Income Taxes

Tax Reform

On December 22, 2017, H.R.1, also known as the “Tax Cuts and Jobs Act,” was signed into U.S. law (“Tax Act”). Among other provisions, the Tax Act reduces the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent, effective January 1, 2018. Based on our fiscal year end, our blended U.S. statutory corporate income tax rate for fiscal 2018 will be 28 percent. Our deferred tax assets, net of deferred tax liabilities, represent anticipated corporate tax benefits to be realized in the future, and the reduction in the U.S. statutory corporate income tax rate reduced these benefits. As a result, we recognized income tax expense in our tax provision in the second quarter of fiscal 2018 to adjust our deferred tax balances to reflect the lower U.S. statutory corporate income tax rate.

Income tax expense for the quarter ended December 29, 2017 included the following adjustments to reflect impacts from the Tax Act:


•	A $52 million ($.43 per diluted share) estimated write-down of existing net deferred tax asset balances based on the lower tax rate and other law changes; and


•	A $26 million ($.21 per diluted share) benefit from the impact of our lower estimated fiscal 2018 tax rate.

Effective Tax Rate

Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 39.3 percent in the quarter ended December 29, 2017 compared with 30.6 percent in the quarter ended December 30, 2016. In addition to the impacts from the Tax Act described above, our effective tax rate for the quarter ended December 29, 2017 benefited from a $22 million ($.18 per diluted share) favorable impact of releasing provisions for uncertain tax positions and the favorable impact of differences in GAAP and tax accounting related to investments. Our effective tax rate for the quarter ended December 30, 2016 was not impacted by any significant discrete item.

Our effective tax rate was 33.5 percent in the two quarters ended December 29, 2017 compared with 29.7 percent in the two quarters ended December 30, 2016. In addition to the items noted above for the quarters ended December 29, 2017 and December 30, 2016, our effective tax rate for the two quarters ended December 29, 2017 and December 30, 2016 benefited from the favorable impact of excess tax benefits related to equity-based compensation.

We have not fully completed our accounting for the income tax impact from the Tax Act enactment. For certain items, we have made a reasonable estimate of the impact on our existing net deferred income tax balances as of December 29, 2017, which is represented by the $52 million estimated adjustment from the revaluation of net deferred tax asset balances described above. For other items, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under Accounting Standards Codification 740, Income Taxes (“ASC 740”) and the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.

Provisional Amounts

We remeasured certain deferred income tax assets and liabilities based on the rate at which we expect them to reverse in the future, which generally is 28 percent for reversals in fiscal 2018 or 21 percent for reversals after fiscal 2018. However, we are still evaluating certain aspects of the Tax Act and refining our calculations, which potentially affects our current estimated valuation of our net deferred income tax assets and could give rise to new deferred tax amounts.

Although the Tax Act affects the tax treatment of foreign earnings and profits (“E&P”) and results in a one-time transition tax on our post-1986 foreign E&P that we have previously deferred from U.S. income tax expense, we have provisionally determined that we will not owe any transition tax. However, we are still refining our calculations, which include estimates for our fiscal 2017 and 2018 layers for foreign E&P, and they could change and therefore change the amount of transition tax we will owe.

Because of the potential impact of deficit allocations on the tax basis for netted foreign E&P of related foreign subsidiaries, we are maintaining a deferred tax liability of approximately $25 million in respect of potential cumulative tax basis differences of $116 million. New statutory or regulatory guidance and further analysis may result in a change in our conclusion as to the need for a deferred tax liability in respect of these cumulative tax basis differences. Other than this deferred tax liability, we have provided for no additional income taxes on any remaining undistributed foreign E&P not subject to the transition tax, or any outside tax basis differences inherent in our foreign subsidiaries, because all other amounts continue to be reinvested indefinitely.

We anticipate future impacts at a U.S. state and local tax level related to the Tax Act; however, statutory and interpretive guidance is not available from applicable state and local tax authorities to reasonably estimate the impact. Consequently, we have not recorded provisional amounts and have continued to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.