Income Taxes

3 Months Ended

Jun. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The provision for income taxes for the three months ended June 30, 2019 is based on our projected annual effective tax rate for fiscal year 2020, adjusted for specific items that are required to be recognized in the period in which they are incurred.

During the three months ended June 30, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”). The transaction did not result in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be eliminated upon consolidation. However, the transaction resulted in a step-up of the Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. As a result, we recognized a $1.17 billion deferred tax asset, net of the impact of the opinion of the Ninth Circuit Court of Appeals in Altera Corp. v. Commissioner (“the Altera opinion”) on the transaction and the realizability analysis discussed below (the “Swiss Deferred Tax Asset”) during the three months ended June 30, 2019.

During the three months ended June 30, 2019, the Altera opinion was issued, which requires related parties in an intercompany cost-sharing arrangement to share stock-based compensation expenses. This opinion reversed the prior United States Tax Court decision, resulting in a reduction of the Swiss Deferred Tax Asset. We also recognized a liability for approximately $90 million of unrecognized tax benefits related to U.S. uncertain tax positions.

The Swiss Deferred Tax Asset will reverse over a 20-year period and is subject to a periodic realizability analysis. Switzerland allows losses to carry forward for seven-years and does not permit the carry back of losses. The Swiss Deferred Tax Asset and the one-time tax benefit was measured and will be periodically remeasured based on the Swiss tax rate in effectfor the years the asset will be recovered. As of June 30, 2019, we performed a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. This realizability analysis relied upon future taxable income as the primary source of taxable income but considered all available sources of income based on the positive and negative evidence. We gave more weight to evidence that can be objectively verified. As a result of our analysis, we have reduced the Swiss Deferred Tax Asset by approximately $0.1 billion. We will not recognize any deferred taxes related to the U.S. taxes on foreign earnings associated with this transfer due to our policy election to recognize these taxes as a period cost.

Our effective tax rate for the three months ended June 30, 2019 was negative 226 percent, as compared to 8.2 percent for the same period in fiscal year 2019. Excluding the impact of the recognition of the Swiss Deferred Tax Asset and the unrecognized tax benefits associated with the Altera opinion, our effective tax rate for the three months ended June 30, 2019 would have been 21.6 percent, which was higher than the same period in fiscal year 2019 primarily due to the exclusion of our Swiss entity from our annual effective tax rate calculation as a result of an expected ordinary loss for which no tax benefit can be recognized.

When compared to the statutory rate of 21 percent, the effective tax rate for the three months ended June 30, 2019 was significantly lower primarily due to the recognition of the Swiss Deferred Tax Asset and earnings realized in countries that have lower statutory tax rates, partially offset by the recognition of unrecognized tax benefits associated with the Altera opinion.

We file income tax returns and are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2009. The timing and potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. It is reasonably possible that a reduction of up to $52 million of unrecognized tax benefits may occur within the next 12 months, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements and tax interpretations.