Income Taxes

9 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The provision for income taxes for the three and nine months ended December 31, 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 (the “Swiss Deferred Tax Asset”). 

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 effect for the years the asset will be recovered.

The transaction resulted in the recognition of a $1.17 billion net Swiss Deferred Tax Asset, which is net of the impact of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner opinion (“the Altera opinion”) on the transaction and a valuation allowance, as of June 30, 2019. Separately, during the three months ended September 30, 2019, Switzerland enacted a new statutory tax rate. As a result of the enactment, we remeasured our Swiss deferred taxes and recognized an additional net tax benefit of $630 million through continuing operations (“Swiss rate change benefit”). As of September 30, 2019 and December 31, 2019, the net Swiss Deferred Tax Asset is $1.8 billion, which is net of a $0.2 billion valuation allowance and a $0.4 billion reduction due to the Altera opinion. The valuation allowance increased by $0.1 billion during the three months ended September 30, 2019 due to the enactment of a new statutory tax rate in Switzerland. There was no material change to the valuation allowance during the three months ended December 31, 2019.

The Altera opinion also requires related parties in an intercompany cost-sharing arrangement to share stock-based compensation expenses. The Altera opinion resulted in the recognition of $90 million of unrecognized tax benefits related to U.S. uncertain tax positions during the three months ended June 30, 2019.

Our effective tax rates for the three and nine months ended December 31, 2019 were 7.5 percent and negative 139.6 percent, respectively, as compared to 1.1 percent and 5.8 percent, for the same periods in fiscal year 2019. Excluding the impacts of the Swiss rate change benefit, the Swiss Deferred Tax Asset, and Altera opinion, our effective tax rates for the three and nine months ended December 31, 2019 would have been 15.8 percent and 14.4 percent, respectively, which was higher than the same periods in fiscal year 2019 primarily due to an increase in U.S. taxes on foreign earnings in fiscal year 2020.

When compared to the statutory rate of 21 percent, the effective tax rates for the three and nine months ended December 31, 2019 were significantly lower primarily due to the recognition of the Swiss rate change benefit, the Swiss Deferred Tax Asset and earnings realized in countries that have lower statutory tax rates, partially offset by the 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. During the three months ended December 31, 2019, the Ninth Circuit Court of Appeals denied en banc review of the Altera opinion. A final determination of Altera is reasonably possible within the next 12 months. If the Altera opinion stands, it would result in a $0.5 billion reduction of our unrecognized tax benefits; approximately $0.1 billion of which relates to U.S. uncertain tax positions recognized as of December 31, 2019 and approximately $0.4 billion of which reduced the Swiss Deferred Tax Asset recognized as of December 31, 2019.

It is also reasonably possible that an additional reduction of up to $15 million of unrecognized tax benefits may occur within the next 12 months, unrelated to the Altera opinion, 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.