Income Taxes

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



	Twelve Months Ended
(Amounts in millions)	April 1, 2016			April 3, 2015			March 28, 2014
Domestic entities	$	(222	)	$	(761	)	$	1
Entities outside the U.S.	232			90			693
Total	$	10		$	(671	)	$	694

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



	Twelve Months Ended
(Amounts in millions)	April 1, 2016			April 3, 2015			March 28, 2014
Current:
Federal	$	(79	)	$	(123	)	$	(68	)
State	(22		)	(43		)	(16		)
Foreign	59			94			130
	(42		)	(72		)	46
Deferred:
Federal	(39		)	(76		)	89
State	48			(14		)	17
Foreign	(29		)	(302		)	22
	(20		)	(392		)	128
Total income tax (benefit) expense	$	(62	)	$	(464	)	$	174

The (benefit) expense for fiscal 2016, 2015, and 2014, includes interest and penalties of $(4) million, $1 million, and $(6) million, respectively, for uncertain tax positions.

The major elements contributing to the difference between the U.S. federal statutory tax rate of 35% and the effective tax rate (ETR) for continuing operations are as follows:



	Twelve Months Ended
	April 1, 2016		April 3, 2015		March 28, 2014
Statutory rate	35.0	%	(35.0	)%	35.0	%
State income tax, net of federal tax	(145.7	)	(4.1	)	(0.1	)
Change in uncertain tax positions	(685.0	)	(0.7	)	6.0
Foreign tax rate differential	(377.4	)	(52.4	)	5.1
Income tax credits	(58.0	)	(0.8	)	(0.4	)
Valuation allowance	743.6		13.4		(21.5	)
Loss on sale of securities	—		—		1.5
SEC settlements	—		10.9		—
U.S. GAAP accounting change impact	(230.0	)	—		—
Other items, net	97.5		(0.5	)	(0.5	)
Effective tax rate	(620.0	)%	(69.2	)%	25.1	%

In fiscal year 2016, the ETR was primarily impacted by:


•	The early adoption of Accounting Standards Update 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09) resulted in a tax benefit from the excess tax benefits realized from share options vested or exercised. This increased the overall income tax benefit and the ETR by $23 million and 230%, respectively.


•	Local losses on investments in Luxembourg (i) increased the valuation allowance and the ETR by $47 million and 470%, respectively, and (ii) decreased the foreign rate differential and ETR by $47 million and by 470%, respectively.


•	An increase in the overall valuation allowance primarily due to the divestiture of the Company's former NPS business division, which resulted in an increase in the valuation allowances related to state net operating losses and state tax credits. This decreased the overall income tax benefit and ETR by $27 million and 270%, respectively.


•	The release of a liability for uncertain tax positions following the closure of the U.K. tax audit for fiscal 2010 to 2012. This increased the overall income tax benefit by $58 million and the ETR by 580%.


•	The Company recognized adjustments to uncertain tax positions in the U.S. that increased the overall income tax benefit by $24 million and the ETR by 240%, respectively.

In fiscal year 2015, the ETR was primarily impacted by:


•	The impact of the non-deductible SEC settlement of $190 million, which decreased the income tax benefit and the ETR by $73 million and 10.9%, respectively.


•	Local losses on investments in Luxembourg increased the foreign rate differential and increased the ETR by $325 million and 48.4%, respectively, with an offsetting decrease in the ETR due to an increase in the valuation allowance of the same amount.


•	Changes in valuation allowances in certain jurisdictions, including a valuation allowance release in the U.K. The total impact of the valuation allowance release increased the income tax benefit and the ETR by $235 million and 35.0%, respectively. There was a net decrease in valuation allowances in fiscal year 2015.

In fiscal year 2014, the ETR was primarily impacted by:


•	The Company recorded a tax expense of $10 million related to the previous restructuring of an operating subsidiary. This expense increased the ETR by 1.5%.


•	A net increase in uncertain tax positions across various jurisdictions of $41 million which increased the ETR by 6.0%. The primary drivers of this increase in tax expense were related to various tax issues including transfer pricing and foreign exchange losses.


•	A decrease in the valuation allowance determined on a tax jurisdictional basis due to a shift in the global mix of income which decreased tax expense and the ETR by $58 million and 8.4%, respectively.


•	Local income on investment recoveries in Luxembourg (i) decreased the valuation allowance and the ETR by $91 million and 13.1%, respectively, and (ii) increased the foreign rate differential and ETR by $91 million and 13.1%, respectively.

