NOTE 17. INCOME TAXES

The income tax accounts reflected in the Balance Sheets as of June 30, 2013 include income taxes payable and deferred taxes allocated to the Company at the time of the Separation. Under the Company’s Tax Sharing and Indemnification Agreement with 21st Century Fox, income taxes payable related to the Company’s U.S. federal and state consolidated tax filings for periods prior to the Separation are the responsibility of 21st Century Fox. The calculation of the Company’s income taxes involves significant judgment and requires the use of both estimates and allocations.

(Loss) income before income tax (benefit) expense was attributable to the following jurisdictions:


	For the fiscal years ended June 30,
	2014^(a)			2013			2012
	(in millions)
U.S.	$	(821	)	$	(432	)	$	(829	)
Foreign		424			605			(1,548	)

(Loss) income before income tax (benefit)	$	(397	)	$	173		$	(2,377	)

^(a)	See discussion of Foreign Tax Refund below.

The significant components of the Company’s income tax (benefit) were as follows:


	For the fiscal years ended June 30,
	2014^(a)			2013			2012
	(in millions)
Current:
U.S.
Federal	$	11		$	183		$	29
State & local		(19	)		21			11
Foreign		(734	)		99			104

Total current tax		(742	)		303			144

U.S.
Federal		17			(317	)		(254	)
State & local		12			(33	)		(31	)
Foreign		22			(327	)		(196	)

Total deferred tax		51			(677	)		(481	)

Total income tax (benefit)	$	(691	)	$	(374	)	$	(337	)

^(a)	See discussion of Foreign Tax Refund below.

Foreign Tax Refund

The Company filed refund claims for certain losses pertaining to periods prior to the Separation in a foreign jurisdiction that were subject to litigation. As of June 30, 2013, the Company had not recognized an asset for these claims since such amounts were being disputed by the foreign tax authority and the resolution was not determinable at that date because the foreign tax authority had further legal recourse including the ability to appeal a favorable ruling for the Company.

In the first quarter of fiscal 2014, the foreign tax authority determined that it would not appeal such ruling received by the Company in July 2013 and therefore, a portion of the uncertain matter was resolved during the three months ended September 30, 2013. In the second quarter of fiscal 2014, the foreign tax authority completed its review and the remaining uncertain matter was resolved during the three months ended December 31, 2013. For the fiscal year ended June 30, 2014, the Company recorded $794 million for the gross tax refund and interest owed to the Company by a foreign tax authority upon completion of its review of the uncertain tax matter.

The Company recorded a tax benefit, net of applicable taxes on interest, of $721 million for the fiscal year ended June 30, 2014 to Income tax benefit in the Statements of Operations. Refunds received related to these matters were remitted to 21st Century Fox, net of applicable taxes on interest, in accordance with the terms of the Tax Sharing and Indemnification Agreement. Accordingly, for the fiscal year ended June 30, 2014, the Company recorded an expense to Other, net of $721 million for the payment to 21st Century Fox in the Statements of Operations which is included in U.S. pre-tax book income in the table of jurisdictional earnings above.

Refer to the table below for the net impact of the tax refund and interest, net of tax, recorded in the Statements of Operations:


	For the fiscal year ended June 30, 2014
	(in millions)
Other, net	$	(721	)
Income tax benefit		721

Net impact to the Statement of Operations	$	—

The reconciliation between the Company’s actual effective tax rate and the statutory U.S. Federal income tax rate of 35% was:


	For the fiscal years ended June 30,
	2014			2013			2012
U.S. federal income tax rate		35	%		35	%		35	%
State and local taxes, net		1			(2	)		1
Foreign operations at lower tax rates^(a)		17			(35	)		(4	)
Foreign tax refund received^(b)		182			—			—
Foreign tax refund paid to 21st Century Fox^(b)		(64	)		—			—
Impact of CMH transaction^(c)		—			(247	)		—
Non-taxable gain on SKY Network Television Ltd.^(d)		—			(56	)		—
Non-deductible goodwill on asset impairment^(e)		—			87			(16	)
Other		3			2			(2	)

