INCOME TAXES

We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes:



	2016		2017		2018
United States	$	1,184	$	806	$	747
Foreign	305		127		230
	$	1,489	$	933	$	977

The income shown above was determined according to GAAP. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year; and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above.

Total income tax expense for a year includes the tax associated with the current tax return (current tax expense) and the change in the net deferred tax asset or liability (deferred tax expense). Our total income tax expense for each of the last three years was as follows:



	2016			2017			2018
Current:
U.S. federal	$	347		$	226		$	265
Foreign	47			40			47
State and local	18			8			17
	412			274			329
Deferred:
U.S. federal	$	24		$	(1	)	$	(48	)
Foreign	(17		)	(9		)	(13		)
State and local	3			—			(8		)
	10			(10		)	(69		)
	$	422		$	264		$	260

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As we have an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for subsequent fiscal years. During fiscal 2018, the impact of the lower tax rate resulted in a tax benefit of approximately $19. With the enactment of the Tax Act, we are evaluating our global working capital requirements and may change our current permanent reinvestment assertion in future periods.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes 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 required 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 $43 for the year ended April 30, 2018, comprised of a provisional repatriation U.S. tax charge of $91 and a provisional net deferred tax benefit of $48.

The Tax Act also established new tax laws that may impact our financial statements beginning in fiscal 2019. These new laws include, but are not limited to (a) Global Intangible Low-Tax Income (GILTI), a new provision for tax on low-tax foreign earnings; (b) Base Erosion Anti-abuse Tax (BEAT), a new minimum tax; (c) repeal of the domestic production activity deduction; and (d) limitations on certain executive compensation.

As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. Due to the complexity of calculating GILTI under the Tax Act, we have not determined which method we will apply. Therefore, we have not recognized any adjustments for GILTI tax in our fiscal 2018 financial statements. We expect to elect an accounting policy in the first quarter of fiscal 2019.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimates, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have used to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

Shortly after the Tax Act was enacted, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). Under SAB 118, companies are provided a measurement period, not to extend beyond one year since the date of enactment. To the extent a company’s accounting for certain income tax effects are incomplete, the company may determine a reasonable estimate and record a provisional amount within the first reporting period in which a reasonable estimate can be determined. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within the measurement period of one year.

Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions with no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States:



	Percent of Income Before Taxes
	2016		2017		2018
U.S. federal statutory rate	35.0	%	35.0	%	30.4	%
State taxes, net of U.S. federal tax benefit	1.0	%	0.9	%	0.8	%
Income taxed at other than U.S. federal statutory rate	(2.5	%)	(1.7	%)	(3.4	%)
Tax benefit from U.S. manufacturing	(2.4	%)	(2.4	%)	(2.5	%)
Tax impact of sale of business	(1.1	%)	—	%	—	%
Amortization of deferred tax benefit from intercompany transactions	(1.6	%)	(1.7	%)	(1.6	%)
Excess tax benefits from stock-based awards	—	%	(1.0	%)	(1.8	%)
Provisional impact of Tax Act	—	%	—	%	2.5	%
Other, net	(0.1	%)	(0.8	%)	2.2	%
Effective rate	28.3	%	28.3	%	26.6	%

Deferred tax assets and liabilities as of the end of each of the last two years were as follows:



April 30,	2017			2018
Deferred tax assets:
Postretirement and other benefits	$	173		$	89
Accrued liabilities and other	17			36
Inventories	27			48
Loss carryforwards	44			51
Valuation allowance	(30		)	(29		)
Total deferred tax assets, net	231			195
Deferred tax liabilities:
Intangible assets	(262		)	(199		)
Property, plant, and equipment	(90		)	(64		)
Other	(15		)	(1		)
Total deferred tax liabilities	(367		)	(264		)
Net deferred tax liability	$	(136	)	$	(69	)

Details of the loss carryforwards and related valuation allowances as of the end of each of the last two years are as follows:



