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:



	Fiscal Years Ended
(in millions)	March 31, 2017			April 1, 2016			April 3, 2015
Domestic entities	$	(157	)	$	(222	)	$	(761	)
Entities outside the U.S.	(17		)	232			90
Total	$	(174	)	$	10		$	(671	)

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



	Fiscal Years Ended
(in millions)	March 31, 2017			April 1, 2016			April 3, 2015
Current:
Federal	$	(32	)	$	(79	)	$	(123	)
State	14			(22		)	(43		)
Foreign	36			59			94
	18			(42		)	(72		)
Deferred:
Federal	(7		)	(39		)	(76		)
State	(1		)	48			(14		)
Foreign	(84		)	(29		)	(302		)
	(92		)	(20		)	(392		)
Total income tax (benefit) expense	$	(74	)	$	(62	)	$	(464	)

The current (benefit) expense for fiscal 2017, 2016 and 2015, includes interest and penalties of $(9) million, $(4) million and $1 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:



	Fiscal Years Ended
	March 31, 2017		April 1, 2016		April 3, 2015
Statutory rate	(35.0	)%	35.0	%	(35.0	)%
State income tax, net of federal tax	(4.0	)	(145.7	)	(4.1	)
Change in uncertain tax positions	(3.4	)	(685.0	)	(0.7	)
Foreign tax rate differential	(41.1	)	(377.4	)	(52.4	)
Capitalized transaction costs	12.1		22.3		—
Change in valuation allowances	34.3		743.6		13.4
Excess tax benefits for stock compensation	(11.3	)	(230.0	)	(0.1	)
Prepaid tax asset amortization	7.1		78.8		(1.1	)
Income Tax Credits	(2.0	)	(58.0	)	(0.8	)
Other items, net	0.8		(3.6	)	11.6
Effective tax rate	(42.5	)%	(620.0	)%	(69.2	)%

In fiscal 2017, the ETR was primarily impacted by:

•

A change in the valuation allowance that primarily consists of an aggregate income tax detriment for the increase in the valuation allowances on tax attributes in the U.S., Germany and Luxembourg, which decreased the overall income tax benefit and decreased the ETR by $135 million and 78%, respectively. Offset by an income tax benefit from the release of valuation allowances on tax attributes in Denmark, Japan and the U.K. which increased the overall income tax benefit and increased the ETR by $75 million and 43.0%, respectively.


•	An income tax detriment for transaction costs incurred that are not deductible for tax purposes, which resulted in a decrease to the overall tax benefit and decreased the ETR by $21 million and 12.1%, respectively.


•	An income tax benefit from excess tax benefits realized from employee share-based payment awards, which resulted in an increase in the overall income tax benefit and increased the ETR by $20 million and 11.3%, respectively.

In fiscal 2016, the ETR was primarily impacted by:


•	The early adoption of ASU 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” 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 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 2015.

The deferred tax assets (liabilities) were as follows:



	As of
(in millions)	March 31, 2017			April 1, 2016
Deferred tax assets
Employee benefits	$	172		$	153
Tax loss/credit carryforwards	1,307			1,158
Accrued interest	16			20
Contract accounting	89			110
Other assets	83			56
Total deferred tax assets	1,667			1,497
Valuation allowance	(1,094		)	(1,036		)
Net deferred tax assets	573			461

Deferred tax liabilities
Depreciation and amortization	(282		)	(183		)
Investment basis differences	(103		)	(91		)
Other liabilities	(45		)	(23		)
Total deferred tax liabilities	(430		)	(297		)

Total net deferred tax assets	$	143		$	164

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



	As of
(in millions)	March 31, 2017		April 1, 2016
Current:
Income tax receivables	$	146	$	60
	$	146	$	60
Non-current:
Income taxes receivable and prepaid taxes	$	50	$	81
Deferred tax assets	381		345
	$	431	$	426

Total	$	577	$	486

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



	As of
(in millions)	March 31, 2017			April 1, 2016
Current:
Liability for uncertain tax positions	$	(17	)	$	(18	)
Income taxes payable	(21		)	(22		)
	$	(38	)	$	(40	)
Non-current:
Deferred tax liabilities	(238		)	(181		)
Liability for uncertain tax positions	(185		)	(175		)
	$	(423	)	$	(356	)

