
	2020		2019		2018

	(In millions)
Current:
U.S.	$	196	$	240	$	1,021
Foreign	263		260		117
State	20		12		22
	479		512		1,160
Deferred:
U.S.	(3)		8		151
Foreign	76		46		57
State	(5)		(3)		(10)
	68		51		198
	$	547	$	563	$	1,358


	2020		2019		2018
Tax provision at U.S. statutory rate	21.0	%	21.0	%	23.4	%
Changes in U.S. tax law	—		—		25.3
Effect of foreign operations taxed at various rates	(5.9)		(5.9)		(15.6)
Changes in prior years’ unrecognized tax benefits	0.5		2.6		(0.9)
Resolutions of prior years’ income tax filings	(1.0)		(0.1)		0.2
Research and other tax credits	(1.3)		(1.1)		(0.8)




Other	(0.2)		0.7		(0.7)
	13.1	%	17.2	%	30.9	%

On June 14, 2019, the U.S. government released regulations that significantly affect how the global intangible low-taxed income (GILTI) provision of the Tax Cuts and Jobs Act (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.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The enactment of the CARES Act does not result in any material adjustments to Applied’s provision for income taxes.

Applied’s effective tax rate for fiscal 2020 was lower than fiscal 2019 primarily due to a decline in the tax expense from changes to uncertain tax provisions year-over-year, an increased tax benefit from tax credits, and increased excess stock compensation tax benefits. This benefit was partly offset by an unfavorable settlement of an uncertain tax position in fiscal 2020.

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.

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 $215 million for fiscal 2020 or $0.23 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 25, 2020		October 27, 2019

	(In millions)
Deferred tax assets:
Allowance for doubtful accounts	$	4	$	8
Inventory reserves and basis difference	119		117
Installation and warranty reserves	14		11
Intangible assets	1,355		1,472
Accrued liabilities	24		15

Deferred revenue	32		36

Tax credits	326		264
Deferred compensation	130		98
Share-based compensation	30		36

Lease liability	55		—
Other	96		58
Gross deferred tax assets	2,185		2,115
Valuation allowance	(314)		(257)
Total deferred tax assets	1,871		1,858
Deferred tax liabilities:
Fixed assets	(76)		(65)
Right of use assets	(54)		—

Undistributed foreign earnings	(39)		(38)


Total deferred tax liabilities	(169)		(103)
Net deferred tax assets	$	1,702	$	1,755

At October 25, 2020, Applied has state research and development tax credit carryforwards of $327 million, including $309 million of credits that are carried over until exhausted and $15 million that are carried over for 15 years and begin to expire in fiscal 2031. 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:


	2020		2019		2018

	(In millions)
Beginning balance of gross unrecognized tax benefits	$	845	$	374	$	391

Settlements with tax authorities	(446)		(1)		(152)
Lapses of statutes of limitation	(3)		(2)		(37)
Increases in tax positions for current year	44		33		91
Increases in tax positions for prior years	91		441		83
Decreases in tax positions for prior years	(35)		—		(2)
Ending balance of gross unrecognized tax benefits	$	496	$	845	$	374

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. Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2020, 2019 and 2018 was $24 million, $24 million and $12 million, respectively. The income tax liability for interest and penalties for fiscal 2020, 2019 and 2018 was $74 million, $50 million and $26 million, respectively, and was classified as non-current income taxes payable.

Included in the balance of unrecognized tax benefits for fiscal 2020, 2019 and 2018 are $410 million, $758 million, and $294 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

In fiscal 2020, Applied settled tax audits in Singapore related to fiscal 2012 through fiscal 2019 for additional tax payments of $72 million and a reduction of future tax deductions of $374 million. The tax expense impact of these settlements was $26 million. 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.

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.