Income Taxes

3 Months Ended

Aug. 31, 2019

NOTE 6 — INCOME TAXES

The effective tax rate was 12.4% and 14.0% for the three months ended August 31, 2019 and August 31, 2018 respectively. The change in the Company's effective tax rate was due to a change in the proportion of earnings taxed in the United States and discrete items.

As of August 31, 2019, total gross unrecognized tax benefits, excluding related interest and penalties, were $897 million, $624 million of which would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets. As of May 31, 2019, total gross unrecognized tax benefits, excluding related interest and penalties, were $808 million. The liability for payment of interest and penalties decreased by $29 million during the three months ended August 31, 2019. As of August 31, 2019 and May 31, 2019, accrued interest and penalties related to uncertain tax positions were $145 million and $174 million, respectively (excluding federal benefit).

The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments.

The Company's major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2008 and fiscal 2013, 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 $150 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the Company's Netherlands income taxes in the future could increase.