Nike 2016 Annual Report Download - page 61

PART II
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
As of May 31,
(In millions) 2016 2015 2014
Unrecognized tax benefits, beginning of the period $ 438 $ 506 $ 447
Gross increases related to prior period tax positions(1) 49 32 814
Gross decreases related to prior period tax positions(1) (20) (123) (166)
Gross increases related to current period tax positions 81 82 125
Gross decreases related to current period tax positions — (9) (30)
Settlements(1) (13) (27) (676)
Lapse of statute of limitations (17) (10) (4)
Changes due to currency translation (12) (13) (4)
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD $ 506 $ 438 $ 506
(1) During the fourth quarter of the fiscal year ended May 31, 2014, the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany
transfer pricing for fiscal years 2011 through 2020. As a result, the Company recorded a gross increase in unrecognized tax benefits related to prior period tax positions, a gross decrease
in unrecognized tax benefits related to prior period tax positions and a settlement. The net impact of these items resulted in a decrease to unrecognized tax benefits.
As of May 31, 2016, total gross unrecognized tax benefits, excluding related
interest and penalties, were $506 million, $290 million of which would affect
the Company’s effective tax rate if recognized in future periods.
The Company recognizes interest and penalties related to income tax matters
in Income tax expense. The liability for payment of interest and penalties
increased by $45 million during the year ended May 31, 2016, decreased by
$3 million during the year ended May 31, 2015 and increased by $55 million
during the year ended May 31, 2014. As of May 31, 2016 and 2015, accrued
interest and penalties related to uncertain tax positions were $209 million and
$164 million, respectively (excluding federal benefit).
The Company incurs tax liabilities primarily in the United States, China and the
Netherlands, as well as various state and other foreign jurisdictions. The
Company is currently under audit by the U.S. Internal Revenue Service (“IRS”)
for fiscal years 2013 through 2015. The Company has closed all U.S. federal
income tax matters through fiscal 2012, with the exception of the validation of
foreign tax credits utilized. During the year ended May 31, 2016, the
Company received from the IRS a statutory notice of deficiency for fiscal
2012, proposing an increase in tax of $223 million, subject to interest, related
to the foreign tax credit matter. The Company intends to contest this
deficiency notice. As previously disclosed, the Company received a statutory
notice of deficiency for fiscal 2011, proposing an increase in tax of $31 million,
subject to interest, related to the foreign tax credit matter. This notice also
reported a decrease in foreign tax credit carryovers for fiscal 2010 and 2011.
The Company has contested this deficiency notice by filing a petition with the
U.S Tax Court in April 2015. The Company does not expect the outcome of
this matter to have a material impact on the financial statements. No
payments on the assessment would be required until the dispute is definitively
resolved. Based on the information currently available, the Company does not
anticipate a significant increase or decrease to its unrecognized tax benefits
for this matter within the next 12 months.
The Company’s major foreign jurisdictions, China and the Netherlands, have
concluded substantially all income tax matters through calendar 2005 and
fiscal 2010, respectively. Although the timing of resolution of audits is not
certain, the Company evaluates all domestic and foreign audit issues in the
aggregate, along with the expiration of applicable statutes of limitations, and
estimates that it is reasonably possible the total gross unrecognized tax
benefits could decrease by up to $92 million within the next 12 months.
The Company provides for U.S. income taxes on the undistributed earnings
of foreign subsidiaries unless they are considered indefinitely reinvested
outside the United States. At May 31, 2016, the indefinitely reinvested
earnings in foreign subsidiaries upon which United States income taxes have
not been provided were approximately $10.7 billion. If these undistributed
earnings were repatriated to the United States or if the shares of the relevant
foreign subsidiaries were sold or otherwise transferred, they would generate
foreign tax credits that would reduce the federal tax liability associated with
the foreign dividend or the otherwise taxable transaction. Assuming a full
utilization of the foreign tax credits, the potential net deferred tax liability
associated with these temporary differences of undistributed earnings would
be approximately $3.6 billion at May 31, 2016.
A portion of the Company’s foreign operations are benefiting from a tax
holiday, which is set to expire in 2021. This tax holiday may be extended when
certain conditions are met or may be terminated early if certain conditions are
not met. The impact of this tax holiday decreased foreign taxes by $173
million, $174 million and $138 million for the fiscal years ended May 31, 2016,
2015 and 2014, respectively. The benefit of the tax holiday on diluted
earnings per common share was $0.10, $0.10 and $0.08 for the fiscal years
ended May 31, 2016, 2015 and 2014, respectively.
Deferred tax assets at May 31, 2016 and 2015 were reduced by a valuation
allowance relating to tax benefits of certain subsidiaries with operating losses.
There was a $43 million net increase in the valuation allowance for the year
ended May 31, 2016, compared to no net change and a net increase of $4
million for the years ended May 31, 2015 and 2014, respectively.
The Company has available domestic and foreign loss carry-forwards of $143 million at May 31, 2016. Such losses will expire as follows:
Year Ending May 31,
(In millions) 2017 2018 2019 2020 2021-2035 Indefinite Total
Net operating losses $ 1 $ 4 $ 1 $ 1 $ 35 $ 101 $ 143
During the years ended May 31, 2016, 2015 and 2014, income tax benefits attributable to employee stock-based compensation transactions of $281 million,
$224 million and $135 million, respectively, were allocated to Total shareholders’ equity.
NOTE 10 — Redeemable Preferred Stock
Sojitz America is the sole owner of the Company’s authorized redeemable
preferred stock, $1 par value, which is redeemable at the option of Sojitz
America or the Company at par value aggregating $0.3 million. A cumulative
dividend of $0.10 per share is payable annually on May 31 and no dividends
may be declared or paid on the common stock of the Company unless
dividends on the redeemable preferred stock have been declared and paid in
full. There have been no changes in the redeemable preferred stock in the
three years ended May 31, 2016, 2015 and 2014. As the holder of the
redeemable preferred stock, Sojitz America does not have general voting
rights, but does have the right to vote as a separate class on the sale of all or
substantially all of the assets of the Company and its subsidiaries, on merger,
consolidation, liquidation or dissolution of the Company or on the sale or
assignment of the NIKE trademark for athletic footwear sold in the United
States. The redeemable preferred stock has been fully issued to Sojitz
America and is not blank check preferred stock. The Company’s articles of
incorporation do not permit the issuance of additional preferred stock.
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