The deferred tax assets (liabilities) are as follows:



(Amounts in millions)	April 1, 2016			April 3, 2015
Deferred Tax Assets
Employee benefits	$	153		$	183
Tax loss/credit carryforwards	1,158			1,082
Accrued interest	20			24
State taxes	7			7
Cumulative foreign exchange gain/loss	2			5
Contract accounting	110			83
Other assets	47			60
Total Deferred Tax Assets	1,497			1,444
Valuation allowance	(1,036		)	(958		)
Net Deferred Tax Assets	461			486

Deferred Tax Liabilities
Depreciation and amortization	(183		)	(168		)
Investment basis differences	(91		)	(94		)
Other liabilities	(23		)	(44		)
Total Deferred Tax Liabilities	(297		)	(306		)

Total Net Deferred Tax Assets	$	164		$	180

Income tax related assets are included in the accompanying Consolidated Balance Sheets are as follows:



(Amounts in millions)	April 1, 2016		April 3, 2015
Current:
Income Tax Receivables	$	60	$	112
	$	60	$	112
Non-current:
Income Taxes Receivable and Prepaid Taxes	$	81	$	109
Deferred Tax Assets	345		396
	$	426	$	505

Total	$	486	$	617

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



(Amounts in millions)	April 1, 2016			April 3, 2015
Current:
Current Tax Liability for Uncertain Tax Positions	$	(18	)	$	—
Income Taxes Payable	(22		)	(25		)
	(40		)	(25		)
Non-current:
Deferred Tax Liabilities	(181		)	(216		)
Non-current Tax Liability for Uncertain Tax Positions	(175		)	(237		)
	(356		)	(453		)

Total	$	(396	)	$	(478	)

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. In determining whether the deferred tax assets are realizable, 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 valuation allowance increased by $78 million in fiscal year 2016. This net increase is primarily due to the following:

•

An increase in the valuation allowance is due to the divestiture of the Company's former NPS business division, which resulted in an increase to valuation allowances related to state net operating losses and state tax credits of $27 million. As a result of the Separation, the Company concluded that it was more likely than not that a portion of its state deferred tax assets would not be realized. A significant piece of objective evidence that was evaluated included cumulative losses incurred in certain U.S. state jurisdictions. Such objective evidence limits the ability to consider other subjective evidence.


•	An increase in valuation allowance of approximately $47 million in Luxembourg due to significant losses on investments. These losses can only be utilized against changes in the fair market value of investments which cannot be forecasted.

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 deferred tax assets of approximately $1.0 billion as of April 1, 2016 due to uncertainties related to the ability to utilize these assets. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors. In determining whether the deferred tax assets are realizable, 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 results of operations.

The Company has available foreign net operating loss (NOL) carryforwards of $4.0 billion and $4.0 billion, federal NOL carryforwards of $42 million and $48 million, and state NOL carryforwards of $556 million and $639 million as of April 1, 2016 and April 3, 2015, respectively. The Company has foreign capital loss carryforwards of $73 million and $39 million as of April 1, 2016 and April 3, 2015, respectively. The Company has state credit carryforwards of $42 million and $53 million and state capital loss carryforwards of $258 million and $364 million as of April 1, 2016 and April 3, 2015, respectively. The Company also has federal foreign tax credit carryforwards of $7 million and $11 million as of April 1, 2016 and April 3, 2015. The foreign NOL carryforwards as of April 1, 2016 can be carried over indefinitely, except for $59 million which expire at various dates through 2028. The foreign capital loss carryforwards as of April 1, 2016 can be carried over indefinitely. The federal NOL carryforwards as of April 1, 2016 expire at various dates through 2035. The state NOL and credit carryforwards as of April 1, 2016 expire at various dates through 2035. The federal foreign tax credit carryforwards as of April 1, 2016 expire at various dates through 2024. The state capital loss carryforwards as of April 1, 2016 expire in 2018.

The Company is currently the beneficiary of tax holiday incentives in India, which expire in various fiscal years through 2026. As a result of the India tax holiday incentives, the Company recorded an income tax benefit of approximately $2 million, $3 million, and $3 million, during fiscal 2016, 2015, and 2014, respectively. The per share effects were $0.02, $0.02, and $0.02, for fiscal 2016, 2015, and 2014, respectively.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-US subsidiaries in non-US operations. As of April 1, 2016, the Company has not made a provision for US income tax where the foreign investment of such earnings is essentially permanent in duration. Generally, such amounts would become subject to US taxation upon the remittance of dividends to the US and under certain other circumstances. As of April 1, 2016, the Company has made a provision of $0.3 million for foreign income tax where the accumulated earnings of certain foreign subsidiaries will be reinvested in other foreign operations. The cumulative undistributed positive taxable earnings of the Company's foreign subsidiaries were approximately $3.0 billion as of April 1, 2016. It is not practicable to estimate the tax cost of repatriating the cumulative undistributed taxable earnings of these foreign subsidiaries to the U.S.

