Note 15 – Income Taxes

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



	Year Ended March 31,
(in millions)	2017		2016		2015
Domestic	$	787	$	729	$	737
Foreign	286		355		378
Income from continuing operations before income taxes	$	1,073	$	1,084	$	1,115

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



	Year Ended March 31,
(in millions)	2017			2016			2015
Current:
Federal	$	215		$	285		$	284
State	30			50			37
Foreign	74			95			56
Total current	$	319		$	430		$	377
Deferred:
Federal	$	2		$	(86	)	$	(74	)
State	(5		)	(20		)	(12		)
Foreign	(18		)	(9		)	14
Total deferred	$	(21	)	$	(115	)	$	(72	)
Total:
Federal	$	217		$	199		$	210
State	25			30			25
Foreign	56			86			70
Total income tax expense from continuing operations	$	298		$	315		$	305

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



	Year Ended March 31,
(in millions)	2017			2016			2015
Tax expense at U.S. federal statutory tax rate	$	376		$	379		$	390
Effect of international operations	(70		)	(77		)	(91		)
U.S. federal and state tax contingencies	—			8			1
Domestic manufacturing deduction	(23		)	(27		)	(23		)
State taxes, net of U.S. federal tax benefit	16			16			15
Valuation allowance	(16		)	3			8
Other, net	15			13			5
Income tax expense from continuing operations	$	298		$	315		$	305

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 were as follows:



	At March 31,
(in millions)	2017			2016
Deferred tax assets:
Modified accrual basis accounting for revenue	$	364		$	391
Share-based compensation	41			36
Accrued expenses	11			42
Net operating losses	149			135
Deductible state tax and interest benefits	19			17
Other	62			75
Total deferred tax assets	$	646		$	696
Valuation allowances	(89		)	(96		)
Total deferred tax assets, net of valuation allowance	$	557		$	600
Deferred tax liabilities:
Purchased software	$	207		$	100
Depreciation	3			4
Other intangible assets	116			39
Internally developed software	23			53
Total deferred tax liabilities	$	349		$	196
Net deferred tax asset	$	208		$	404

In management’s judgment, it is more likely than not that the total deferred tax assets, net of valuation allowance, of approximately $557 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 $702 million and $671 million at March 31, 2017 and 2016, respectively. The NOLs will expire as follows: $477 million between 2018 and 2037 and $225 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 decreased approximately $7 million at March 31, 2017 and increased approximately $11 million at March 31, 2016. The decrease in the valuation allowance at March 31, 2017 primarily related to the release of valuation allowances in certain foreign jurisdictions due to the change in management's judgment of estimated future taxable income, partially offset by an increase in valuation allowance related to acquired NOL's. The increase in the valuation allowance at March 31, 2016 primarily related to acquired NOL's which are subject to annual limitations under IRS code Section 382, and NOL's and other deferred tax assets in foreign jurisdictions that in management's judgment will not be realized, offset by currency translation adjustments.

No provision has been made for U.S. federal income taxes on approximately $3,202 million and $2,987 million at March 31, 2017 and 2016, 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, 2017, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $161 million (of which approximately $16 million was classified as current). In addition, at March 31, 2017, the Company recorded approximately $19 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions. At March 31, 2016, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $163 million (of which approximately $1 million was classified as current). In addition, at March 31, 2016, the Company recorded approximately $17 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 was as follows:



	At March 31,
(in millions)	2017			2016
Balance at beginning of year	$	143		$	134
Additions for tax positions related to the current year	13			22
Additions for tax positions from prior years	4			20
Reductions for tax positions from prior years	(9		)	(14		)
Settlement payments	(3		)	(16		)
Statute of limitations expiration	(13		)	(5		)
Translation and other	(3		)	2
Balance at end of year	$	132		$	143

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $116 million and $119 million at March 31, 2017 and 2016, respectively. The gross amount of interest and penalties accrued, reported in “Total liabilities,” was approximately $29 million and $20 million for fiscal years 2017 and 2016, respectively. The amount of interest and penalties increased approximately $9 million for fiscal year 2017 and decreased approximately $8 million for fiscal year 2016.

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 2014 and forward;


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


•	Canada — tax years are open for years 2008 and forward.

In November 2013, the Company received a tax assessment from the Brazilian tax authority relating to fiscal years 2008-2013. The assessment included a report of findings in connection with the examination. The Company disagrees with the proposed adjustments in the assessment and intends to vigorously dispute these matters through applicable administrative and judicial procedures, as appropriate. As the result of decisions at the Administrative Court of Appeals, the total potential liability from the tax assessment at March 31, 2017 was approximately 180 million Brazilian reais (which translated to approximately $58 million at March 31, 2017), including interest and penalties accumulated through March 31, 2017. While the Company believes that it will ultimately prevail, if the assessment is not resolved in favor of the Company, it would have an impact on the Company’s consolidated financial position, cash flows and results of operations.

The Company does not believe it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.