Income Taxes

12 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The sources of (loss) income from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the United States, are as follows:

	Fiscal Years Ended
(in millions)	March 31, 2023		March 31, 2022		March 31, 2021
Domestic entities	$	(206)	$	(566)	$	975
Entities outside the United States	(679)		1,707		(321)
Total	$	(885)	$	1,141	$	654

The income tax expense (benefit) on income (loss) from continuing operations is comprised of:

	Fiscal Years Ended
(in millions)	March 31, 2023		March 31, 2022		March 31, 2021
Current:
Federal	$	96	$	(118)	$	730
State	39		(17)		257
Foreign	155		285		216
	290		150		1,203
Deferred:
Federal	(192)		9		(221)
State	(47)		(9)		(51)
Foreign	(370)		255		(131)
	(609)		255		(403)
Total income tax (benefit) expense	$	(319)	$	405	$	800

The current federal (benefit) and tax expense for fiscal years 2023, 2022, and 2021 includes a $(61) million, $(7) million and $(4) million transition tax benefit, respectively. The current expense (benefit) for fiscal years 2023, 2022 and 2021, includes interest and penalties of $1 million, $(3) million and $2 million, respectively, for uncertain tax positions.

In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for tax liabilities arising prior to the HPES Merger, and DXC is liable to HPE for income tax receivables it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a $26 million tax indemnification receivable related to uncertain tax positions, a $53 million tax indemnification receivable related to other tax payables, and a $89 million tax indemnification payable related to other tax receivables.

In connection with the spin-off of the Company's former U.S. public sector business (the "USPS Separation"), the Company entered into a tax matters agreement with Perspecta Inc. (including its successors and permitted assigns, "Perspecta"). The Company generally will be responsible for tax liabilities arising prior to the USPS Separation, and Perspecta is liable to the Company for income tax receivables related to pre-spin-off periods. 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 remains liable to HPE for tax receivables transferred to Perspecta related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a $18 million tax indemnification receivable from Perspecta related to other tax payables and a $6 million tax indemnification payable to Perspecta related to income tax and other tax receivables.

In connection with the sale of the HPS business, the Company entered into a tax matters agreement with Dedalus. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the sale of the HPS business.

The major elements contributing to the difference between the U.S. federal statutory tax rate and the effective tax rate ("ETR") for continuing operations is below.

	Fiscal Years Ended
	March 31, 2023		March 31, 2022		March 31, 2021
Statutory rate	(21.0)	%	21.0	%	21.0	%
State income tax, net of federal tax	(1.4)		(6.9)		10.8
Foreign tax rate differential	(2.3)		151.1		(198.4)
Change in valuation allowances	(1.3)		(140.9)		239.3
Income tax and foreign tax credits	(8.0)		(15.2)		(48.7)
Change in uncertain tax positions	1.2		6.8		17.2
Withholding taxes	3.5		6.2		10.3
U.S. tax on foreign income	5.8		2.5		17.6
Excess tax benefits or expense for stock compensation	0.6		0.1		2.2
Capitalized transaction costs	0.2		0.2		0.5
Base erosion and transition taxes	(9.1)		6.6		(0.7)
Impact of business divestitures	(7.6)		3.0		52.6
Granite trust capital loss	—		—		(5.7)
Indemnification costs	1.2		—		—
Other items, net	2.2		1.0		4.3
Effective tax rate	(36.0)	%	35.5	%	122.3	%

In fiscal 2023, the ETR was primarily impacted by:

•A reduction in base erosion and transition taxes, which increased income tax benefit and decreased the ETR by $81 million and 9.1%, respectively.

•Income tax and foreign tax credits, which increased income tax benefit and decreased the ETR by $71 million and 8.0%, respectively, offset by tax expense on U.S. international tax inclusions which decreased tax benefit and increased the ETR by $51 million and 5.8%, respectively.

•Non-taxable gains and losses on business divestitures, which increased income tax benefit and decreased the ETR by $67 million and 7.6%, respectively.

In fiscal 2022, the ETR was primarily impacted by:

•Income tax and foreign tax credits, which decreased income tax expense and decreased the ETR by $174 million and 15.2%, respectively.

•Changes in Luxembourg losses that increased the ETR by $1,609 million and 141.0%, respectively, with an offsetting decrease in the ETR due to a decrease in the valuation allowance of the same amount.

•Adjustments to uncertain tax positions that increased the overall income tax expense and the ETR by $78 million and 6.8%, respectively.

In fiscal 2021, the ETR was primarily impacted by:

•Impact of the HHS and other business divestitures, which increased tax expense and increased the ETR $344 million and 52.6%, respectively. The HHS tax gain increased tax expense and the ETR as the tax basis of assets sold, primarily goodwill, was lower than the book basis.

