Entity information:
Income Taxes
The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income before provision for income taxes, based on tax jurisdiction, are as follows:
 
Fiscal Year
(in millions)
2017
 
2016
 
2015
U.S.
$
(234
)
 
$
333

 
$
639

International
4,836

 
4,003

 
2,847

Income before provision for income taxes
$
4,602

 
$
4,336

 
$
3,486


The provision for income taxes consists of the following:
 
Fiscal Year
(in millions)
2017
 
2016
 
2015
Current tax expense:
 

 
 

 
 

U.S.
$
614

 
$
440

 
$
1,128

International
840

 
835

 
502

Total current tax expense
1,454

 
1,275

 
1,630

Deferred tax (benefit) expense:
 

 
 

 
 

U.S.
(399
)
 
(67
)
 
(705
)
International
(477
)
 
(410
)
 
(114
)
Net deferred tax benefit
(876
)
 
(477
)
 
(819
)
Total provision for income taxes
$
578

 
$
798

 
$
811


Deferred taxes arise because of the different treatment of transactions under U.S. GAAP and income tax accounting, known as temporary differences. The Company records the tax effect of these temporary differences as deferred tax assets and deferred tax liabilities. Deferred tax assets generally represent items that may be used as a tax deduction or credit in a tax return in future years for which the Company has already recorded the tax benefit in the consolidated statements of income. The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on the Company’s tax return but has not yet been recognized as an expense in the consolidated statements of income. Tax assets (liabilities), shown before jurisdictional netting of deferred tax assets (liabilities), are comprised of the following:
(in millions)
April 28, 2017
 
April 29, 2016
Deferred tax assets:
 

 
 

Net operating loss, capital loss, and credit carryforwards
$
6,800

 
$
7,568

Other accrued liabilities
658

 
619

Accrued compensation
427

 
358

Pension and post-retirement benefits
456

 
530

Stock-based compensation
278

 
316

Other
308

 
341

Inventory
277

 
225

Federal and state benefit on uncertain tax positions
191

 
308

Unrealized loss on available-for-sale securities and derivative financial instruments
—

 
107

Gross deferred tax assets
9,395

 
10,372

Valuation allowance
(6,311
)
 
(7,032
)
Total deferred tax assets
3,084

 
3,340

Deferred tax liabilities:
 

 
 

Intangible assets
(4,943
)
 
(5,173
)
Basis impairment
—

 
(230
)
Realized loss on derivative financial instruments
(112
)
 
(112
)
Other
(74
)
 
(179
)
Accumulated depreciation
(149
)
 
(189
)
Unrealized gain on available-for-sale securities and derivative financial instruments
(18
)
 
—

Outside basis difference of subsidiaries
(112
)
 
—

Total deferred tax liabilities
(5,408
)
 
(5,883
)
Prepaid income taxes
475

 
365

Income tax receivables
218

 
529

Tax liabilities, net
$
(1,631
)
 
$
(1,649
)
Reported as (after valuation allowance and jurisdictional netting):
 

 
 

Prepaid expenses and other current assets
$
545

 
$
697

Tax assets
1,509

 
1,383

Deferred tax liabilities
(2,978
)
 
(3,729
)
Noncurrent liabilities held for sale
(707
)
 
—

Tax liabilities, net
$
(1,631
)
 
$
(1,649
)

At April 28, 2017, the Company had approximately $24.9 billion of net operating loss carryforwards in certain non-U.S. jurisdictions, of which $22.0 billion have no expiration, and the remaining $2.9 billion will expire during fiscal 2018 through 2037. Included in these net operating loss carryforwards are $17.6 billion of net operating losses related to a subsidiary of the Company, substantially all of which were recorded in fiscal 2008 as a result of the receipt of a favorable tax ruling from certain non-U.S. taxing authorities. The Company has recorded a full valuation allowance against these net operating losses, as management does not believe that it is more likely than not that these net operating losses will be utilized. Certain of the remaining non-U.S. net operating loss carryforwards of $7.3 billion have a valuation allowance recorded against the carryforwards, as management does not believe that it is more likely than not that these net operating losses will be utilized.
At April 28, 2017, the Company had $1.0 billion of U.S. federal net operating loss carryforwards, which will expire during fiscal year 2018 through fiscal year 2036. For U.S. state purposes, the Company had $690 million of net operating loss carryforwards at April 28, 2017, which will expire during fiscal year 2018 through fiscal year 2037.
At April 28, 2017, the Company also had $392 million of tax credits available to reduce future income taxes payable, of which $75 million have no expiration, and the remaining credits expire during fiscal year 2018 through fiscal year 2037.
The Company has established valuation allowances of $6.3 billion and $7.0 billion at April 28, 2017 and April 29, 2016, respectively, primarily related to the uncertainty of the utilization of certain deferred tax assets and primarily comprised of tax loss and credit carryforwards in various jurisdictions. The decrease in the valuation allowance during fiscal year 2017 is primarily driven by carryover attribute utilization and expiration, as well as the effects of currency fluctuations. These valuation allowances would result in a reduction to the provision for income taxes in the consolidated statements of income if they are ultimately not required.
At April 28, 2017, the Company had certain potential non-U.S. tax attributes that had not been recorded in the consolidated financial statements, including $12.0 billion of non-U.S. special deductions with an indefinite carryforward period. The Company has treated these amounts as special deductions for financial statement purposes since utilization is contingent upon the annual performance of certain economic factors. The Company expects to recognize a small portion of the special deduction annually based on meeting the defined economic factors. The Company continues to analyze whether the utilization of such benefits may be accelerated.
The Company’s effective income tax rate from continuing operations varied from the U.S. federal statutory tax rate as follows:
 
