NOTE 5 — Income Taxes

The effective tax rate was 23.6% and 24.2% for the nine month periods ended February 28, 2015 and 2014, respectively. The decrease in the Company’s effective tax rate was primarily due to the resolution of audits in several jurisdictions, an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate, and the retroactive reinstatement of the U.S. research and development tax credit. These factors were partially offset by the impact of tax expense on intercompany transactions.

As of February 28, 2015, total gross unrecognized tax benefits, excluding related interest and penalties, were $444 million, $252 million of which would affect the Company’s effective tax rate if recognized in future periods. As of May 31, 2014, total gross unrecognized tax benefits, excluding related interest and penalties, were $506 million. The liability for payment of interest and penalties did not change during the nine months ended February 28, 2015. As of February 28, 2015 and May 31, 2014, accrued interest and penalties related to uncertain tax positions were $167 million (excluding federal benefit).

The Company is subject to taxation primarily in the United States, China, the Netherlands and Brazil, as well as various other state and foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service (IRS) for the 2012 through 2014 tax years. The Company has closed all U.S. federal income tax matters through fiscal 2011, with the exception of the validation of foreign tax credits utilized. During the current period, the IRS issued a statutory notice of deficiency for fiscal 2011 proposing an increase in tax of $31 million, subject to interest, related to the foreign tax credit matter. This notice also reported a decrease in foreign tax credit carryovers for fiscal 2010 and 2011. The Company does not expect the outcome of this matter to have a material impact on the financial statements. The Company intends to contest this deficiency notice by filing a petition with the U.S. Tax Court. No payments on the assessment would be required until the dispute is definitively resolved. Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits for this matter within the next 12 months.

The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2009 and calendar 2008, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $38 million within the next 12 months.