Effective tax rate^(f)		174	%		(216	)%		14	%

^(a)

The Company’s foreign operations are located primarily in Australia and the United Kingdom (“UK”) which have lower income tax rates than the U.S. For the year ended June 30, 2014, the effect of foreign operations had the opposite impact on the effective tax rate from the prior years due to the overall pre-tax book loss. The significant amount of pre-tax income from foreign jurisdictions in fiscal 2013 disclosed in the table of jurisdictional earnings above is primarily attributable to non-recurring gains from our operations in Australia, including the CMH transaction, and gain from the sale of the Company’s investment in SKY Network Television Ltd. which are discussed in footnotes (d) and (e) below. The impact of foreign operations on the Company’s effective tax rate is dependent on the mix of pre-tax book income or loss amongst jurisdictions and the overall level of pre-tax book income, including non-recurring items. In addition to tax rates in Australia and the UK being lower than in the U.S., in fiscal 2013, the effect of our foreign operations had a greater percentage impact on our effective tax rate than in prior years due to the Company’s comparatively low amount of overall pre-tax book income in that year.

^(b)

The Company recorded a tax benefit, net of applicable taxes on interest, of $721 million for the fiscal year ended June 30, 2014 to Income tax benefit in the Statements of Operations related to certain foreign tax refunds received. See the discussion of Foreign Tax Refund above. The tax benefit related to these refunds increased our effective tax rate 182%.

These foreign tax refunds received were remitted to 21st Century Fox, net of applicable taxes on interest, in accordance with the terms of the Tax Sharing and Indemnification Agreement. Accordingly, for the fiscal year ended June 30, 2014, the Company recorded an expense to Other, net of approximately $721 million for the payment to 21st Century Fox in the Statements of Operations. This expense is a non-deductible item the tax effect of which is approximately $252 million and reflected as a decrease of approximately 64% in our effective tax rate.

^(c)

The Company recognized a non-recurring pre-tax gain of approximately $1.3 billion associated with the acquisition of CMH for the fiscal year ended June 30 2013. This pre-tax gain does not give rise to taxable income. The 247% reduction in our effective tax rate in fiscal 2013 is attributable to the non-taxable gain recognized on the acquisition of CMH, which was a result of revaluing the Company’s non-controlling interest to fair value as of the acquisition date, as well as the reversal of the historic deferred tax liability related to the consolidation of FOX SPORTS Australia. See Note 3—Acquisitions, Disposals and Other Transactions for further information.

^(d)	In March 2013, the Company sold its 44% equity interest in SKY Network Television Ltd. and recorded a non-taxable gain of approximately $321 million which was included in Other, net in the Statements of Operations for the fiscal year ended June 30, 2013. See Note 5—Investments.

^(e)	The Company recorded non-cash charges related to the impairment of Goodwill. To the extent these expenses are non-deductible they have an impact on our effective tax rate. See Note 7—Goodwill and Other Intangible Assets

^(f)

For the fiscal year ended June 30, 2014, the effective tax rate of 174% represents an income tax benefit when compared to a pre-tax book loss. As a result, certain reconciling items between the U.S. federal income tax rate and the Company’s effective tax rate may have the opposite impact as in prior years. For the fiscal year ended June 30, 2013, the negative effective tax rate results from the Company’s total tax benefit when compared to pre-tax book income. Further, reconciling items for the fiscal year ended June 30, 2013 have a greater percentage impact on the Company’s effective tax rate due to the comparatively lower amount of pre-tax book income and related tax at the U.S. statutory tax rate of 35%.