Total	$	(461	)	$	(396	)

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 $1.1 billion as of March 31, 2017 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. 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. Valuation allowances are evaluated as of the balance sheet date and will be subject to change in each future reporting period as a result of changes in various factors. The net increase in the valuation allowance of $58 million in fiscal 2017, is primarily due to restructuring costs in non-U.S. jurisdictions, local losses on investments in Luxembourg and the recording of additional valuation allowances on certain state income tax carry-forwards, reduced by the release of valuation allowances in non-U.S. jurisdictions. The release of valuation allowances in the non-U.S. jurisdictions is due to objectively verifiable positive evidence, improved earnings and three years of cumulative profits.

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



	As of March 31, 2017							As of April 1, 2016
(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	$	65	$	—	$	65	2037	$	42	$	—	$	42	2035
State	$	911	$	—	$	911	2037	$	556	$	—	$	556	2035
Foreign	$	4,608	$	4,537	$	71	2036	$	4,045	$	3,986	$	59	2028
Tax credit carryforwards
Federal	$	7	$	—	$	7	2024	$	7	$	—	$	7	2024
State	$	45	$	10	$	35	2026	$	42	$	10	$	32	2026
Foreign	$	10	$	—	$	10	2020	$	—	$	—	$	—	N/A
Capital loss carryforwards
Federal	$	—	$	—	$	—	N/A	$	—	$	—	$	—	N/A
State	$	289	$	—	$	289	2018	$	258	$	—	$	258	2018
Foreign	$	235	$	235	$	—	N/A	$	73	$	73	$	—	N/A

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 $1 million, $2 million and $3 million, during fiscal 2017, 2016 and 2015, respectively. The per share effects were $0.01, $0.02 and $0.02, for fiscal 2017, 2016 and 2015, respectively.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in non-U.S. operations. As of March 31, 2017, the Company has not made a provision for U.S. income tax where the foreign investment of such earnings is essentially permanent in duration. Generally, such amounts would become subject to U.S. taxation upon the remittance of dividends to the U.S. and under certain other circumstances. As of March 31, 2017, the Company has not made a provision 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 $3.1 billion as of March 31, 2017. 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.

The Company accounts for income tax uncertainties in accordance with Income Taxes (ASC 740), 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 consolidated 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, 2017			April 1, 2016
Tax	$	192		$	180
Interest	25			33
Penalties	11			11
Net of tax attributes	(26		)	(31		)
Total	$	202		$	193

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, 2017			April 1, 2016			April 3, 2015
Balance at beginning of fiscal year	$	180		$	304		$	298
Gross increases related to prior year tax positions	14			21			45
Gross decreases related to prior year tax positions	(12		)	(101		)	(13		)
Gross increases related to current year tax positions	10			7			12
Settlements and statute of limitation expirations	(7		)	(48		)	(27		)
Acquisitions	6			3			—
Foreign exchange and others	1			(6		)	(11		)
Balance at end of fiscal year	$	192		$	180		$	304

The Company’s liability for uncertain tax positions at March 31, 2017, April 1, 2016 and April 3, 2015, includes $149 million, $122 million and $148 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. The following table presents the change in interest and penalties from the previous reported period, as well as the liability at the end of each period presented:



	As of and for the Fiscal Years Ended
	March 31, 2017			April 1, 2016			April 3, 2015
(in millions)	Increase (Decrease)
Interest	$	(8	)	$	(6	)	$	9
Interest, net of tax	$	(9	)	$	(4	)	$	10
Accrued penalties	$	—		$	2		$	(10	)
Liability for interest	$	25		$	33		$	39
Liability for interest, net of tax	$	20		$	29		$	33
Liability for penalties	$	11		$	11		$	9

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		2010 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 U.S. Federal audit through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. 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. This audit cycle is now under review by the Joint Committee on Taxation. The Company has agreed to extend the statute of limitations associated with this audit through November 30, 2017.

As of March 31, 2017, we are undergoing an IRS audit for fiscal 2011 through 2013 Federal income tax returns. During the first quarter of 2018, we received a Revenue Agent’s Report, which includes proposed adjustments to previously filed tax returns. We continue to believe that our tax positions are more-likely-than-not sustainable and that we will ultimately prevail.

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 $24 million to $54 million, excluding interest and penalties.