Income Taxes

12 Months Ended

Sep. 29, 2019

On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Act. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. The tax rate for fiscal 2019 and future years was reduced to 21% from our blended 24.5% in fiscal 2018. In the first quarter of fiscal 2019 the measurement period related to the Tax Act concluded, which resulted in immaterial adjustments to our provisional estimates.

While the Tax Act provides for a modified territorial tax system, global intangible low-taxed income (“GILTI”) provisions are applied providing an incremental tax on foreign income. We have made a policy election to classify taxes due under the GILTI provision as a current period expense.

Components of earnings before income taxes (in millions):



Fiscal Year Ended	Sep 29, 2019		Sep 30, 2018		Oct 1, 2017
United States	$	3,518.7	$	4,826.0	$	3,393.0
Foreign	947.5		954.0		924.5
Total earnings before income taxes	$	4,466.2	$	5,780.0	$	4,317.5

Provision/(benefit) for income taxes (in millions):



Fiscal Year Ended	Sep 29, 2019			Sep 30, 2018			Oct 1, 2017
Current taxes:
U.S. federal	$	1,414.3		$	156.2		$	931.0
U.S. state and local	447.8			52.0			170.8
Foreign	458.3			327.0			216.6
Total current taxes	2,320.4			535.2			1,318.4
Deferred taxes:
U.S. federal	(1,074.5		)	633.7			121.2
U.S. state and local	(322.4		)	101.5			14.2
Foreign	(51.9		)	(8.4		)	(21.2		)
Total deferred taxes	(1,448.8		)	726.8			114.2
Total income tax expense	$	871.6		$	1,262.0		$	1,432.6

Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate:



Fiscal Year Ended	Sep 29, 2019		Sep 30, 2018		Oct 1, 2017
Statutory rate	21.0	%	24.5	%	35.0	%
State income taxes, net of federal tax benefit	2.1		2.1		2.8
Foreign rate differential	(0.1	)	(0.1	)	(2.8	)
Excess tax benefits of stock-based compensation	(2.1	)	(0.9	)	—
Residual tax on foreign earnings	1.7		—		—
Foreign derived intangible income	(1.5	)	—		—
Tax impacts related to sale of certain operations	(1.3	)	—		—
Domestic production activity deduction	—		—		(1.8	)
Gain resulting from acquisition of joint venture	—		(5.8	)	—
Impact of the Tax Act	—		2.8		—
Other, net	(0.3	)	(0.8	)	—
Effective tax rate	19.5	%	21.8	%	33.2	%

In the first quarter of fiscal 2019, we revised our indefinite reinvestment assertions for prior years' earnings from certain foreign subsidiaries. This change did not have a material impact to our financial results. As of September 29, 2019, in foreign subsidiaries in which we are partially indefinitely reinvested, the gross taxable temporary difference between the accounting basis and tax basis was approximately $1.3 billion, for which there could be up to approximately $300 million of unrecognized tax liability.

Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in millions):



	Sep 29, 2019			Sep 30, 2018
Deferred tax assets:
Property, plant and equipment	$	66.5		$	67.4
Intangible assets and goodwill	230.0			—
Accrued occupancy costs	121.6			109.0
Accrued compensation and related costs	62.7			64.2
Stored value card liability and deferred revenue	1,649.0			144.2
Stock-based compensation	77.5			96.7
Net operating losses	75.6			79.2
Other	130.7			129.5
Total	$	2,413.6		$	690.2
Valuation allowance	(75.1		)	(129.3		)
Total deferred tax asset, net of valuation allowance	$	2,338.5		$	560.9
Deferred tax liabilities:
Property, plant and equipment	(400.9		)	(348.1		)
Intangible assets and goodwill	(209.9		)	(274.2		)
Other	(148.3		)	(74.1		)
Total	(759.1		)	(696.4		)
Net deferred tax asset (liability)	$	1,579.4		$	(135.5	)
Reported as:
Deferred income tax assets	1,765.8			134.7
Deferred income tax liabilities (included in Other long-term liabilities)	(186.4		)	(270.2		)
Net deferred tax asset (liability)	$	1,579.4		$	(135.5	)

The valuation allowance as of September 29, 2019 and September 30, 2018 was primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries.

As of September 29, 2019, we had federal net operating loss carryforwards of $41.8 million which have an indefinite carryforward period, state net operating loss carryforwards of $78.1 million which will begin to expire in fiscal 2024, state tax credit carryforwards of $3.5 million which will begin to expire in fiscal 2024, and foreign net operating loss carryforwards of $246.2 million, of which $109.5 million have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2020.

Uncertain Tax Positions

As of September 29, 2019, we had $132.1 million of gross unrecognized tax benefits of which $113.2 million, if recognized, would affect our effective tax rate. We recognized a benefit of $2.8 million, a benefit of $0.5 million and an expense of $5.2 million of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2019, 2018 and 2017, respectively. As of September 29, 2019 and September 30, 2018, we had accrued interest and penalties of $10.0 million and $12.8 million, respectively, within our consolidated balance sheets.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):



	Sep 29, 2019			Sep 30, 2018			Oct 1, 2017
Beginning balance	$	224.6		$	196.9		$	146.5
Increase related to prior year tax positions	3.8			17.5			10.4
Decrease related to prior year tax positions	(75.3		)	(41.8		)	—
Increase related to current year tax positions	18.5			62.4			41.3
Decreases related to settlements with taxing authorities	(16.4		)	(4.5		)	—
Decrease related to lapsing of statute of limitations	(23.1		)	(5.9		)	(1.3		)
Ending balance	$	132.1		$	224.6		$	196.9

We are currently under examination, or may be subject to examination, by various U.S. federal, state, local and foreign tax jurisdictions for fiscal 2008 through 2018. We are no longer subject to U.S. federal examination for years prior to fiscal 2016. We are no longer subject to U.S. state examination for years prior to fiscal 2011. We are no longer subject to examination in any material international markets prior to 2008.

It is reasonably possible that up to $29 million of the Company's gross unrecognized tax benefits may be recognized by the end of fiscal 2020 for reasons such as a lapse of the statute of limitations or resolution of examinations with tax authorities.