
	2019		2018		2017

	(In millions)
Current:
U.S.	$	240	$	1,021	$	64
Foreign	260		117		236
State	12		22		9
	512		1,160		309
Deferred:
U.S.	8		151		(11)
Foreign	46		57		(7)
State	(3)		(10)		6
	51		198		(12)
	$	563	$	1,358	$	297


	2019		2018		2017
Tax provision at U.S. statutory rate	21.0	%	23.4	%	35.0	%
Changes in U.S. tax law	—		25.3		—
Effect of foreign operations taxed at various rates	(5.9)		(15.6)		(25.3)
Changes in prior years' unrecognized tax benefits	2.6		(0.9)		0.1
Resolutions of prior years' income tax filings	(0.1)		0.2		(1.8)
Research and other tax credits	(1.1)		(0.8)		(0.7)




Other	0.7		(0.7)		0.5
	17.2	%	30.9	%	7.8	%

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 may be selected 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.

Before the Tax Act, U.S. income tax had not been provided for certain unrepatriated earnings that were considered indefinitely reinvested. Income tax is now provided for all unrepatriated earnings.

The effective tax rate for fiscal 2019 was lower than fiscal 2018 primarily due to tax expense of $1.1 billion in 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 fiscal 2019 was higher than fiscal 2018 primarily due to certain provisions in the Tax Act becoming effective in fiscal 2019, tax expense of $87 million in fiscal 2019 related to changes in uncertain tax positions and the excess tax benefit from share-based compensation in fiscal 2019 being $42 million less than the prior fiscal year.

The effective tax rate for fiscal 2018 was higher than fiscal 2017 primarily due to tax expense of $1.1 billion for the transition tax and remeasurement of deferred tax assets as a result of the Tax Act, partially offset by changes in the geographical composition of income, tax benefits from the lower U.S. federal corporate tax rate, adoption of authoritative guidance for share-based compensation, and the resolution of tax liabilities for uncertain tax positions. In addition, fiscal 2017 included tax benefits from the recognition of previously unrecognized foreign tax credits.

In the reconciliation between the statutory U.S. federal income tax rate and the effective income tax rate, the effect of foreign operations taxed at various rates represents the difference between an income tax provision at the U.S. federal statutory income tax rate and the recorded income tax provision, with the difference expressed as a percentage of worldwide income before income taxes. This effect is substantially related to the tax effect of pre-tax income in jurisdictions with lower statutory tax rates. The foreign operations with the most significant effective tax rate impact are in Singapore. The statutory tax rate for fiscal 2018 for Singapore is 17%. Applied has been granted conditional reduced tax rates that expire in fiscal 2025, excluding potential renewal and subject to certain conditions with which Applied expects to comply. The tax benefit arising from these tax rates was $167 million for fiscal 2019 or $0.18 per diluted share.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized. The components of deferred income tax assets and liabilities were as follows:


	October 27, 2019		October 28, 2018

	(In millions)
Deferred tax assets:
Allowance for doubtful accounts	$	8	$	8
Inventory reserves and basis difference	117		117
Installation and warranty reserves	11		7
Intangible assets	1,472		—
Accrued liabilities	15		20

Deferred revenue	36		12

Tax credits	264		236
Deferred compensation	98		79
Share-based compensation	36		37

Other	58		45
Gross deferred tax assets	2,115		561
Valuation allowance	(257)		(230)
Total deferred tax assets	1,858		331
Deferred tax liabilities:
Fixed assets	(65)		(48)
Intangible assets	—		(38)
Undistributed foreign earnings	(38)		(32)


Total deferred tax liabilities	(103)		(118)
Net deferred tax assets	$	1,755	$	213

At October 27, 2019, Applied has state research and development tax credit carryforwards of $264 million, including $252 million of credits that are carried over until exhausted and $11 million that are carried over for 15 years and begin to expire in fiscal 2029. It is more likely than not that all tax credit carryforwards, net of valuation allowance, will be utilized.

Applied maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored based on the best information available. Gross unrecognized tax benefits are classified as non-current income taxes payable or as a reduction in deferred tax assets. A reconciliation of the beginning and ending balances of gross unrecognized tax benefits in each fiscal year is as follows:


	2019		2018		2017

	(In millions)
Beginning balance of gross unrecognized tax benefits	$	374	$	391	$	320

Settlements with tax authorities	(1)		(152)		(42)
Lapses of statutes of limitation	(2)		(37)		(15)
Increases in tax positions for current year	33		91		95
Increases in tax positions for prior years	441		83		33
Decreases in tax positions for prior years	—		(2)		—
Ending balance of gross unrecognized tax benefits	$	845	$	374	$	391

The increases in tax positions for prior years of $441 million for fiscal 2019 include the effect of adoption of Accounting Standard Update 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (See Note 1). Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2019, 2018 and 2017 was $24 million, $12 million and $17 million, respectively. The income tax liability for interest and penalties for fiscal 2019, 2018 and 2017 was $50 million, $26 million and $46 million, respectively, and was classified as non-current income taxes payable.

Included in the balance of unrecognized tax benefits for fiscal 2019, 2018 and 2017 are $758 million, $294 million, and $284 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

In fiscal 2019, Applied paid an immaterial amount as a result of settlements with tax authorities. In fiscal 2018, Applied paid $158 million, including interest and penalties, as a result of a settlement in Israel for fiscal 2011 through fiscal 2015 resulting in the recognition of a tax expense of $6 million. In fiscal 2017, Applied paid $29 million, including interest and penalties, as a result of a settlement in Italy for fiscal 2011 resulting in the recognition of a tax expense of $6 million.

Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. returns for fiscal 2015 and later years, and foreign tax returns for fiscal 2010 and later years.

The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be part of the settlement process, is highly uncertain. This could cause fluctuations in Applied’s financial condition and results of operations. Applied continues to have ongoing negotiations with various taxing authorities throughout the year.