Fiscal Year
 
2017
 
2016
 
2015
U.S. federal statutory tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (decrease) in tax rate resulting from:
 

 
 

 
 

U.S. state taxes, net of federal tax benefit
1.0

 
0.9

 
0.8

Research and development credit
(0.9
)
 
(1.2
)
 
(0.7
)
Domestic production activities
(0.4
)
 
(0.3
)
 
(0.4
)
International
(27.1
)
 
(23.4
)
 
(24.3
)
Puerto Rico Excise Tax
(1.5
)
 
(1.6
)
 
(1.7
)
Impact of adjustments(1)
5.7

 
11.4

 
13.3

Valuation allowance release
(1.0
)
 
(0.9
)
 
—

Other, net
1.8

 
(1.5
)
 
1.3

Effective tax rate
12.6
 %
 
18.4
 %
 
23.3
 %

(1)
Adjustments include the impact of inventory step-up, impact of product technology upgrade commitment, special charge (gain), net, restructuring charges, net, certain litigation charges, acquisition-related items, amortization of intangible assets, loss on previously held forward starting interest rate swaps, debt tender premium, impact of acquisition on interest expense, and certain tax adjustments, net.
During fiscal year 2017, the Company recognized certain tax adjustments of $202 million, including the following:
•
A charge of $404 million associated with the IRS resolution for the Ardian, CoreValve, Inc., Ablation Frontiers, Inc., PEAK Surgical, Inc. and Salient Surgical Technologies, Inc. acquisition-related issues and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for certain businesses. This resolution does not include the businesses that are the subject of the Medtronic, Inc. U.S. Tax Court case for fiscal years 2005 and 2006.
•
A net charge of $125 million associated with the expected divestiture of a portion of our Patient Monitoring & Recovery division to Cardinal Health. The net charge primarily relates to the tax effect from the recognition of the outside basis difference of certain subsidiaries, which are included in the expected divestiture.
•
A charge of $86 million associated with the IRS’s disallowance of the utilization of certain net operating losses, along with the recognition of a valuation allowance against the net operating loss deferred tax asset, which were recognized during the year.
•
A charge of $18 million as a result of the redemption of an intercompany minority interest during the year.
•
A benefit of $431 million as the result of the resolution of Covidien's previously disclosed Tyco International plc intercompany debt issues with the U.S. Tax Court and the Appeals Division of the IRS.
The $202 million of net certain tax adjustments were recognized in provision for income taxes in the consolidated statements of income for fiscal year 2017.
During fiscal year 2016 the Company recognized certain tax adjustments of $417 million, which included the following:
•
A charge of $442 million primarily related to the U.S. income tax expense resulting from the Company's completion of an internal reorganization of the ownership of certain legacy Covidien businesses that reduced the cash and investments held by its U.S.-controlled non-U.S. subsidiaries (the Internal Reorganization). As a result of the Internal Reorganization, approximately $9.7 billion of cash, cash equivalents and investments in marketable debt and equity securities previously held by U.S.-controlled non-U.S. subsidiaries became available for general corporate purposes.
•
A $25 million tax benefit associated with the disposition of a wholly owned U.S. subsidiary.
The $417 million of net certain tax adjustments were recorded in the provision for income taxes in the consolidated statements of income for fiscal year 2016.
During fiscal year 2015, the Company recognized certain tax adjustments of $349 million, which included the following:
•
A charge of $329 million related to the resolution of the Kyphon Inc. (Kyphon) acquisition-related issues with the U.S. Internal Revenue Service (IRS).
•
A charge of $20 million related to a taxable gain associated with the Covidien acquisition.
The $349 million of certain tax adjustments were recognized in provision for income taxes in the consolidated statements of income for fiscal year 2015.
No deferred taxes have been provided for any portion of the approximately $31.8 billion and $29.0 billion of undistributed earnings of the Company’s subsidiaries at April 28, 2017 and April 29, 2016, respectively, since these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. During fiscal year 2017, the Company removed its permanently reinvested assertion on $200 million of undistributed earnings of certain subsidiaries in anticipation of the divestiture of a portion of its Patient Monitoring & Recovery division to Cardinal Health. Due to the number of legal entities and jurisdictions involved and the complexity of the legal entity structure of the Company, the complexity of the tax laws in the relevant jurisdictions, including, but not limited to the rules pertaining to the utilization of foreign tax credits in the United States and the impact of projections of income for future years to any calculations, the Company believes it is not practicable to estimate, within any reasonable range, the amount of additional taxes which may be payable upon distribution of these undistributed earnings.
Currently, the Company’s operations in Puerto Rico, Switzerland, Singapore, Dominican Republic, Costa Rica, and Israel have various tax incentive grants. The tax reductions as compared to the local statutory rate favorably impacted earnings by $475 million, $474 million, and $414 million in fiscal years 2017, 2016, and 2015, respectively, and earnings per diluted share by $0.34, $0.33, and $0.37 in fiscal years 2017, 2016, and 2015, respectively. Unless these grants are extended, they will expire between fiscal years 2018 and 2029. The Company’s historical practice has been to renew, extend, or obtain new tax incentive grants upon expiration of existing tax incentive grants. If the Company is not able to renew, extend, or obtain new tax incentive grants, the expiration of existing tax incentive grants could have a material impact on the Company’s financial results in future periods.
The Company had $1.9 billion, $2.7 billion, and $2.9 billion of gross unrecognized tax benefits at April 28, 2017, April 29, 2016, and April 24, 2015, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2017, 2016, and 2015 is as follows:
 
