Income Taxes

3 Months Ended

Jun. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company's effective tax rate from continuing operations ("ETR") was 18.4% and 35.8% for the three months ended June 30, 2019 and June 30, 2018, respectively. For the three months ended June 30, 2019, the primary drivers of the ETR were the global mix of income and the reduction of our estimated fiscal 2019 base erosion anti-avoidance tax ("BEAT") for the October 31, 2019 tax year due to electing out of additional first year bonus depreciation. For the three months ended June 30, 2018, the primary drivers of the ETR were the global mix of income, offset by the impact of transition tax and the new global intangible low taxed income tax ("GILTI") on certain non-U.S. earnings due to U.S. tax reform and an increase in our state valuation allowances on separate company state return deferred tax assets of legacy CSC due to the spin-off of our USPS business.

The tax expense associated with discontinued operations for the three months ended June 30, 2019 was $0 million as compared to $18 million during the same periods of the prior fiscal year. The primary driver of the variance in the tax expense for the three months ended June 30, 2019 and June 30, 2018 was the difference in income before tax for the respective periods.

As the result of the issuance of new U.S. Treasury regulations in the first quarter of fiscal 2020, the Company changed its permanent reinvestment assertion with respect to certain foreign corporations, reducing the amount that will ultimately be repatriated to the U.S. by approximately $506 million. With the exception of this change, our prior permanent reinvestment assertion, that we will repatriate all current and accumulated earnings for all non-U.S. subsidiaries other than India, continues to apply. We do not believe this assertion change will have an adverse effect on the Company as U.S. cash needs will be satisfied from other sources of non-U.S. earnings.

In connection with the Separation of USPS, the Company entered into a tax matters agreement with Perspecta. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the Separation of USPS. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE pursuant to the tax matters agreement between the Company and HPE. The Company is also liable to HPE for tax receivables and refunds which it receives from Perspecta related to pre-HPES Merger periods that were transferred to Perspecta. Pursuant to the tax matters agreement with Perspecta, the Company recorded a tax indemnification receivable from Perspecta of $95 million and a tax indemnification payable to Perspecta of $69 million related to income tax and other tax liabilities. As a result of the HPES Merger, the Company continues to have a net receivable of $16 million from HPE, comprised of a $101 million tax indemnification receivable related to tax payables, a $49 million tax indemnification receivable related to uncertain tax positions (net of related deferred tax benefits), and $134 million of tax indemnification payable related to other tax receivables.

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2017. With respect to CSC's fiscal 2008 through 2010 federal tax returns, the Company previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to some, but not all of these adjustments.

The Company has agreed to extend the statute of limitations associated with this audit through November 30, 2019.

In addition, during the first quarter of fiscal 2018, the Company received a Revenue Agent’s Report with proposed adjustments to CSC's fiscal 2011 through 2013 federal returns. The Company has filed a protest of certain of these adjustments to the IRS Office of Appeals. In the first quarter of fiscal 2020, we filed for competent authority relief relating to certain transfer pricing adjustments. The Company has agreed to extend the statute of limitations associated with this audit through March 31, 2020. The IRS is also examining CSC's fiscal 2014 through 2017 federal income tax returns. The Company has received several proposed adjustments for this cycle in the first quarter of fiscal 2020 and expects to receive a Revenue Agent's Report in the second quarter of fiscal 2020. The Company continues to believe that its tax positions are more-likely-than-not sustainable and that the Company will ultimately prevail. The company has agreed to extend the statute of limitations for the fiscal 2014 through fiscal 2016 tax years through March 31, 2020. The Company expects to reach a resolution for all years no earlier than the second quarter of fiscal 2021.

In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued for unrecognized tax benefits. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more-likely-than-not standard if such positions are not upheld. Conversely, the Company could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes that are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of $2 million to $6 million, excluding interest, penalties and tax carry-forwards.