Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), which significantly revises U.S. corporate income taxation by, among other things, lowering the U.S. corporate income tax rate from 35.0 percent to 21.0 percent, broadening the base of taxation, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company adopted guidance allowing for a measurement period, not to exceed one year, to finalize the accounting for the income tax impacts of the Tax Act. Until the accounting for the income tax impacts of the Tax Act is complete, the reported amounts are based on reasonable estimates and are disclosed as provisional.

As of October 26, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the Tax Act. The Company’s calculation of the transition tax and the Tax Act impact to deferred tax assets, liabilities, and valuation allowances are based on reasonable estimates. The Company made the following adjustments to the provisional calculations during the three and six months ended October 26, 2018:

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A $37 million increase to the transition tax liability was recorded during the three months ended October 26, 2018. During the six months ended October 26, 2018, a net $13 million reduction to the transition tax liability was recorded, resulting in a total provisional transition tax charge of $2.5 billion as of October 26, 2018. The Company has not yet completed the calculation of the total post-1986 foreign earnings & profits (E&P) and the income tax pools for all foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. In addition, further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional tax liability or the accounting treatment of the provisional tax liability.


•	No adjustments were recorded during the three and six months ended October 26, 2018 associated with the remeasurement of deferred tax assets, liabilities, and valuation allowances. The Company continues to report the impact from the remeasurement of deferred tax assets, liabilities, and valuation allowances as provisional.

The Company made the accounting policy election to treat taxes due on U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred (the "period cost method").

The Company’s effective tax rate for the three and six months ended October 26, 2018 was 17.3 percent and 13.3 percent, respectively, as compared to (16.5) percent and (3.4) percent for the three and six months ended October 27, 2017, respectively. The increase in the effective tax rate for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year, was primarily due to the impacts from certain tax adjustments, the gain on the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the second quarter of fiscal year 2018, the finalization of certain tax returns and audits, the impact from the lapse of federal statutes of limitations, excess tax benefits related to stock-based compensation, and year-over-year changes in operational results by jurisdiction.

Certain Tax Adjustments

During the three months ended October 26, 2018, the charge from certain tax adjustments of $58 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A charge of $37 million associated with the transition tax liability recorded in connection with the Tax Act, as noted above. The income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $21 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current quarter sale of U.S. manufactured inventory held as of April 27, 2018.

During the six months ended October 26, 2018, the net charge from certain tax adjustments of $29 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A benefit of $13 million associated with the transition tax liability recorded in connection with the Tax Act, as noted above. The income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $42 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current year sale of U.S. manufactured inventory held as of April 27, 2018.

During the three months ended October 27, 2017, the net benefit from certain tax adjustments of $404 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A benefit of $6 million related to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

During the six months ended October 27, 2017, the net benefit from certain tax adjustments of $344 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A net charge of $54 million primarily related to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

At both October 26, 2018 and April 27, 2018, the Company's gross unrecognized tax benefits were $1.7 billion. In addition, the Company had accrued gross interest and penalties of $170 million at October 26, 2018. If all of the Company’s unrecognized tax benefits were recognized, approximately $1.7 billion would impact the Company’s effective tax rate. At both October 26, 2018 and April 27, 2018, the total balance of the Company's gross unrecognized tax benefits was recorded as a noncurrent liability within accrued income taxes on the consolidated balance sheets. The Company recognizes interest and penalties related to income tax matters within income tax provision in the consolidated statements of income and records the liability within either current or noncurrent accrued income taxes on the consolidated balance sheets.

Refer to Note 17 to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.