NOTE 17. INCOME TAXES

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


	For the fiscal years ended June 30,
	2015			2014^(a)			2013
	(in millions)
U.S.	$	(348	)	$	(821	)	$	(432	)
Foreign		404			424			605

Income (loss) before income tax expense (benefit)	$	56		$	(397	)	$	173

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

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


	For the fiscal years ended June 30,
	2015			2014^(a)			2013
	(in millions)
Current:
U.S.
Federal	$	2		$	11		$	183
State & local		11			(19	)		21
Foreign		135			(734	)		99

Total current tax		148			(742	)		303

Deferred:
U.S.
Federal		(2	)		17			(317	)
State & local		1			12			(33	)
Foreign		(13	)		22			(327	)

Total deferred tax		(14	)		51			(677	)

Total income tax expense (benefit)	$	134		$	(691	)	$	(374	)

^(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.

During fiscal 2014, the litigation was resolved in favor of the Company and as a result, the Company received approximately $794 million for the gross tax refund and interest owed to the Company by the foreign tax authority.

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 (expense) 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 (expense) 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,
	2015			2014			2013
U.S. federal income tax rate		35	%		35	%		35	%
State and local taxes, net		12			1			(2	)
Foreign operations at lower tax rates^(a)		(23	)		17			(35	)
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)		201			—			87
Non-deductible compensation and benefits		7			—			—
Other, net^(f)		7			3			2

Effective tax rate^(g)		239	%		174	%		(216	)%

^(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 fiscal years ended June 30, 2015 and June 30, 2013, the effect of foreign operations at lower tax rates decreased the Company’s effective tax rate 23% and 35%, respectively, as the Company recorded an overall pre-tax book income on a consolidated basis. Furthermore, the impact of foreign operations at lower tax rates had a greater percentage impact on the Company’s effective tax rate in those years due to jurisdictional income mix and the comparatively low amount of consolidated pre-tax book income in those years. For the year ended June 30, 2014, the effect of foreign operations at lower tax rates increased the Company’s effective tax rate 17% as the company recorded an overall pre-tax book loss on a consolidated basis. 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 (c) and (d) below.

^(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 resulting in a 247% reduction in our effective tax rate in the fiscal year ended June 30, 2013. The gain recognized on the acquisition of CMH does not give rise to taxable income and was a result of revaluing the Company’s non-controlling interest to fair value as of the acquisition date in addition to 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)	Other effective tax rate reconciliation items include non-deductible expenses are comparable year-over-year; however the impact appears more significant for the year-ended June 30, 2015 due to lower pre-tax book income.

^(g)

For the fiscal year ended June 30, 2015, the effective tax rate of 239% represents an income tax expense when compared to consolidated pre-tax book income. For the fiscal year ended June 30, 2014, the effective tax rate of 174% represents an income tax benefit when compared to consolidated 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. 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 years ended June 30, 2015 and June 30, 2013, have a greater percentage impact on the Company’s effective tax rate due to the comparatively low amount of consolidated pre-tax book income.

The Company recognized current and deferred income taxes in the Balance Sheets at June 30, 2015 and 2014, respectively:


	As of June 30,
	2015			2014
	(in millions)
Other current assets	$	61		$	76
Other non-current assets		216			146
Other current liabilities		(1	)		(36	)
Deferred income taxes		(166	)		(224	)

Net deferred tax liabilities	$	110		$	(38	)

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


	As of June 30,
	2015			2014
	(in millions)
Deferred tax assets:
Accrued liabilities	$	56		$	49
Capital loss carryforwards		892			1,120
Retirement benefit obligations		85			89
Net operating loss carryforwards		541			262
Business credits		46			47
Other		307			225

Total deferred tax assets		1,927			1,792

Deferred tax liabilities:
Asset basis difference and amortization		(468	)		(376	)
Other		(41	)		(61	)

Total deferred tax liabilities		(509	)		(437	)

Net deferred tax asset before valuation allowance		1,418			1,355
Less: valuation allowance (See Note 20 - Valuation and Qualifying Accounts)		(1,308	)		(1,393	)

