INCOME TAXES

12 Months Ended

Jun. 29, 2019

Income Tax Provisions

For financial reporting purposes, earnings before income taxes consists of the following:



	2019		2018		2017
	(In thousands)
U.S.	$	1,910,549	$	1,765,793	$	1,569,073
Foreign	95,287		190,431		197,157
Total	$	2,005,836	$	1,956,224	$	1,766,230

The income tax provision for each fiscal year consists of the following:



	2019			2018		2017
	(In thousands)
U.S. federal income taxes	$	262,940		$	399,254	$	534,266
State and local income taxes	73,835			62,670		69,913
Foreign income taxes	(5,210		)	63,534		19,548
Total	$	331,565		$	525,458	$	623,727

The current and deferred components of the income tax provisions for each fiscal year are as follows:



	2019			2018		2017
	(In thousands)
Current	$	458,284		$	337,550	$	675,573
Deferred	(126,719		)	187,908		(51,846		)
Total	$	331,565		$	525,458	$	623,727

The deferred tax provisions result from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred Tax Assets and Liabilities

Significant components of Sysco’s deferred tax assets and liabilities are as follows:



	Jun. 29, 2019			Jun. 30, 2018
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	274,231		$	226,274
Pension	157,670			115,361
Share-based compensation	39,218			34,486
Deferred compensation	29,694			29,512
Receivables	17,383			13,001
Self-insured liabilities	16,496			—
Inventory	12,139			14,728
Foreign currency remeasurement losses and currency hedge	1,725			15,796
Other	32,641			33,386
Deferred tax assets before valuation allowances	581,197			482,544
Valuation allowances	(127,807		)	(123,237		)
Total deferred tax assets	453,390			359,307
Deferred tax liabilities:
Excess tax depreciation and basis differences of assets	163,123			180,950
Goodwill and intangible assets	358,847			373,041
Other	22,892			40,774
Total deferred tax liabilities	544,862			594,765
Total net deferred tax assets (liabilities)	$	(91,472	)	$	(235,458	)

The company’s deferred tax asset for net operating loss carryforwards as of June 29, 2019 and June 30, 2018 consisted of state and foreign net operating tax loss carryforwards. The state net operating loss carryforwards outstanding as of June 29, 2019 expire in fiscal years 2020 through 2038. The foreign net operating loss carryforward periods vary by jurisdiction, from 17 years to unlimited.

The company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. As a result of the company’s analysis, it was concluded that, as of June 29, 2019, a valuation allowance of $127.8 million should be established against the portion of the deferred tax asset attributable to certain foreign and U.S. state losses. The company will continue to monitor facts and circumstances in the reassessment of the likelihood that net operating loss carryforwards will be realized.

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code that affected the company’s fiscal year ending June 30, 2018, including, but not limited to: (1) reducing the U.S. federal corporate tax rate; (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over 8 years; and (3) bonus depreciation that will allow for full expensing of qualified property placed in service after September 27, 2017. The Tax Act also establishes new tax laws that could affect Sysco in future fiscal years, including, but not limited to (1) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (2) a new provision designed to tax global intangible low-taxed income (GILTI); (3) creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (4) a new limitation on deductible interest; (5) repeal of the domestic production activity deduction; and (6) increased limitations on the deductibility of certain executive compensation.

Also, in December 2017, the Securities and Exchange Commission staff issued SAB 118, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC Topic 740, “Income Taxes” (ASC 740). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act was incomplete, but it was able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company could not determine a provisional estimate to be included in the financial statements, it continued to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. In accordance with SAB 118, the company recognized provisional impacts related to re-measurement of deferred tax assets and liabilities and the one-time transition tax in its results for the annual period ended June 30, 2018. In the second quarter of fiscal 2019, the company completed its accounting for all aspects of the Tax Act, with a corresponding adjustment of $15.1 million to income tax expense related to transition tax, and a benefit of $3.2 million attributable to realizability of certain deferred tax assets.

Effective Tax Rates

Reconciliations of the statutory federal income tax rate to the effective income tax rates for each fiscal year are as follows:



	2019		2018		2017
U.S. statutory federal income tax rate	21.00	%	28.00	%	35.00	%
State and local income taxes, net of any applicable federal income tax benefit	3.35		2.48		2.61
Foreign income taxes	(1.42	)	0.07		(2.81	)
Uncertain tax position	(0.31	)	(0.22	)	0.01
Tax benefit of equity-based compensation	(2.07	)	(2.66	)	—
Impact of U.S. Tax Reform	(4.64	)	0.13		—
Other	0.62		(0.95	)	0.50
Effective income tax rate	16.53	%	26.85	%	35.31	%

The effective tax rate of 16.53% for fiscal 2019 was favorably impacted by the reduction of the statutory rate in the U.S. and certain foreign jurisdictions, the excess tax benefits attributable to equity compensation exercises and the favorable impact of $95.1 million of foreign tax credits included within Impacts of U.S. Tax Reform. These credits fully offset our transition tax liability, as well as a reduction of the statutory tax rate in the U.S. and certain foreign jurisdictions. Foreign earnings taxed at rates different than our domestic tax rate had the impact of decreasing the effective tax rate.

The effective tax rate of 26.85% for fiscal 2018 was favorably impacted by the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), as well as a reduction of the statutory tax rate in the U.S. and certain foreign jurisdictions. Foreign earnings taxed at rates different than our domestic tax rate had the impact of increasing the effective tax rate.

The effective tax rate of 35.31% for fiscal 2017 was favorably impacted by tax credits allowed against U.S. Federal and State income tax liabilities, as well as a reduction of the statutory tax rate in certain foreign jurisdictions. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:



	2019			2018
	(In thousands)
Unrecognized tax benefits at beginning of year	$	12,195		$	16,278
Additions for tax positions related to prior years	20,508			652
Reductions for tax positions related to prior years	(6,086		)	(4,033		)
Reductions due to settlements with taxing authorities	(508		)	(702		)
Unrecognized tax benefits at end of year	$	26,109		$	12,195

As of June 29, 2019, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $4.6 million. As of June 30, 2018, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $8.5 million. The expense recorded for interest and penalties related to unrecognized tax benefits was not material in any year presented.

If Sysco were to recognize all unrecognized tax benefits recorded as of June 29, 2019, approximately $24.8 million of the $26.1 million reserve would reduce the effective tax rate. If Sysco were to recognize all unrecognized tax benefits recorded as of June 30, 2018, approximately $9.6 million of the $12.2 million reserve would reduce the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco’s positions are sustained on audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various jurisdictions and the allocation of income and expense between tax jurisdictions. In addition, the amount of unrecognized tax benefits recognized within the next twelve months may decrease due to the expiration of the statute of limitations for certain years in various jurisdictions; however, it is possible that a jurisdiction may open an audit on one of these years prior to the statute of limitations expiring. Sysco anticipates an immaterial decrease to the reserve within twelve months as a result of lapse of statutes.

Sysco’s federal tax returns for 2018 and subsequent tax years have statutes of limitations that remain open for audit. As of June 29, 2019, Sysco’s tax returns in the majority of the state and local and material foreign jurisdictions are no longer subject to audit for the years before 2011.

Other

Undistributed income of certain consolidated foreign subsidiaries at June 29, 2019 amounted to $384.8 million, for which no deferred U.S. income tax provision has been recorded because Sysco intends to indefinitely reinvest such income in those foreign operations. An estimate of any U.S. income or foreign withholding taxes that may be applicable upon actual or deemed repatriation is not practical due to the complexities associated with the hypothetical calculation.