•Continued losses in countries where we are recording a valuation allowance on certain deferred tax assets, primarily in Belgium, Denmark, Italy, France, Luxembourg, and U.S., and an impairment of the full German deferred tax asset, which increased income tax expense and increased the ETR by $1,565 million and 239.3%, respectively.

•An increase in income tax and foreign tax credits, which decreased income tax expense and decreased the ETR by $319 million and 48.7%, respectively.

•Local losses on investments in Luxembourg that increased the foreign rate differential and decreased the ETR by $1,226 million and 187.5%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount.

•The Company recognized adjustments to uncertain tax positions that increased the overall income tax expense and the ETR by $112 million and 17.2%, respectively.

The deferred tax assets (liabilities) were as follows:

	As of
(in millions)	March 31, 2023		March 31, 2022
Deferred tax assets
Tax loss/credit carryforwards	2,327		2,360
Accrued interest	18		15
Operating lease liabilities	219		244
Contract accounting	135		132
Other assets	272		338
Total deferred tax assets	2,971		3,089
Valuation allowance	(2,064)		(2,133)
Net deferred tax assets	907		956
Deferred tax liabilities
Depreciation and amortization	(98)		(430)
Operating right-of-use asset	(208)		(227)
Investment basis differences	(8)		(8)
Employee benefits	(103)		(426)
Other liabilities	(198)		(220)
Total deferred tax liabilities	(615)		(1,311)
Total net deferred tax assets (liabilities)	$	292	$	(355)

Income tax related assets are included in the accompanying balance sheets as follows:

	As of
(in millions)	March 31, 2023		March 31, 2022
Current:
Income tax receivables and prepaid taxes	$	60	$	78
	$	60	$	78
Non-current:
Income taxes receivable and prepaid taxes	$	192	$	130
Deferred tax assets	460		221
	$	652	$	351
Total	$	712	$	429

Income tax related liabilities are included in the accompanying balance sheet as follows:

	As of
(in millions)	March 31, 2023		March 31, 2022
Current:
Liability for uncertain tax positions	$	(1)	$	(34)
Income taxes payable	(119)		(163)
	$	(120)	$	(197)
Non-current:
Deferred taxes	(168)		(576)
Income taxes payable	(16)		(39)
Liability for uncertain tax positions	(403)		(379)
	$	(587)	$	(994)
Total	$	(707)	$	(1,191)

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. As of each reporting date, management weighs new evidence, both positive and negative, that could affect its view of the future realization of its net deferred tax assets. Objective verifiable evidence, which is historical in nature, carries more weight than subjective evidence, which is forward looking in nature.

A valuation allowance has been recorded against deferred tax assets of approximately $2,064 million as of March 31, 2023, due to uncertainties related to the ability to utilize these assets. In assessing whether its deferred tax assets are realizable, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. The Company considers all available positive and negative evidence including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations.

The net decrease in the valuation allowance of $66 million in fiscal 2023 was primarily due to a currency translation adjustment of $55 million.

The following table provides information on the Company's various tax carryforwards:

	As of March 31, 2023							As of March 31, 2022
(in millions)	Total		With No Expiration		With Expiration		Expiration Dates Through	Total		With No Expiration		With Expiration		Expiration Dates Through
Net operating loss carryforwards
Federal	$	70	$	70	$	—	N/A	$	88	$	88	$	—	N/A
State	$	463	$	217	$	246	2043	$	589	$	243	$	346	2042
Foreign	$	9,164	$	5,370	$	3,794	2040	$	9,368	$	5,635	$	3,733	2039
Tax credit carryforwards
Federal	$	19	$	—	$	19	2043	$	5	$	—	$	5	2042
State	$	4	$	—	$	4	2037	$	5	$	2	$	3	2037
Foreign	$	—	$	—	$	—	N/A	$	—	$	—	$	—	N/A
Capital loss carryforwards
Federal	$	42	$	42	$	—	N/A	$	42	$	—	$	42	2026
State	$	46	$	46	$	—	N/A	$	—	$	—	$	—	N/A
Foreign	$	199	$	199	$	—	N/A	$	199	$	199	$	—	N/A

The Company also has federal and state 163(j) interest deduction carryforward attributes of approximately $23 million and $770 million, respectively, that have no expiration.

The majority of our global unremitted foreign earnings have been taxed or would be exempt from U.S. tax upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The following earnings are considered indefinitely reinvested: approximately $484 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and approximately $200 million of our accumulated earnings in India. A portion of these indefinitely reinvested earnings may be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position in the future based on its future strategy and cash needs.

