Note 15 – Income Taxes

The amounts of income from continuing operations before income taxes attributable to domestic and foreign operations are as follows:



	Year Ended March 31,
(in millions)	2013		2012		2011
Domestic	$	924	$	830	$	751
Foreign	394		524		458
Income from continuing operations before income taxes	$	1,318	$	1,354	$	1,209

Income tax expense (benefit) from continuing operations consists of the following:



	Year Ended March 31,
(in millions)	2013			2012			2011
Current:
Federal	$	279		$	275		$	110
State	39			37			48
Foreign	32			120			88
Total current	$	350		$	432		$	246
Deferred:
Federal	$	(18	)	$	4		$	65
State	3			(22		)	5
Foreign	28			2			70
Total deferred	$	13		$	(16	)	$	140
Total:
Federal	$	261		$	279		$	175
State	42			15			53
Foreign	60			122			158
Total income tax expense from continuing operations	$	363		$	416		$	386

The income tax expense from continuing operations is reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:



	Year Ended March 31,
(in millions)	2013			2012			2011
Tax expense at U.S. federal statutory tax rate	$	461		$	474		$	423
Effect of international operations	(128		)	(89		)	(129		)
U.S. federal and state tax contingencies	(8		)	23			61
Domestic manufacturing deduction	(21		)	(19		)	(19		)
State taxes, net of U.S. federal tax benefit	23			17			13
Valuation allowance	11			(15		)	(2		)
Other, net	25			25			39
Income tax expense from continuing operations	$	363		$	416		$	386

Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences from continuing operations are as follows:



	At March 31,
(in millions)	2013			2012
Deferred tax assets:
Modified accrual basis accounting for revenue	$	379		$	447
Share-based compensation	38			48
Accrued expenses	42			30
Net operating losses	158			173
Intangible assets amortizable for tax purposes	7			11
Deductible state tax and interest benefits	51			56
Other	55			53
Total deferred tax assets	$	730		$	818
Valuation allowances	(75		)	(68		)
Total deferred tax assets, net of valuation allowance	$	655		$	750
Deferred tax liabilities:
Purchased software	$	93		$	133
Depreciation	21			31
Other intangible assets	41			56
Capitalized development costs	209			206
Total deferred tax liabilities	$	364		$	426
Net deferred tax asset	$	291		$	324

In management’s judgment, it is more likely than not that the total deferred tax assets, net of valuation allowance, of approximately $655 million will be realized in the foreseeable future. Realization of the net deferred tax assets is dependent on the Company’s generation of sufficient future taxable income in the related tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards, and tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustments in future periods if estimates of future taxable income change.

U.S. federal, state and foreign net operating loss carryforwards (NOLs) totaled approximately $764 million and $876 million at March 31, 2013 and 2012, respectively. The NOLs will expire as follows: $612 million between 2013 and 2032 and $152 million may be carried forward indefinitely.

A valuation allowance has been provided for deferred tax assets that are not expected to be realized. The valuation allowance increased approximately $7 million at March 31, 2013 and decreased approximately $17 million at March 31, 2012. The increase in the valuation allowance at March 31, 2013 primarily related to amounts of NOLs in foreign jurisdictions that in management's judgment will not be realized. The decrease in the valuation allowance at March 31, 2012 resulted primarily from the recognition of state NOLs due to a change in forecasted state taxable income.

No provision has been made for U.S. federal income taxes on approximately $2,220 million and $1,999 million at March 31, 2013 and 2012, respectively, of unremitted earnings of the Company’s foreign subsidiaries since the Company plans to permanently reinvest all such earnings outside the United States. It is not practicable to determine the amount of tax associated with such unremitted earnings.

At March 31, 2013, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $486 million (of which none was classified as current). In addition, at March 31, 2013, the Company has recorded approximately $47 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions. At March 31, 2012, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $641 million (of which none was classified as current). In addition, at March 31, 2012, the Company had recorded approximately $56 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions.

A roll-forward of the Company’s uncertain tax positions for all U.S. federal, state and foreign tax jurisdictions is as follows:



	At March 31,
(in millions)	2013			2012
Balance at beginning of year	$	523		$	522
Additions for tax positions related to the current year	30			26
Additions for tax positions from prior years	60			21
Reductions for tax positions from prior years	(158		)	(17		)
Settlement payments	(55		)	(19		)
Statute of limitations expiration	(15		)	(6		)
Translation and other	(3		)	(4		)
Balance at end of year	$	382		$	523

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $311 million and $410 million at March 31, 2013 and 2012, respectively. The gross amount of interest and penalties accrued, reported in “Total liabilities,” was approximately $104 million, $118 million and $98 million for fiscal years 2013, 2012 and 2011, respectively. The amount of interest and penalties decreased approximately $14 million for fiscal year 2013 and increased approximately $20 million and $16 million for fiscal years 2012 and 2011, respectively.

In the fiscal year ended March 31, 2013, the Company reclassified approximately $150 million of deferred tax assets from non-current to current due to a change in tax accounting method reflected in the Company's federal income tax return for the fiscal year ended March 31, 2012. This accounting change did not affect income tax expense.

A number of years may elapse before a particular uncertain tax position for which the Company has not recorded a financial statement benefit is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The Company is subject to tax audits in the following major taxing jurisdictions:


•	United States — federal tax years are open for years 2005 through 2007 and years 2011 and forward;


•	Germany — tax years are open for years 2010 and forward;


•	Italy — tax years are open for years 2008 and forward;


•	Japan— tax years are open for years 2007 and forward; and


•	United Kingdom — tax years are open for years 2010 and forward.

The U.S. Internal Revenue Service (IRS) examination of the Company’s federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007 has been forwarded to the Joint Committee of Taxation for final approval. As final approval had not been obtained as of the end of the fiscal year, matters relating to this audit were not deemed effectively settled.

While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its financial statements reflect the probable outcome of uncertain tax positions. The Company may adjust these uncertain tax positions, as well as any related interest or penalties, in light of changing facts and circumstances, including the settlement of income tax audits and the expirations of statutes of limitation. To the extent a settlement differs from the amounts previously reserved, that difference generally would be recognized as a component of income tax expense in the period of resolution. Although the timing of the resolution of income tax examinations is highly uncertain, it is reasonably possible that settlements, payments and new information in the next 12 months related to certain federal, foreign and state tax issues may result in changes to the Company’s uncertain tax positions, including issues involving taxation of international operations, certain state tax issues and other matters. The Company believes that such reasonably possible changes within the next 12 months may reduce the balance of unrecognized tax benefits by an amount up to $250 million.