INCOME TAXES
The components of income from continuing operations before income taxes are:
|
| | | | | | | | | |
| Year Ended Aug. 31, |
(Dollars in millions) | 2017 | 2016 | 2015 |
United States | $ | 1,720 |
| $ | 1,457 |
| $ | 2,092 |
|
Outside United States | 1,166 |
| 534 |
| 1,069 |
|
Total | $ | 2,886 |
| $ | 1,991 |
| $ | 3,161 |
|
The components of income tax provision from continuing operations are: |
| | | | | | | | | |
| Year Ended Aug. 31, |
(Dollars in millions) | 2017 | 2016 | 2015 |
Current: | | | |
U.S. federal | $ | 236 |
| $ | 393 |
| $ | 675 |
|
U.S. state | 25 |
| 43 |
| 69 |
|
Outside United States | 319 |
| 231 |
| 408 |
|
Total Current | $ | 580 |
| $ | 667 |
| $ | 1,152 |
|
Deferred: | | |
| |
|
U.S. federal | 81 |
| (109 | ) | (91 | ) |
U.S. state | 4 |
| (7 | ) | (2 | ) |
Outside United States | (39 | ) | 144 |
| (195 | ) |
Total Deferred | 46 |
| 28 |
| (288 | ) |
Total | $ | 626 |
| $ | 695 |
| $ | 864 |
|
Factors causing Monsanto’s income tax provision from continuing operations to differ from the U.S. federal statutory rate are:
|
| | | | | | | | | |
| Year Ended Aug. 31, |
(Dollars in millions) | 2017 | 2016 | 2015 |
U.S. Federal Statutory Rate | $ | 1,010 |
| $ | 697 |
| $ | 1,106 |
|
U.S. Domestic Manufacturing Deduction | (41 | ) | (64 | ) | (87 | ) |
U.S. R&D Tax Credit | (34 | ) | (34 | ) | (30 | ) |
U.S. State Income Taxes | 27 |
| 28 |
| 39 |
|
Lower Taxes on Foreign Operations | (409 | ) | (243 | ) | (209 | ) |
Valuation Allowances | 93 |
| 308 |
| 13 |
|
Adjustment for Unrecognized Tax Benefits | — |
| (6 | ) | (4 | ) |
Other | (20 | ) | 9 |
| 36 |
|
Income Tax Provision | $ | 626 |
| $ | 695 |
| $ | 864 |
|
Deferred income tax balances are related to:
|
| | | | | | |
| As of Aug. 31, |
(Dollars in millions) | 2017 | 2016 |
Net Operating Loss and Other Carryforwards | $ | 608 |
| $ | 438 |
|
Employee Fringe Benefits | 311 |
| 331 |
|
Royalties | 220 |
| 189 |
|
Restructuring and Impairment Reserves
| 127 |
| 155 |
|
Inventories | 93 |
| 91 |
|
Allowance for Doubtful Accounts | 85 |
| 77 |
|
Environmental and Litigation Reserves | 82 |
| 70 |
|
Other | 318 |
| 407 |
|
Valuation Allowance | (394 | ) | (346 | ) |
Total Deferred Tax Assets | $ | 1,450 |
| $ | 1,412 |
|
Property, Plant and Equipment | 667 |
| 533 |
|
Intangibles | 411 |
| 334 |
|
Total Deferred Tax Liabilities | 1,078 |
| 867 |
|
Net Deferred Tax Assets | $ | 372 |
| $ | 545 |
|
Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established.
As of Aug. 31, 2017, and Aug. 31, 2016, Monsanto had available approximately $587 million and $696 million, respectively, of net operating loss carryforwards (“NOLs”), most of which relates to Brazilian operations where NOLs have no expiration date. Management believes it is more likely than not that the company will realize these deferred tax assets in Brazil.
As of Aug. 31, 2017, and Aug. 31, 2016, Monsanto had approximately $328 million and $281 million, respectively, of deferred tax assets in Argentina, primarily related to accrued royalties for which a tax benefit will be realized when paid. As a result of losses generated in Argentina in the current and prior years, the company determined it was not more likely than not to utilize these deferred tax assets and established a valuation allowance against the entire balance of these deferred tax assets in Argentina.
As of Aug. 31, 2017, and Aug. 31, 2016, Monsanto had approximately $232 million and $97 million, respectively, of deferred tax assets in the United States related to foreign tax credits that have a ten year carryforward period that expires from 2025 to 2027. Management believes it is more likely than not that the company will realize these deferred tax assets in the United States.
Income taxes and remittance taxes have not been recorded on approximately $4.2 billion of undistributed earnings of foreign operations of Monsanto because Monsanto intends to reinvest those earnings indefinitely. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.
Monsanto operates in various countries throughout the world and, as a result, files income tax returns in numerous jurisdictions. These tax returns are subject to examination by various federal, state and local tax authorities. Due to the nature of the examinations, it may take several years before they are completed. Management regularly assesses the risk of the company’s tax return filing positions for all open years. For Monsanto’s major tax jurisdictions, the tax years that remain subject to examination are shown below:
|
| |
Jurisdiction | |
U.S. Federal | 2014-2017 |
U.S. State | 2000-2017 |
Argentina | 2001-2017 |
Brazil | 2007-2017 |
As of Aug. 31, 2017, Monsanto had total unrecognized tax benefits of $120 million, of which $100 million would favorably impact the effective tax rate if recognized. As of Aug. 31, 2016, Monsanto had total unrecognized tax benefits of $123 million, of which $90 million would favorably impact the effective tax rate if recognized.
Accrued interest and penalties included in other liabilities in the Statements of Consolidated Financial Position were $34 million and $24 million as of Aug. 31, 2017, and Aug. 31, 2016, respectively. Monsanto recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax provision within the Statements of Consolidated Operations. For the year ended Aug. 31, 2017, the company recognized $1 million of income tax expense for interest and penalties. For the year ended Aug. 31, 2016, the company recognized less than $1 million of income tax benefit for interest and penalties. For the year ending Aug. 31, 2015, the company recognized $6 million of income tax benefit for interest and penalties.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:
|
| | | | | | |
(Dollars in millions) | 2017 | 2016 |
Balance Sept. 1 | $ | 123 |
| $ | 135 |
|
Increases for prior year tax positions | 35 |
| 17 |
|
Decreases for prior year tax positions | (33 | ) | (11 | ) |
Increases for current year tax positions | 9 |
| 8 |
|
Settlements | (2 | ) | (1 | ) |
Lapse of statute of limitations | (11 | ) | (23 | ) |
Foreign currency translation | (1 | ) | (2 | ) |
Balance Aug. 31 | $ | 120 |
| $ | 123 |
|
If the company’s assessment of unrecognized tax benefits is not representative of actual outcomes, the company’s consolidated financial statements could be significantly impacted in the period of settlement or when the statute of limitations expires. Management estimates it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $50 million within the next 12 months, primarily as a result of the resolution of audits currently in progress in several jurisdictions involving issues common to large multinational corporations and the lapsing of the statute of limitations in multiple jurisdictions.