The Company accounts for income tax uncertainties in accordance with ASC 740 Income Taxes, which prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of liabilities for uncertain tax positions, interest and penalties.

In accordance with ASC 740, the Company’s liability for uncertain tax positions was as follows:

	Fiscal Years Ended
(in millions)	March 31, 2023		March 31, 2022
Tax	$	399	$	422
Interest	79		76
Penalties	18		20
Offset to receivable	(91)		(104)
Net of tax attributes	(1)		(1)
Total	$	404	$	413

The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):

	Fiscal Years Ended
(in millions)	March 31, 2023		March 31, 2022		March 31, 2021
Balance at beginning of fiscal year	$	422	$	354	$	253
Gross increases related to prior year tax positions	31		61		60
Gross decreases related to prior year tax positions	(17)		(16)		(30)
Gross increases related to current year tax positions	8		93		102
Settlements and statute of limitation expirations	(43)		(33)		(36)
Acquisitions and dispositions	—		(36)		6
Foreign exchange and others	(2)		(1)		(1)
Balance at end of fiscal year	$	399	$	422	$	354

The Company’s liability for uncertain tax positions at March 31, 2023, March 31, 2022, and March 31, 2021, includes $368 million, $393 million and $316 million, respectively, related to amounts that, if recognized, would affect the effective tax rate (excluding related interest and penalties). The increase related to prior year tax positions primarily relates to an increase in foreign tax credits. The change in settlements and statute of limitation expirations primarily relates to amounts agreed to with tax authorities.

The Company recognizes interest accrued related to uncertain tax positions and penalties as a component of income tax expense. During the year ended March 31, 2023, the Company had a net increase in interest expense of $3 million ($1 million net of tax) and a net decrease in accrued expense for penalties of $2 million and, as of March 31, 2023, recognized a liability for interest of $79 million ($61 million net of tax) and penalties of $18 million. During the year ended March 31, 2022, the Company had net decrease in interest expense of $1 million ($1 million net of tax) and net decrease in accrued expense for penalties of $2 million, and as of March 31, 2022, recognized a liability for interest of $76 million ($60 million net of tax) and penalties of $20 million. During the year ended March 31, 2021, the Company had a net increase in interest of $1 million ($(1) million net of tax) and a net increase in accrued expense for penalties of $1 million and as of March 31, 2021, recognized a liability for interest of $46 million ($39 million net of tax) and penalties of $22 million.

The Company is currently under examination in several tax jurisdictions. A summary of the tax years that remain subject to examination in certain of the Company’s major tax jurisdictions are:

Jurisdiction:	Tax Years that Remain Subject to Examination (Fiscal Year Ending):
United States – Federal	2009 and forward
United States – Various States	2009 and forward
Canada	2010 and forward
France	2016 and forward
Germany	2010 and forward
India	2001 and forward
U. K.	2018 and forward

Tax Examinations

The Internal Revenue Service (the “IRS”) has examined, or is examining, the Company’s federal income tax returns for fiscal 2009 through the tax year ended October 31, 2018. With respect to CSC’s fiscal 2009 through 2017 federal tax returns, the Company participated in settlement negotiations with the IRS Office of Appeals. The IRS examined several issues for these tax years that resulted in various audit adjustments. The Company and the IRS Office of Appeals have settled various audit adjustments, and we disagree with the IRS’ disallowance of certain losses and deductions resulting from restructuring costs and tax planning strategies in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and are challenging them in the U.S. Tax Court, these matters are not fully reserved and would result in incremental federal and state tax expense and cash tax payments of approximately $477 million (including estimated interest and penalties) for the unreserved portion of these items if we do not prevail. We have received notices of deficiency with respect to fiscal 2009, 2010, 2011 and 2013 and have timely filed petitions with the U.S. Tax Court. We do not expect the U.S. Tax Court matters to be resolved in the next 12 months.

The Company’s fiscal years 2009, 2010, 2011 and 2013 are in the U.S. Tax Court, and consequently these years will remain open until such proceedings have concluded. The statute of limitations on assessments related to a refund claim for fiscal year 2012 is open through February 28, 2025. The Company has agreed to extend the statute of limitations for fiscal and tax return years 2014 through 2020 to September 30, 2024. The Company expects to reach resolution for fiscal and tax return years 2009 through 2020 no earlier than fiscal 2025.

The Company may settle certain other tax examinations for different amounts than the Company has accrued as uncertain tax positions. Consequently, the Company may need to accrue and ultimately pay additional amounts or pay lower amounts than previously estimated and accrued when positions are settled in the future. The Company believes the outcomes that are reasonably possible within the next 12 months to result in a reduction in its liability for uncertain tax positions, excluding interest, penalties, and tax carryforwards, would be approximately $16 million.