In May 2013, the India Finance Act 2013 introduced a share buyback tax. Additional legislation was passed effective in May 2015 that increased the share buyback tax rate to 23.1% and increased the dividend distribution tax rate to 20.4%, among other changes. The Company uses the lower undistributed tax rate to measure deferred taxes on inside basis differences, including undistributed earnings, of our India operations as these earnings are permanently reinvested. If the Company changes its intent and distributes such earnings either in the form of a dividend or a share buyback, dividend distribution tax or share buyback tax will be incurred.

CSC elected to early adopt ASU 2016-09 in the fourth quarter of fiscal 2016 which requires the recognition of excess tax benefits and tax deficiencies within income tax (benefit) expense in the Consolidated Statements of Operations (see Note 1). The Company elected to apply this change in presentation prospectively from the beginning of fiscal year 2016, thus prior periods have not been adjusted. This election resulted in the recognition of $23 million, or $0.16 per share, of excess tax benefits recorded within income tax benefit for the year ended April 1, 2016. This change could create volatility in the Company's effective tax rate in future periods. During fiscal 2015 and 2014, excess tax benefits were recorded in equity instead of to the statement of operations.

The Company elected to implement the cash flow presentation rules related to the settlement of stock-based awards and cash paid by directly withholding shares for tax withholding purposes retrospectively and restated prior periods within the Consolidated Statements of Cash Flows. This resulted in the reclassification of $23 million, $18 million, and $8 million of excess tax benefits related to the settlement of stock-based awards from financing to operating activities, and $48 million, $22 million, and $9 million of taxes paid related to net share settlements of stock-based compensation awards from operating activities to financing activities for the twelve months ended April 1, 2016, April 3, 2015 and March 28, 2014, respectively.

The Company accounts for income tax uncertainties in accordance with ASC 740-10, 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.

As of April 1, 2016, in accordance with ASC 740, "Income Taxes," the Company’s liability for uncertain tax positions was $193 million, including interest of $33 million, penalties of $11 million, and net of tax attributes of $31 million. As of April 3, 2015, the Company’s liability for uncertain tax positions was $237 million, including interest of $39 million, penalties of $9 million, and net of tax attributes of $115 million. As of March 28, 2014, the Company's liability for uncertain tax positions was $252 million, including interest of $30 million, penalties of $19 million, and net of tax attributes of $95 million.

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



	Twelve Months Ended
(Amounts in millions)	April 1, 2016			April 3, 2015			March 28, 2014
Balance at Beginning of Fiscal Year	$	304		$	298		$	293
Gross increases related to prior year tax positions	21			45			31
Gross decreases related to prior year tax positions	(101		)	(13		)	(27		)
Gross increases related to current year tax positions	7			12			10
Settlements and statute of limitation expirations	(48		)	(27		)	(1		)
Current Year Acquisitions	3			—			—
Foreign exchange and others	(6		)	(11		)	(8		)
Balance at End of Fiscal Year	$	180		$	304		$	298

The Company’s liability for uncertain tax positions at April 1, 2016, April 3, 2015, and March 28, 2014, includes $122 million, $148 million, and $160 million, respectively, related to amounts that, if recognized, would affect the effective tax rate (excluding related interest and penalties).

The Company recognizes interest accrued related to uncertain tax positions and penalties as a component of income tax expense. During the year ended April 1, 2016, the Company had a net decrease in interest of $6 million (decrease of $4 million net of tax) and an increase in accrued penalties of $2 million, and as of April 1, 2016, has recognized a liability for interest of $33 million ($29 million net of tax) and penalties of $11 million. During the year ended April 3, 2015, the Company had a net increase in interest of $9 million ($10 million net of tax) and a net decrease in accrued penalties of $10 million, and as of April 3, 2015, recognized a liability for interest of $39 million ($33 million net of tax) and penalties of $9 million. During the year ended March 28, 2014, the Company net decrease interest expense of $8 million ($4 million net of tax) and accrued penalties of $2 million, and as of March 28, 2014, recognized a liability for interest of $30 million ($24 million net of tax) and penalties of $19 million.

Tax Examination Status:

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		2008 and forward
United States – Various States		2008 and forward
Australia		2012 and forward
Canada		2008 and forward
Denmark		2010 and forward
France		2013 and forward
Germany		2010 and forward
India		1998 and forward
United Kingdom		2013 and forward

It is reasonably possible that during the next twelve months the Company's liability for uncertain tax positions may change by a significant amount. The IRS is examining the Company's federal income tax returns for fiscal 2008 through 2013. The Company entered into negotiations for a resolution of the fiscal 2008 through 2010 audit through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company has agreed to extend the statute of limitations associated with the audit through November 30, 2016. During the fourth quarter of fiscal 2016, the Company and the IRS reached an agreement in principle as to the settlement terms and the Company remeasured its uncertain tax positions. 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 though payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in liability for uncertain tax positions of $18 million to $49 million, excluding interest and penalties.