Taxes on Earnings

Prior to the Separation, Hewlett Packard Enterprise's operating results were included in former Parent's various consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For the purposes of the Company's Consolidated and Combined Financial Statements for periods prior to the Separation, income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis separate from former Parent. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise for fiscal 2015 and prior.

Provision for Taxes

The domestic and foreign components of earnings from continuing operations before taxes were as follows:



	For the fiscal years ended October 31,
	2017			2016			2015
	In millions
U.S.	$	(1,098	)	$	(1,144	)	$	288
Non-U.S.	1,370			5,004			1,647
	$	272		$	3,860		$	1,935

The Benefit (provision) for taxes on earnings from continuing operations were as follows:



	For the fiscal years ended October 31,
	2017			2016			2015
	In millions
U.S. federal taxes:
Current	$	560		$	940		$	1,640
Deferred	(1,366		)	(959		)	(2,610		)
Non-U.S. taxes:
Current	64			874			313
Deferred	25			(58		)	60
State taxes:
Current	(107		)	36			45
Deferred	660			(210		)	(153		)
	$	(164	)	$	623		$	(705	)

The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate were as follows:



	For the fiscal years ended October 31,
	2017		2016		2015
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	3.0	%	1.0	%	12.4	%
Lower rates in other jurisdictions, net	(426.3	)%	(24.5	)%	(10.5	)%
Valuation allowance	310.0	%	(14.7	)%	(85.9	)%
U.S. permanent differences	27.8	%	(2.3	)%	1.9	%
Uncertain tax positions	(8.4	)%	23.1	%	5.8	%
Other, net	(1.4	)%	(1.5	)%	4.9	%
	(60.3	)%	16.1	%	(36.4	)%

The jurisdictions with favorable tax rates that had the most significant impact on the Company's effective tax rate in the periods presented include Puerto Rico, China and Singapore. The Company plans to reinvest earnings of these jurisdictions indefinitely outside the U.S., and therefore has not provided for U.S. taxes on those indefinitely reinvested earnings.

In fiscal 2017, the Company recorded $554 million of net income tax benefits related to items unique to the year. These amounts primarily included $699 million of income tax benefits in connection with the Everett and Seattle Transactions and $326 million of income tax benefits on restructuring charges, separation costs, transformation costs and acquisition and other related charges, the effects of which were partially offset by $473 million of income tax charges to record valuation allowances on U.S. state deferred tax assets, and $88 million of income tax charges related to pre-Separation tax matters.

In fiscal 2016, the Company recorded $250 million of net income tax charges related to items unique to the year. These amounts primarily included $714 million of income tax charges related to pre-Separation tax matters, of which $647 million was related to the effect of the potential settlement of certain pre-Separation Hewlett-Packard Company income tax liabilities, and $169 million of income tax charges resulting from a gain on the H3C divestiture, the effects of which were partially offset by $509 million of income tax benefits on restructuring charges, separation costs and acquisition and other related charges, and $124 million of income tax benefits resulting from a gain on the MphasiS divestiture.

In fiscal 2015, the Company recorded $1.7 billion of net income tax benefits related to items unique to the year. These amounts primarily included $1.8 billion of income tax benefits due to a release of valuation allowances pertaining to certain U.S. state deferred tax assets, $139 million of income tax benefits related to restructuring charges and separation costs, and $67 million of income tax benefits related to uncertain tax positions, the effects of which were partially offset by $486 million of income tax charges to record valuation allowances on certain foreign deferred tax assets and $229 million of income tax charges related to state tax impacts of the separation of deferred taxes under the Separate Return Method.

As a result of certain employment actions and capital investments the Company has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, through 2024. The gross income tax benefits attributable to these actions and investments were estimated to be $378 million ($0.23 diluted net EPS) in fiscal 2017, $401 million ($0.23 diluted net EPS) in fiscal 2016 and $260 million ($0.14 diluted net EPS) in fiscal 2015. Refer Note 18, "Net Earnings Per Share" for details on shares used to compute diluted net EPS.

Uncertain Tax Positions

A reconciliation of unrecognized tax benefits is as follows:



	As of October 31,
	2017			2016			2015
	In millions
Balance at beginning of year	$	11,411		$	4,901		$	1,024
Increases:
For current year's tax positions	28			1,456			1,428
For prior years' tax positions	311			820			3,538
Net transfers from former Parent through equity	—			4,455			—
Decreases:
For prior years' tax positions	(202		)	(114		)	(70		)
Statute of limitations expiration	(70		)	(47		)	(2		)
Settlements with taxing authorities	(216		)	(60		)	(7		)
Net transfers to former Parent through equity	—			—			(1,010		)
Balance at end of year	$	11,262		$	11,411		$	4,901

Up to $3.0 billion, $2.7 billion and $0.2 billion of Hewlett Packard Enterprise's unrecognized tax benefits at October 31, 2017, 2016 and 2015, respectively, would affect the Company's effective tax rate if realized. The $149 million decrease in the amount of unrecognized tax benefits for the year ended October 31, 2017, is primarily related to the settlement of a foreign tax audit concerning an intercompany transaction, partially offset by unrecognized tax benefits related to the timing of intercompany royalty revenue recognition, which does not affect the Company's effective tax rate.

For fiscal 2015, the unrecognized tax benefits reflected in the Company's Consolidated and Combined Financial Statements have been determined using the Separate Return Method. The $6.5 billion increase in the amount of unrecognized tax benefits for the year ended October 31, 2016, is primarily related to certain pre-Separation income tax liabilities for which the Company is joint and severally liable under the Tax Matters Agreement entered in to with HP Inc. effective November 1, 2015, as well as the unrecognized tax benefits related to the timing of intercompany royalty revenue recognition, which does not affect the Company's effective tax rate.

Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Benefit (provision) for taxes in the Consolidated and Combined Statements of Earnings. The Company had accrued $304 million and $197 million for interest and penalties as of October 31, 2017 and 2016, respectively.

Hewlett Packard Enterprise engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Hewlett Packard Enterprise does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including resolution of certain intercompany transactions, joint and several tax liabilities and other matters. Accordingly, Hewlett Packard Enterprise believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $2.7 billion within the next 12 months.

Hewlett Packard Enterprise is subject to income tax in the U.S. and approximately 120 other countries and is subject to routine corporate income tax audits in many of these jurisdictions.

With respect to major foreign tax jurisdictions, HPE is no longer subject to tax authority examinations for years prior to 2005. HPE was subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009 which the Company settled with the relevant taxing authority for $456 million during the third quarter of fiscal 2017. The settlement amount is due to be paid in semi-annual installments over the next three fiscal years. With respect to major state tax jurisdictions, HPE is no longer subject to tax authority examinations for years prior to 2003.

Hewlett Packard Enterprise believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of the Company's tax provision. The Company adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net earnings or cash flows.

Hewlett Packard Enterprise is joint and severally liable for certain pre-Separation tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by federal, state and foreign tax authorities. The IRS is conducting an audit of former Parent’s 2009 - 2015 income tax returns. HP Inc. has received from the IRS Notices of Deficiency for its fiscal 1999 - 2000 and 2003 - 2005 tax years, and RARs for its fiscal 2001 - 2002 and 2006 - 2008 tax years.

Hewlett Packard Enterprise has not provided for U.S. federal income and foreign withholding taxes on $12 billion of undistributed earnings from non-U.S. operations as of October 31, 2017 because the Company intends to reinvest such earnings indefinitely outside of the U.S. The undistributed earnings from non-U.S. operations has decreased from October 31, 2016 due to the Everett and Seattle Transactions and utilization of such earnings to fund losses of non-U.S. subsidiaries. If the Company were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. The Company will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. federal and withholding taxes have been provided where excess cash has accumulated and the Company determines that it is advantageous for business operations, tax or cash management reasons.

Deferred Income Taxes

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.

The significant components of deferred tax assets and deferred tax liabilities were as follows:



	As of October 31,
	2017			2016
	In millions
Deferred tax assets:
Loss and credit carry-forwards	$	4,775		$	1,596
Inventory valuation	79			84
Intercompany transactions—royalty prepayments	4,267			4,445
Intercompany transactions—excluding royalty prepayments	129			160
Warranty	156			164
Employee and retiree benefits	661			1,042
Accounts receivable allowance	19			30
Restructuring	186			98
Deferred revenue	757			670
Other	574			463
Total deferred tax assets	11,603			8,752
Valuation allowance	(2,789		)	(2,095		)
Total deferred tax assets net of valuation allowance	8,814			6,657
Deferred tax liabilities:
Unremitted earnings from foreign subsidiaries	(3,824		)	(3,665		)
Fixed assets	(385		)	(118		)
Intangible assets	(46		)	(164		)
Total deferred tax liabilities	(4,255		)	(3,947		)
Net deferred tax assets and liabilities	$	4,559		$	2,710

Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows:



	As of October 31,
	2017			2016
	In millions
Deferred tax assets	$	4,663		$	2,806
Deferred tax liabilities	(104		)	(96		)
Deferred tax assets net of deferred tax liabilities	$	4,559		$	2,710

The Company periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $439 million and $3.7 billion during fiscal 2017 and 2016, respectively. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 15 years and 5 years, respectively. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in consolidation.

As of October 31, 2017, the Company had $1.0 billion, $1.5 billion and $7.7 billion of federal, state and foreign net operating loss carry-forwards, respectively. Amounts included in state, foreign and federal net operating loss carry-forwards will begin to expire in 2018, 2019, and 2030, respectively. Hewlett Packard Enterprise has provided a valuation allowance of $108 million and $1.4 billion for deferred tax assets related to state and foreign net operating losses carry-forwards, respectively.

As of October 31, 2017, Hewlett Packard Enterprise had recorded deferred tax assets for various tax credit carry-forwards as follows:



	Carryforward		Valuation Allowance			Initial Year of Expiration
	In millions
U.S. foreign tax credits	$	2,623	$	—		2021
U.S. research and development and other credits	110		—			2019
Tax credits in state and foreign jurisdictions	166		(162		)	2019
Balance at end of year	$	2,899	$	(162	)

Deferred Tax Asset Valuation Allowance

The deferred tax asset valuation allowance and changes were as follows:



	As of October 31,
	2017			2016			2015
	In millions
Balance at beginning of year	$	2,095		$	1,572		$	1,527
Income tax expense	848			(203		)	(1,449		)
Other comprehensive income, currency translation and charges to other accounts	(154		)	726			1,494
Balance at end of year	$	2,789		$	2,095		$	1,572

Total valuation allowances increased by $694 million in fiscal 2017, due primarily to the valuation allowance recorded against foreign deferred tax assets related to loss carry-forwards and increases in U.S. domestic valuation allowances on deferred taxes related to state operations. Total valuation allowances increased by $523 million in fiscal 2016 due primarily to the valuation allowance recorded against foreign deferred tax assets related to pension assets and liabilities, partially offset by decreases in foreign deferred tax assets for net operating losses.

Tax Matters Agreement and Other Income Tax Matters

In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc., formerly Hewlett-Packard Company. In connection with the Everett and Seattle Transactions, the company entered into a DXC Tax Matters Agreement with DXC and a Micro Focus Tax Matters Agreement with Micro Focus, respectively. See Note 20, "Guarantees, Indemnifications and Warranties", for a description of the Tax Matters Agreement, DXC Tax Matters Agreement and Micro Focus Tax Matters Agreement.