	April 30, 2017							April 30, 2018
	Gross Amount		Deferred Tax Asset		Valuation Allowance			Gross Amount		Deferred Tax Asset		Valuation Allowance			Expiration (as of April 30, 2018)
Finland net operating losses	$	65	$	13	$	—		$	94	$	19	$	—		2024-2028
Brazil net operating losses	49		17		(17		)	48		16		(16		)	None
United Kingdom non-trading losses	27		5		(5		)	29		6		(6		)	None
Various state net operating losses	—		—		—			34		2		—			2033-2038
Other	43		9		(8		)	41		8		(7		)	Various¹
	$	184	$	44	$	(30	)	$	246	$	51	$	(29	)

¹As of April 30, 2018, gross amount includes loss carryforwards of $11 that do not expire and $30 that expire in varying amounts over the next 10 years.

Although the losses in Brazil can be carried forward indefinitely, it is uncertain whether we will realize sufficient taxable income to allow us to use these losses. The non-trading losses in the United Kingdom can also be carried forward indefinitely. However, we know of no significant transactions that will let us use them.

During 2014, we deferred a tax benefit of $95 that resulted primarily from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets, composed primarily of an intangible asset. We have been amortizing the deferred benefit to tax expense over approximately six years for financial reporting purposes, in accordance with Accounting Standard Codification (ASC) 740-10-25-3(e) (Income Taxes) and ASC 810-45-8 (Consolidation), resulting in a tax benefit of $5 in 2014, $15 in 2015, $16 in 2016, $16 in 2017, and $16 in 2018. The remaining balance of the deferred benefit, which is included in “other liabilities” on the accompanying consolidated balance sheet, was $27 as of April 30, 2018. As discussed in Note 1, revised accounting guidance (ASU 2016-16) will require the recognition of income tax consequences of intercompany transfers of assets other than inventory when the transfer occurs. Our adoption of this revised guidance will result in this balance being recognized as an increase in retained earnings rather than as a reduction in income tax expense.

As of April 30, 2018, we had approximately $1,270 of undistributed earnings from our foreign subsidiaries ($1,053 at April 30, 2017). Historically, deferred tax liabilities have not been recognized on these earnings. However, upon enactment of the Tax Act, the undistributed earnings of our foreign subsidiaries are subject to U.S. tax due to the Tax Act’s provision imposing a mandatory deemed repatriation tax on accumulated foreign earnings provision. As a result, we have provisionally recognized a one-time income tax expense of $91. Deferred tax liabilities were not provided for any additional outside basis differences inherent in our foreign subsidiaries (i.e. basis differences in excess of those subject to the mandatory deemed repatriation tax) as these amounts continue to be provisionally reinvested indefinitely outside the United States. If these amounts were not considered permanently reinvested, deferred tax liabilities would have been provided for additional income taxes (if any) and withholding taxes payable in various countries. A determination of the unrecognized deferred tax liabilities on the earnings reinvested indefinitely at April 30, 2018 is not practicable.

At April 30, 2018, we had $11 of gross unrecognized tax benefits, $9 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:



	2016			2017			2018
Unrecognized tax benefits at beginning of year	$	13		$	9		$	9
Additions for tax positions provided in prior periods	1			2			5
Additions for tax positions provided in current period	—			—			1
Decreases for tax positions provided in prior years	(4		)	(2		)	(4		)
Settlements of tax positions in the current period	(1		)	—			—
Unrecognized tax benefits at end of year	$	9		$	9		$	11

We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2011 for one state in the United States; 2016 in the United Kingdom; 2014 in Australia and Finland; 2013 in Brazil, Germany, Mexico and the Netherlands; and 2012 in Poland. The audit of our fiscal 2016 U.S. federal tax return was concluded in the second quarter of fiscal 2018; we expect the audit of the fiscal 2017 U.S. federal tax return to be concluded in the first half of fiscal 2019. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2018 tax year.

We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months.