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.
Earnings from continuing operations before income taxes consisted of the following:
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| | | | | | | | | | | |
Years ended June 30 | 2017 | | 2016 | | 2015 |
United States | $ | 9,031 |
| | $ | 8,788 |
| | $ | 8,496 |
|
International | 4,226 |
| | 4,581 |
| | 2,516 |
|
TOTAL | $ | 13,257 |
| | $ | 13,369 |
| | $ | 11,012 |
|
Income taxes on continuing operations consisted of the following:
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| | | | | | | | | | | |
Years ended June 30 | 2017 | | 2016 | | 2015 |
CURRENT TAX EXPENSE |
U.S. federal | $ | 1,531 |
| | $ | 1,673 |
| | $ | 2,127 |
|
International | 1,243 |
| | 1,483 |
| | 1,142 |
|
U.S. state and local | 241 |
| | 224 |
| | 252 |
|
| 3,015 |
| | 3,380 |
| | 3,521 |
|
DEFERRED TAX EXPENSE |
U.S. federal | 28 |
| | 33 |
| | (607 | ) |
International and other | 20 |
| | (71 | ) | | (189 | ) |
| 48 |
| | (38 | ) | | (796 | ) |
TOTAL TAX EXPENSE | $ | 3,063 |
| | $ | 3,342 |
| | $ | 2,725 |
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A reconciliation of the U.S. federal statutory income tax rate to our actual income tax rate on continuing operations is provided below:
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| | | | | | | | |
Years ended June 30 | 2017 | | 2016 | | 2015 |
U.S. federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Country mix impacts of foreign operations | (6.8 | )% | | (9.1 | )% | | (14.0 | )% |
Changes in uncertain tax positions | (2.0 | )% | | (0.5 | )% | | (0.9 | )% |
Excess tax benefits from the exercise of stock options | (1.3 | )% | | — | % | | — | % |
Venezuela deconsolidation charge | — | % | | — | % | | 6.6 | % |
Other | (1.8 | )% | | (0.4 | )% | | (2.0 | )% |
EFFECTIVE INCOME TAX RATE | 23.1 | % | | 25.0 | % | | 24.7 | % |
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 impact of adopting ASU 2016-09, "Stock Compensation (Topic 718): Improvements to Employee-Share-Based Payment Accounting)."
Tax costs charged to shareholders' equity totaled $333 for the year ended June 30, 2017. This primarily relates to the impact of certain adjustments to pension obligations recorded in stockholders' equity, partially offset by the tax effects of net investment hedges. Tax benefits credited to shareholders' equity totaled $899 for the year ended June 30, 2016. This primarily relates to the impact of certain adjustments to pension obligations recorded in stockholders' equity and the impact of excess tax benefits from the exercise of stock options.
We have undistributed earnings of foreign subsidiaries of approximately $49 billion at June 30, 2017, for which deferred taxes have not been provided. Such earnings are considered indefinitely invested in the foreign subsidiaries. If such earnings were repatriated, additional tax expense may result. However, the calculation of the amount of deferred U.S. income tax on these earnings is not practicable because of the large number of assumptions necessary to compute the tax.
A reconciliation of the beginning and ending liability for uncertain tax positions is as follows:
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| | | | | | | | | | | |
Years ended June 30 | 2017 | | 2016 | | 2015 |
BEGINNING OF YEAR | $ | 857 |
| | $ | 1,096 |
| | $ | 1,437 |
|
Increases in tax positions for prior years | 87 |
| | 124 |
| | 87 |
|
Decreases in tax positions for prior years | (147 | ) | | (97 | ) | | (146 | ) |
Increases in tax positions for current year | 75 |
| | 97 |
| | 118 |
|
Settlements with taxing authorities | (381 | ) | | (301 | ) | | (250 | ) |
Lapse in statute of limitations | (22 | ) | | (39 | ) | | (27 | ) |
Currency translation | (4 | ) | | (23 | ) | | (123 | ) |
END OF YEAR | $ | 465 |
| | $ | 857 |
| | $ | 1,096 |
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Included in the total liability for uncertain tax positions at June 30, 2017, is $284 that, depending on the ultimate resolution, could impact the effective tax rate in future periods.
The Company is present in approximately 140 taxable jurisdictions and, at any point in time, has 50-60 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. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions could increase or decrease within the next 12 months. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective tax rate related to these items.
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, 2017, 2016 and 2015, we had accrued interest of $100, $323 and $347 and accrued penalties of $20, $20 and $19, respectively, which are not included in the above table. During the fiscal years ended June 30, 2017, 2016 and 2015, we recognized $62, $2 and $15 in interest benefit/(expense) and $0, $(2) and $13 in penalties benefit/(expense), respectively. The net benefits recognized resulted primarily from the favorable resolution of tax positions for prior years.
Deferred income tax assets and liabilities were comprised of the following:
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| | | | | | | |
As of June 30 | 2017 | | 2016 |
DEFERRED TAX ASSETS | | | |
Pension and postretirement benefits | $ | 1,775 |
| | $ | 2,226 |
|
Loss and other carryforwards | 1,516 |
| | 1,077 |
|
Stock-based compensation | 732 |
| | 845 |
|
Unrealized loss on financial and foreign exchange transactions | 259 |
| | 122 |
|
Fixed assets | 212 |
| | 216 |
|
Accrued marketing and promotion | 210 |
| | 240 |
|
Advance payments | 121 |
| | 515 |
|
Inventory | 75 |
| | 61 |
|
Accrued interest and taxes | 30 |
| | 55 |
|
Other | 709 |
| | 764 |
|
Valuation allowances | (505 | ) | | (467 | ) |
TOTAL | $ | 5,134 |
| | $ | 5,654 |
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| | | |
DEFERRED TAX LIABILITIES | | | |
Goodwill and other intangible assets | $ | 9,403 |
| | $ | 9,461 |
|
Fixed assets | 1,495 |
| | 1,533 |
|
Unrealized gain on financial and foreign exchange transactions | 314 |
| | 387 |
|
Other | 26 |
| | 105 |
|
TOTAL | $ | 11,238 |
| | $ | 11,486 |
|
Net operating loss carryforwards were $3.3 billion and $3.2 billion at June 30, 2017 and 2016, respectively. If unused, $1.1 billion will expire between 2017 and 2036. The remainder, totaling $2.2 billion at June 30, 2017, may be carried forward indefinitely.