Note 14 – 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)	2018		2017		2016
Domestic	$	704	$	787	$	729
Foreign	317		286		355
Income from continuing operations before income taxes	$	1,021	$	1,073	$	1,084

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



	Year Ended March 31,
(in millions)	2018			2017			2016
Current:
Federal	$	385		$	215		$	285
State	36			30			50
Foreign	85			74			95
Total current	$	506		$	319		$	430
Deferred:
Federal	$	60		$	2		$	(86	)
State	(10		)	(5		)	(20		)
Foreign	(11		)	(18		)	(9		)
Total deferred	$	39		$	(21	)	$	(115	)
Total:
Federal	$	445		$	217		$	199
State	26			25			30
Foreign	74			56			86
Total income tax expense from continuing operations	$	545		$	298		$	315

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)	2018			2017			2016
Tax expense at U.S. federal statutory tax rate	$	322		$	376		$	379
Tax Cuts and Jobs Act	290			—			—
Effect of international operations	(61		)	(70		)	(77		)
U.S. federal and state tax contingencies	(2		)	—			8
Domestic manufacturing deduction	(21		)	(23		)	(27		)
State taxes, net of U.S. federal tax benefit	16			16			16
Valuation allowance	(9		)	(16		)	3
Other, net	10			15			13
Income tax expense from continuing operations	$	545		$	298		$	315

Income tax expense from continuing operations includes approximately $290 million resulting from reasonable estimates of the impact of changes in tax law in the United States from the Tax Act. The amounts recorded for the impacts of the Tax Act are provisional amounts of approximately $194 million related to the taxation of unremitted earnings of the Company’s foreign subsidiaries, which is payable over eight years, and approximately $96 million related to the remeasurement of deferred tax assets and liabilities for the change in income tax rates. The provisional amounts were reduced by approximately $28 million from the Company's prior estimate due to results from the full fiscal year 2018 operations needed for calculations under the Tax Act and analysis of the historic unremitted earnings of the Company's foreign subsidiaries. The Company will continue to refine the provisional amounts as it reviews and analyzes the historic unremitted earnings of its foreign subsidiaries, as well as the attendant computations that impact the measurement of the taxation of unremitted earnings, and also takes into consideration any additional regulatory guidance published by the U.S. tax authorities in respect of the Tax Act. The Company expects to finalize the tax expense as soon as practical, but not later than the third quarter of fiscal year 2019.

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)	2018			2017
Deferred tax assets:
Modified accrual basis accounting for revenue	$	283		$	364
Share-based compensation	31			41
Accrued expenses	12			11
Net operating losses	125			149
Deductible state tax and interest benefits	10			19
Other	51			62
Total deferred tax assets	$	512		$	646
Valuation allowance	(72		)	(89		)
Total deferred tax assets, net of valuation allowance	$	440		$	557
Deferred tax liabilities:
Purchased software	$	129		$	207
Depreciation	—			3
Other intangible assets	70			116
Internally developed software	5			23
Total deferred tax liabilities	$	204		$	349
Net deferred tax asset	$	236		$	208

In management’s judgment, it is more likely than not that the total deferred tax assets, net of valuation allowance, of approximately $440 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 $734 million and $702 million at March 31, 2018 and 2017, respectively. The NOLs will expire as follows: $526 million between 2019 and 2038 and $208 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 $17 million and $7 million at March 31, 2018 and 2017, respectively. The decrease in the valuation allowance at both March 31, 2018 and 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 NOLs.

Previously, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations. Under the Tax Act, all foreign earnings are subject to U.S. taxation and the Company has recorded a provisional estimate of approximately $194 million for the deemed repatriation tax on these earnings. Except to the extent of the U.S. income tax recognized under the Tax Act, the Company has not recognized other income taxes (e.g., state and foreign) and withholding taxes that would be incurred upon remittance of approximately $2,274 million and $3,202 million at March 31, 2018 and 2017, respectively, of unremitted earnings of the Company’s foreign subsidiaries since the Company plans to permanently reinvest all such earnings outside the United States. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the amount of tax associated with such unremitted earnings.

At March 31, 2018, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $157 million (of which approximately $7 million was classified as current). In addition, at March 31, 2018, the Company recorded approximately $10 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions. 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.

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)	2018			2017
Balance at beginning of year	$	132		$	143
Additions for tax positions related to the current year	11			13
Additions for tax positions from prior years	25			4
Reductions for tax positions from prior years	(8		)	(9		)
Settlement payments	(16		)	(3		)
Statute of limitations expiration	(16		)	(13		)
Translation and other	5			(3		)
Balance at end of year	$	133		$	132

The amount of unrecognized tax benefits excluding interest and penalties that, if recognized, would affect the effective tax rate was approximately $124 million and $116 million at March 31, 2018 and 2017, respectively. The gross amount of interest and penalties accrued, reported in “Total liabilities,” was approximately $24 million and $29 million for fiscal years 2018 and 2017, respectively. The amount of interest and penalties decreased approximately $5 million for fiscal year 2018 and increased approximately $9 million for fiscal year 2017.

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 2015 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 judicial procedures, as appropriate. As the result of decisions at the administrative courts, the total potential liability from the tax assessment at March 31, 2018 was approximately 228 million Brazilian reais (which translated to approximately $69 million at March 31, 2018), including interest and penalties accumulated through March 31, 2018 and further regulatory assessments associated with appealing to the judicial courts. 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.