Taxes on Earnings

9 Months Ended

Jul. 31, 2020

Provision for Taxes

The Company's effective tax rate was 126.5% and 89.8% for the three months ended July 31, 2020 and 2019, respectively, and 15.5% and 31.4% for the nine months ended July 31, 2020 and 2019, respectively. The effective tax rates for the three and nine months ended July 31, 2020 were impacted by income tax benefits resulting from tax rate changes and differed from the statutory tax rate due to favorable tax rates associated with certain earnings from the Company’s operations in lower tax jurisdictions throughout the world. The effective tax rate for the nine months ended July 31, 2020 also included the effects of the non-deductible goodwill impairment. The effective tax rates for the three and nine months ended July 31, 2019 were significantly impacted by the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and the settlement of certain pre-Separation tax liabilities of HP Inc. The Company's effective tax rate is based on forecasted annual results which may fluctuate significantly through the remainder of fiscal 2020 due to the uncertain economic impact of COVID-19 on the Company's operating results.

For the three and nine months ended July 31, 2020, the Company recorded $86 million and $253 million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2020, the amount primarily included $72 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges and $30 million of income tax benefits related to tax rate changes on deferred taxes. For the nine months ended July 31, 2020, the amount primarily included $120 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $57 million of income tax benefits related to Indian distribution tax rate changes, $56 million of income tax benefits related to the change in pre-Separation tax liabilities for which the Company shares joint and several liability with HP Inc. and for which the Company is indemnified by HP Inc., and $30 million of income tax benefits related to tax rate changes on deferred taxes.

For the three and nine months ended July 31, 2019, the Company recorded $303 million of net income tax benefits and $80 million of net income tax charges, respectively, related to various items discrete to the period. For the three months ended July 31, 2019, this amount primarily included $308 million of income tax benefits predominantly related to the change in pre-Separation tax liabilities as a result of the effective settlement of the U.S. federal income tax audit of fiscal years 2013 through 2015 for HP Inc. for which the Company shared joint and several liability and $18 million of net income tax benefits on transformation costs, and acquisition, disposition and other related charges, partially offset by $19 million of income tax charges related to uncertain tax reserves pertaining to separation activities and $14 million of income tax charges related to

changes in U.S. state valuation allowances as a result of impacts of the Tax Act. For the nine months ended July 31, 2019, the amount primarily included $365 million of income tax charges related to changes in U.S. federal and state valuation allowances as a result of impacts of the Tax Act, $40 million of income tax charges related to future withholding tax costs on distributions of earnings, and $19 million of income tax charges related to uncertain tax reserves pertaining to separation activities, partially offset by $264 million of income tax benefits related to the change in pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc., and $75 million of income tax benefits on transformation costs, and acquisition, disposition and other related charges.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted into law in response to COVID-19. The CARES Act, among other things, provides tax relief to businesses, including the deferral of certain payroll taxes, relief for retaining employees, and other income tax provisions. In addition to the CARES Act, governments around the world are also enacting comparable legislation to address COVID-19 economic impacts. The effects of these legislative changes were not material to the Condensed Consolidated Financial Statements for the three and nine months ended July 31, 2020.

Uncertain Tax Positions

As of July 31, 2020 and October 31, 2019, the amount of unrecognized tax benefits was $2.2 billion and $2.3 billion, respectively, of which up to $711 million and $772 million, respectively, would affect the Company's effective tax rate if realized as of their respective periods.

The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Benefit (provision) for taxes in the Condensed Consolidated Statements of Earnings. The Company recognized $13 million of interest expense and $43 million of interest income for the three months ended July 31, 2020 and 2019, respectively, and $12 million of interest income for each of the nine months ended July 31, 2020 and 2019. As of July 31, 2020 and October 31, 2019, the Company had $117 million and $129 million, respectively, recorded for interest and penalties in the Condensed Consolidated Balance Sheets.

The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company does not expect complete resolution of any 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 issues involving intercompany transactions, joint and several tax liabilities and other matters. Accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $105 million within the next 12 months.

Deferred Tax Assets and Liabilities

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


	As of
	July 31, 2020		October 31, 2019
	In millions
Deferred tax assets	$	1,705	$	1,515
Deferred tax liabilities	(282)		(311)
Deferred tax assets net of deferred tax liabilities	$	1,423	$	1,204

Tax Matters Agreement with HP Inc., and Other Income Tax Matters

On October 30, 2019, the Company and HP Inc. entered into a Termination and Mutual Release Agreement and terminated the Tax Matters Agreement. Under the Termination and Mutual Release Agreement, HP Inc. agreed to pay $300 million of which $200 million was paid in fiscal 2019 and $50 million was paid in the third quarter of fiscal 2020. The Company expects to receive the remaining $50 million in fiscal 2021.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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