The Company recognized current and deferred income taxes in the Balance Sheets at June 30, 2014 and 2013, respectively:


	As of June 30,
	2014			2013
	(in millions)
Other current assets	$	76		$	55
Other non-current assets		146			139
Other current liabilities		(36	)		(61	)
Deferred income taxes		(224	)		(152	)

Net deferred tax liabilities	$	(38	)	$	(19	)

The significant components of the Company’s deferred tax assets and liabilities were as follows:


	As of June 30,
	2014			2013
	(in millions)
Deferred tax assets:
Accrued liabilities	$	49		$	61
Capital loss carryforwards		1,120			1,124
Retirement benefit obligations		89			105
Net operating loss carryforwards		262			275
Business credits		47			20
Other		225			155

Total deferred tax assets		1,792			1,740

Deferred tax liabilities:
Asset basis difference and amortization		(376	)		(366	)
Other		(61	)		(2	)

Total deferred tax liabilities		(437	)		(368	)

Net deferred tax asset before valuation allowance		1,355			1,372
Less: valuation allowance (See Note 20 - Valuation and Qualifying Accounts)		(1,393	)		(1,391	)

Net deferred tax liabilities	$	(38	)	$	(19	)

Prior to the Separation, 21st Century Fox executed an internal restructuring transaction to facilitate the separation of the companies. The internal transaction was structured in a manner that resulted in an increase of approximately $1.0 billion in the U.S. tax basis to fair market value of certain intangible assets, including goodwill, owned by the Company, and which will be amortizable in future years for tax purposes. As part of this internal restructuring, News America Incorporated (“NAI”), a subsidiary of 21st Century Fox, transferred certain assets to, and received common stock and cumulative redeemable preferred stock of a new U.S. subsidiary that is now a subsidiary of the Company. NAI sold the preferred stock to an unrelated third party prior to the Separation and retained the proceeds from this sale. (See Note 9—Redeemable Preferred Stock). Prior to the Separation, the increased tax basis and related amortization deductions were deferred because the Company was a part of the same consolidated tax group. However, upon the Separation, the Company separated from 21st Century Fox’s consolidated tax group and, at that point, the Company obtained a fair market value tax basis in the transferred intangible assets including goodwill. Accordingly, the Company recognized a U.S. deferred tax asset of $363 million which was recorded to equity. A valuation allowance of $12 million was also recorded to equity to reduce the state tax portion of this deferred tax asset to an amount that will more likely than not be realized as of June 30, 2013.

As of June 30, 2014, the Company had approximately $1.1 billion of net operating loss carryforwards available to offset future taxable income in various jurisdictions. This includes $213 million in Australia and $509 million in the U.K. both of which can be carried forward indefinitely, $324 million in various other foreign jurisdictions of which $30 million are subject to various expiration periods, and $294 million of which can be carried forward indefinitely, and $13 million in various U.S. state and local jurisdictions which are subject to varying expiration periods. The Company has recorded a deferred tax asset of $262 million and $275 million (net of approximately $48 million and $10 million, respectively, of unrecognized tax benefits) associated with its net operating loss carryforwards as of June 30, 2014 and 2013, respectively. Valuation allowances of $142 million and $100 million have been established to reduce the deferred tax asset associated with the Company’s net operating losses to an amount that will more likely than not be realized as of June 30, 2014 and 2013, respectively.

As of June 30, 2014, the Company had approximately $2.3 billion and $2.1 billion of capital loss carryforwards in Australia and the U.K., respectively, which may be carried forward indefinitely. Realization of such capital losses is dependent on the generation of capital gain taxable income and in certain cases, meeting certain continuity of business requirements in order to utilize such losses. The Company has recorded a deferred tax asset of $1.1 billion and $1.1 billion (net of approximately nil and $101 million, respectively, of unrecognized tax benefits) as of June 30, 2014 and 2013, respectively. In accordance with the Company’s accounting policy, valuation allowances of $1.1 billion and $1.1 billion have been established to reduce the deferred tax asset associated with the Company’s capital losses to an amount that will more likely than not be realized as of June 30, 2014 and 2013, respectively.

Tax Sharing and Indemnification Agreement

The Company entered into a Tax Sharing and Indemnification Agreement with 21st Century Fox that governs the Company’s and 21st Century Fox’s respective rights, responsibilities, and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Among other matters, as subsidiaries of 21st Century Fox prior to the Separation, the Company and each of its domestic subsidiaries have joint and several liability with 21st Century Fox for the consolidated U.S. federal income taxes of the 21st Century Fox consolidated group relating to any taxable periods during which the Company or any of such subsidiaries are or were a member of the 21st Century Fox consolidated group. Under the Tax Sharing and Indemnification Agreement, 21st Century Fox will indemnify the Company for any such liability.