Fiscal Year
(in millions)
2017
 
2016
 
2015
Gross unrecognized tax benefits at beginning of fiscal year
$
2,703

 
$
2,860

 
$
1,172

Gross increases:
 

 
 

 
 

Prior year tax positions
147

 
36

 
331

Current year tax positions
75

 
202

 
231

Acquisitions
4

 
—

 
1,199

Gross decreases:
 

 
 

 
 

Prior year tax positions
(538
)
 
(116
)
 
(40
)
Settlements
(467
)
 
(275
)
 
(33
)
Statute of limitation lapses
(28
)
 
(4
)
 
—

Gross unrecognized tax benefits at end of fiscal year
1,896

 
2,703

 
2,860

Cash advance paid in connection with proposed settlements
—

 
(384
)
 
(378
)
Gross unrecognized tax benefits at end of fiscal year, net of cash advance
$
1,896

 
$
2,319

 
$
2,482


If all of the Company’s unrecognized tax benefits at April 28, 2017, April 29, 2016, and April 24, 2015 were recognized, $1.8 billion, $2.1 billion, and $2.2 billion would impact the Company’s effective tax rate, respectively. Although the Company believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on the Company’s effective tax rate in future periods. The Company has recorded gross unrecognized tax benefits of $1.9 billion as a long-term liability. The Company estimates that within the next 12 months, it is reasonably possible that its uncertain tax positions, excluding interest, could decrease by as much as $225 million, net as a result of the resolution of tax matters with the IRS and other taxing authorities as well as statute of limitation lapses.
The Company recognizes interest and penalties related to income tax matters in provision for income taxes in the consolidated statements of income and records the liability in the current or long-term accrued income taxes in the consolidated balance sheets, as appropriate. The Company had $360 million, $609 million, and $656 million of accrued gross interest and penalties at April 28, 2017, April 29, 2016, and April 24, 2015, respectively. During the fiscal years ended April 28, 2017, April 29, 2016, and April 24, 2015, the Company recognized gross interest (income) expense of approximately $(208) million, $80 million, and $142 million, respectively, in provision for income taxes in the consolidated statements of income.
The Company’s reserves for uncertain tax positions relate to unresolved matters with the IRS and other taxing authorities. These reserves are subject to a high degree of estimation and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or other tax authorities during future tax audits, could have a material impact on the Company’s financial results in future periods. The Company continues to believe that its reserves for uncertain tax positions are appropriate and that it has meritorious defenses for its tax filings and will vigorously defend them during the audit process, appellate process, and through litigation in courts, as necessary.
The major tax jurisdictions where the Company conducts business which remain subject to examination are as follows:
Jurisdiction
 
Earliest Year Open
United States - federal and state
 
1997
Brazil
 
2012
Canada
 
2008
China
 
2009
Costa Rica
 
2013
Dominican Republic
 
2013
France
 
2011
Germany
 
2010
India
 
2001
Ireland
 
2011
Israel
 
2010
Italy
 
2005
Japan
 
2010
Luxembourg
 
2012
Mexico
 
2005
Puerto Rico
 
2009
Singapore
 
2011
Switzerland
 
2011
United Kingdom
 
2014

See Note 20 for additional information regarding the status of current tax audits and proceedings.