany transfers of assets other than inventory when the transfer occurs. Our adoption of this revised guidance resulted in this balance being recognized as an increase in retained earnings rather than as a reduction in income tax expense.

At April 30, 2019, we had $11 of gross unrecognized tax benefits, $9 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:



	2017			2018			2019
Unrecognized tax benefits at beginning of year	$	9		$	9		$	11
Additions for tax positions provided in prior periods	2			5			1
Additions for tax positions provided in current period	—			1			1
Decreases for tax positions provided in prior years	(2		)	(4		)	(2		)
Unrecognized tax benefits at end of year	$	9		$	11		$	11

We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2014 for one state in the United States; 2017 in the United Kingdom; 2015 in Australia; 2014 in Finland, Germany, Poland, and the Netherlands; and 2013 in Brazil and Mexico. The audit of our fiscal 2017 U.S. federal tax return was concluded in the second quarter of fiscal 2019; we expect the audit of the fiscal 2018 U.S. federal tax return to be concluded in the first half of fiscal 2020. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2019 tax year.

We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months.