The Tax Sharing and Indemnification Agreement provides that the Company will generally indemnify 21st Century Fox against taxes attributable to the Company’s assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, 21st Century Fox will generally indemnify the Company against U.S. consolidated and combined taxes attributable to such periods, and the Company will indemnify 21st Century Fox against the Company’s separately filed U.S., state, and foreign taxes and foreign consolidated and combined taxes for such periods.

The Tax Sharing and Indemnification Agreement also contains restrictions on the Company’s ability to take actions that could cause the Separation or certain internal transactions undertaken in anticipation of the Separation to fail to qualify for tax free treatment for U.S. federal income tax purposes. These restrictions will apply for the two year period after the Separation, unless the Company obtains the consent of 21st Century Fox to take such an action. Moreover, the Tax Sharing and Indemnification Agreement generally provides that if the Separation or the internal transactions that were intended not to be subject to U.S. federal income tax are determined to be subject to U.S. federal income tax and such determination was the result of certain actions taken, or omitted to be taken, after the Separation by the Company or any of its subsidiaries that (i) were inconsistent with any representation or covenant made in connection with the private letter ruling or opinion of 21st Century Fox’s tax counsel, (ii) violated any representation or covenant in the Tax Sharing and Indemnification agreement, or (iii) the Company or any of its subsidiaries know or reasonably should expect may result in any such determination, the Company will be responsible for any taxes imposed on 21st Century Fox as a result of such determination.

Uncertain Tax Positions

The following table sets forth the change in the Company’s unrecognized tax benefits, excluding interest and penalties:


	For the fiscal years ended June 30,
	2014			2013			2012
	(in millions)
Balance, beginning of period	$	127		$	132		$	132
Additions for prior year tax positions		39			1			—
Additions for current year tax positions		5			6			5
Reduction for prior year tax positions		(114	)		—			—
Impact of currency translations		1			(12	)		(5	)

Balance, end of period	$	58		$	127		$	132

The change to uncertain tax positions impacting the effective tax rate is $10 million. The remaining change relates to uncertain tax positions recorded net against deferred tax assets for which full valuation allowances have been provided.

The Company recognizes interest and penalty charges related to unrecognized tax benefits as income tax expense, which is consistent with the recognition in prior reporting periods. The Company recognized interest charges of nil, $1 million and $1 million during the fiscal years ended June 30, 2014, 2013 and 2012, respectively. The Company recorded liabilities for accrued interest of approximately $2 million and $6 million as of June 30, 2014 and 2013, respectively.

The Company is subject to tax in various domestic and international jurisdictions and, as a matter of ordinary course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its financial condition, future results of operations or liquidity. The U.S. Internal Revenue Service has concluded its examination of 21st Century Fox’s returns through fiscal 2008. Additionally, the Company’s income tax returns for the fiscal 2007 through 2013 and fiscal 2009 through 2013 are subject to examination in the U.K. and Australia, respectively. Consequently, it is reasonably possible that uncertain tax positions may increase or decrease in the next twelve months, however, actual developments in this area could differ from those currently expected. As of June 30, 2014 and 2013, approximately $12 million and $26 million would affect the Company’s effective income tax rate, if and when recognized in future fiscal years. The amount of uncertain tax liabilities which may be resolved within the next twelve months is not expected to be material.

The Company has not provided for U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested amounted to approximately $3.8 billion as of June 30, 2014. The amount of undistributed earnings reflects adjustments related to the separation from 21st Century Fox that were finalized with the filing of our fiscal 2013 tax returns.

During the fiscal year ended June 30, 2014, 2013 and 2012, the Company paid gross income taxes of $116 million, $107 million and $118 million, respectively, and received income tax refunds of $837 million, $22 million and $30 million, respectively. The income tax refunds for the fiscal year ended June 30, 2014 included the $794 million related to amounts received from a foreign tax authority as discussed above.