Income Taxes

The Company's effective tax rate on income from continuing operations (ETR) was 25.1% and 43.9% for the quarter and nine months ended January 2, 2015, respectively, and 21.5% and 27.3% for the quarter and nine months ended December 27, 2013, respectively. The following are the primary drivers of the ETR for the nine months ended January 2, 2015 and December 27, 2013. For the tax impact of discontinued operations, see Note 4.

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During the third quarter and nine months ended January 2, 2015, the ETR was impacted by a $462 million mark-to-market accounting loss related to CSC pension plans which was partially offset by a penalty of $190 million recorded as part of a settlement with the Securities and Exchange Commission. The impact of the pension mark-to-market and SEC penalty adjustments decreased the ETR by 2.9% for the third quarter and increased the ETR by 16.7% for the nine months ended January 2, 2015.


•	During the third quarter and nine months ended January 2, 2015, the ETR decreased due to the global mix of income.


•	During the third quarter and nine months ended January 2, 2015, the Company recorded $11 million and $15 million of income tax benefits, respectively, related to the reversal of certain state uncertain tax positions for which the statute of limitations has expired, which decreased the ETR by 2.7% and 36.5%, respectively.


•	During the third quarter and nine months ended December 27, 2013, the Company recorded an income tax benefit of approximately $6 million relating to the settlement of audits for certain of its Non-U.S. jurisdictions, which reduced the ETR by 1.7% and 0.7%, respectively.


•	During the third quarter and nine months ended December 27, 2013, the Company recorded a mark-to-market accounting gain of $114 million related to CSC pension plans in certain Non-U.S. jurisdictions with valuation allowances established on their deferred tax assets, which decreased the ETR by 10.0% and 4.3%, respectively.

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. A valuation allowance has been recorded against certain deferred tax assets due to uncertainties related to the ability to utilize these assets. The valuation allowance is based on historical earnings, estimates of taxable income by jurisdiction and the period over which the deferred tax assets will be recoverable. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors. As of January 2, 2015, total valuation allowances included approximately $360 million related to deferred tax assets, including tax loss carryforwards, in the United Kingdom. In evaluating positive and negative evidence through the end of the third quarter, including three-year cumulative historical losses on a US GAAP basis, management has concluded that such valuation allowances continue to be appropriate. Based on recent earnings in this jurisdiction and an expectation that the business may be able to demonstrate a pattern of sustained profitability by the end of the fourth quarter, management believes there is a reasonable possibility that, by the end of fiscal 2015, sufficient positive evidence may become available to reach a conclusion that a portion of the valuation allowance related to the United Kingdom will no longer be needed. As such, the Company may release a portion of its valuation allowance against its deferred taxes, which would result in the recognition of certain deferred tax assets and an income tax benefit for the period in which such release is recorded.

There were no material changes to uncertain tax positions as of the third quarter of fiscal 2015 compared to the fiscal 2014 year-end, except for $16 million of state uncertain tax positions for which the statute of limitations has expired.

The Internal Revenue Service (IRS) examined several issues for the fiscal years 2008 through 2010 that resulted in audit adjustments to the Company's federal income tax returns. The Company does not agree with many of the proposed adjustments and has filed an Appeals brief. As a result, the Company expects to reach a resolution no earlier than fiscal year 2016. The significant items subject to appeal primarily relate to foreign exchange losses and other U.S. international tax issues. 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 as uncertain tax positions. 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 with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in the liability for uncertain tax positions of up to $15 million, excluding interest, penalties, and tax carryforwards.