Income Taxes

9 Months Ended

Jul. 28, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (Tax Act). The Tax Act requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities were subject to remeasurement due to the reduction of the U.S. federal corporate tax rate. The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which provided guidance on accounting for the income tax effects of the Tax Act and a measurement period for companies to complete this accounting. Applied completed the accounting for the Tax Act during the measurement period, which ended one year after the enactment date of the Tax Act. Accounting for the remeasurement of deferred tax assets was completed in the fourth quarter of fiscal 2018, and the accounting for the transition tax was completed in the first quarter of fiscal 2019.

The Tax Act also includes provisions that impact Applied starting in fiscal 2019, including a provision designed to tax global intangible low-taxed income (GILTI). On June 14, 2019, the U.S. government released regulations that significantly affect how the GILTI provision of the Tax Act is interpreted. As a result, Applied reversed a tax benefit of $96 million in the third quarter of fiscal 2019 that had been realized in the first half of fiscal 2019. An accounting policy choice is allowed to treat GILTI temporary differences in taxable income either as a current-period expense when incurred (period cost method) or factor such amounts into the measurement of deferred taxes (deferred method). Applied has chosen the period cost method.

Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and the resolution of prior years’ income tax filings.

Applied’s effective tax rates for the third quarter of fiscal 2019 and 2018 were 27.0 percent and 5.7 percent, respectively. The effective tax rate for the third quarter of fiscal 2019 was higher than the same period in the prior fiscal year primarily due to the regulations released on June 14, 2019. 

Applied’s effective tax rates for the first nine months of fiscal 2019 and 2018 were 17.3 percent and 35.2 percent, respectively. The effective tax rate was lower than the same period in the prior fiscal year primarily due to tax expense of $1.1 billion in the first nine months of fiscal 2018 for the transition tax and remeasurement of deferred tax assets as a result of the Tax Act. Excluding the tax expense of $1.1 billion, the effective tax rate for the first nine months of fiscal 2019 was higher than the rate in the same period of the prior fiscal year primarily due to certain provisions in the Tax Act becoming effective in fiscal 2019, tax expense of $79 million in the first nine months of fiscal 2019 related to changes in uncertain tax positions and the excess tax benefit from share-based compensation in the first nine months of fiscal 2019 being $42 million less than in the same period in the prior fiscal year.

During the next twelve months, it is reasonably possible that unrecognized tax benefits related to certain tax positions taken on previously filed tax returns could be recognized in the amount of approximately $65 million as a result of negotiations with tax authorities and lapses of statutes of limitation.