INCOME TAXES

12 Months Ended

Jun. 30, 2020

INCOME TAXES

Income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax assets and liabilities, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the U.S. Tax Act). The U.S. Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rates and implementing a hybrid territorial tax system. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ended June 30, 2018, and 21% for subsequent fiscal years. However, the U.S. Tax Act eliminated the domestic manufacturing deduction and moved to a hybrid territorial system, which also largely eliminated the ability to credit certain foreign taxes that existed prior to enactment of the U.S. Tax Act.

There were also certain transitional impacts of the U.S. Tax Act. As part of the transition to the new hybrid territorial tax system, the U.S. Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate caused us to adjust our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $602 for the fiscal year ended June 30, 2018, comprised of an estimated repatriation tax charge of $3.8 billion (comprised of U.S. repatriation taxes and foreign withholding taxes) and an estimated net deferred tax benefit of $3.2 billion. The transitional impact was finalized during the fiscal year ended June 30, 2019, with no significant impact on income tax expense.

Any legislative changes, as well as any other new or proposed Treasury regulations to address questions that arise because of the U.S. Tax Act, may result in additional income tax impacts which could be material in the period any such changes are enacted.

The Global Intangible Low-Taxed Income (GILTI) provision of the U.S. Tax Act requires the Company to include in its U.S. Income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. An accounting policy election is available to account for the tax effects of GILTI either as a current period expense when incurred, or to recognize deferred taxes for book and tax basis differences expected to reverse as GILTI in future years. We have elected to account for the tax effects of GILTI as a current period expense when incurred.

Earnings before income taxes consisted of the following:


Years ended June 30	2020		2019		2018
United States	$	10,338	$	1,659	$	9,277
International	5,496		4,410		4,049
TOTAL	$	15,834	$	6,069	$	13,326

Income taxes consisted of the following:


Years ended June 30	2020		2019		2018
CURRENT TAX EXPENSE
U.S. federal	$	1,266	$	1,064	$	3,965
International	1,769		1,259		1,131
U.S. state and local	292		191		213
	3,327		2,514		5,309
DEFERRED TAX EXPENSE/(BENEFIT)
U.S. federal	39		(296)		(1,989)
International and other	(635)		(115)		145
	(596)		(411)		(1,844)
TOTAL TAX EXPENSE	$	2,731	$	2,103	$	3,465

A reconciliation of the U.S. federal statutory income tax rate to our actual effective income tax rate is provided below:


Years ended June 30	2020		2019		2018
U.S. federal statutory income tax rate	21.0	%	21.0	%	28.1	%
Country mix impacts of foreign operations	(0.1)	%	(0.5)	%	(4.7)	%
State income taxes, net of federal benefit	1.4	%	2.6	%	1.4	%
Excess tax benefits from the exercise of stock options	(1.6)	%	(3.8)	%	(0.4)	%
Tax benefit from simplification of legal entity structure	(1.4)	%	—	%	—	%
Foreign derived intangible income deduction (FDII)	(1.0)	%	(2.2)	%	—	%
Changes in uncertain tax positions	0.1	%	(0.3)	%	(0.3)	%
Goodwill impairment	—	%	22.8	%	—	%
Net transitional impact of U.S. Tax Act	—	%	—	%	4.5	%
Other	(1.2)	%	(4.9)	%	(2.6)	%
EFFECTIVE INCOME TAX RATE	17.2	%	34.7	%	26.0	%

Country mix impacts of foreign operations includes the effects of foreign subsidiaries' earnings taxed at rates other than the U.S. statutory rate, the U.S. tax impacts of non-U.S. earnings repatriation and any net impacts of intercompany transactions. Changes in uncertain tax positions represent changes in our net liability related to prior year tax positions.

Excess tax benefits from the exercise of stock options reflect the excess of actual tax benefits received on employee exercises of stock options and other share-based payments (which generally equals the income taxable to the employee) over the amount of tax benefits that were calculated at the grant dates of such instruments.

Tax benefits credited to shareholders' equity totaled $18 for the year ended June 30, 2020. This primarily relates to the tax effects of certain adjustments to pension obligations and unrealized foreign exchange losses recorded in stockholders' equity, partially offset by the tax effects of net investment hedges. Tax costs charged to shareholders' equity totaled $80 for the year ended June 30, 2019. This primarily relates to the tax effects of net investment hedges and certain adjustments to pension obligations recorded in stockholders' equity.

Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely invested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to a one-time transition tax. This charge included taxes for all U.S. income taxes and for the related foreign withholding taxes for the portion of those earnings which are no longer considered indefinitely invested. We have not provided deferred taxes on approximately $19 billion of earnings that are considered permanently reinvested.

A reconciliation of the beginning and ending liability for uncertain tax positions is as follows:


Years ended June 30	2020		2019		2018
BEGINNING OF YEAR	$	466	$	470	$	465
Increases in tax positions for prior years	60		85		26
Decreases in tax positions for prior years	(21)		(94)		(38)
Increases in tax positions for current year	82		71		87
Settlements with taxing authorities	(83)		(37)		(45)
Lapse in statute of limitations	(12)		(27)		(20)
Currency translation	(7)		(2)		(5)
END OF YEAR	$	485	$	466	$	470

Included in the total liability for uncertain tax positions at June 30, 2020 is $278 that, depending on the ultimate resolution, could impact the effective tax rate in future periods.

The Company is present in approximately 70 countries and over 150 taxable jurisdictions and, at any point in time, has 40-50 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an

ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2008 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available, we anticipate that over the next 12-month period, audit activity could be completed related to uncertain tax positions in multiple jurisdictions for which we have accrued existing liabilities of approximately $60, including interest and penalties.

We recognize the additional accrual of any possible related interest and penalties relating to the underlying uncertain tax position in income tax expense. As of June 30, 2020, 2019 and 2018, we had accrued interest of $141, $133 and $99 and accrued penalties of $17, $17 and $15, respectively, which are not included in the above table. During the fiscal years ended June 30, 2020, 2019 and 2018, we recognized $39, $40 and $22 in interest expense and $1, $2 and $5 in penalties expense, respectively.

Deferred income tax assets and liabilities were comprised of the following:


As of June 30	2020		2019
DEFERRED TAX ASSETS
Pension and postretirement benefits	$	1,602	$	1,591
Loss and other carryforwards	875		1,007
Stock-based compensation	398		421
Accrued marketing and promotion	353		334
Fixed assets	218		232
Lease liabilities	190		—
Unrealized loss on financial and foreign exchange transactions	64		73
Inventory	27		41
Accrued interest and taxes	20		15
Other	829		931
Valuation allowances	(486)		(442)
TOTAL	$	4,090	$	4,203

DEFERRED TAX LIABILITIES
Goodwill and intangible assets	$	5,775	$	6,506
Fixed assets	1,485		1,413
Lease right-of-use assets	185		—
Unrealized gain on financial and foreign exchange transactions	169		147
Foreign withholding tax on earnings to be repatriated	118		239
Other	366		351
TOTAL	$	8,098	$	8,656

Net operating loss carryforwards were $2.9 billion at June 30, 2020 and $3.5 billion at June 30, 2019. If unused, approximately $900 will expire between 2020 and 2039. The remainder, totaling $2.0 billion at June 30, 2020, may be carried forward indefinitely.