Net deferred tax liabilities	$	110		$	(38	)

As of June 30, 2015, the Company had income tax Net Operating Loss Carryforwards (NOLs) (gross, net of uncertain tax benefits), in various jurisdictions as follows:


Jurisdiction	Expiration	Amount (in millions)
U.S. Federal	2017 to 2034	$	833
U.S. States	Various		223
Australia	Indefinite		322
U.K.	Indefinite		253
Other Foreign	Various		323

Utilization of the NOLs is dependent on generating sufficient taxable income from our operations in each of the respective jurisdictions to which the NOLs relate, while taking into account limitations and/or restrictions on our ability to use them. Our U.S. Federal NOLs relate to attributes received as part of the acquisitions of Move and Harlequin and are subject to limitations as promulgated under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and are also subject to review by the Internal Revenue Service. Section 382 of the Code limits the amount of NOL that we can use on an annual basis to offset consolidated US taxable income.

The Company has recorded a deferred tax asset of $541 million and $262 million (net of approximately $95 million and $48 million, respectively, of unrecognized tax benefits) associated with its net operating loss carryforwards as of June 30, 2015 and 2014, respectively. Significant judgment is applied in assessing our ability to realize our NOLs and other tax assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets within the applicable expiration period. On the basis of this evaluation, valuation allowances of $304 million and $142 million have been established to reduce the deferred tax asset associated with the Company’s NOLs to an amount that will more likely than not be realized as of June 30, 2015 and 2014, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change.

As of June 30, 2015, the Company had approximately $1.6 billion and $2.0 billion of capital loss carryforwards in Australia and the U.K., respectively, which may be carried forward indefinitely. The Company also had $9 million of U.S. Federal capital loss carryforwards which expire in varying amounts beginning in 2016. Realization of our capital losses is dependent on the generation of capital gain taxable income and in satisfying certain continuity of business requirements in certain foreign jurisdictions. The Company has recorded a deferred tax asset of $892 million and $1.1 billion as of June 30, 2015 and 2014, respectively for these capital loss carryforwards. In accordance with the Company’s accounting policy, valuation allowances of $892 million and $1.1 billion have been established to reduce the capital loss carryforward deferred tax asset to an amount that will more likely than not be realized as of June 30, 2015 and 2014, respectively.

As of June 30, 2015, the Company had approximately $12 million of U.S. Federal tax credit carryforward which includes $10 million of foreign tax credits and $2 million of research & development credits which begin to expire in 2025.

As of June 30, 2015, the Company had approximately $6 million of non-U.S. tax credit carryforwards which expire in various amounts beginning in 2025 and $28 million of state tax credit carryforwards (net of U.S. federal benefit), of which the balance can be carried forward indefinitely. In accordance with the Company’s accounting policy, a valuation allowance of $34 million has been established to reduce the deferred tax asset associated with the Company’s non-U.S. and state credit carryforwards to an amount that will more likely than not be realized as of June 30, 2015.

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 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 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 taxes for such periods.

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,
	2015			2014			2013
	(in millions)
Balance, beginning of period	$	58		$	127		$	132
Additions for prior year tax positions		79			39			1
Additions for current year tax positions		4			5			6
Reduction for prior year tax positions		(7	)		(114	)		—
Impact of currency translations		(5	)		1			(12	)

Balance, end of period	$	129		$	58		$	127

The change to uncertain tax positions impacting the effective tax rate for the year ended June 30, 2015 is $27 million.

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 $6 million, nil and $1 million during the fiscal years ended June 30, 2015, 2014 and 2013, respectively. The Company recorded liabilities for accrued interest of approximately $8 million and $2 million as of June 30, 2015 and 2014, respectively.

The Company’s tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examination can be unpredictable. The Company is currently undergoing tax examinations in several states and foreign jurisdictions. The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid, however, our liability may need to be adjusted as new information becomes known and as tax examinations continue to progress.

The U.S. Internal Revenue Service has concluded its examination of the Company’s returns through fiscal year 2008, and is currently under exam for fiscal years 2009 through 2013. 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 fiscal year, however, actual developments in this area could differ from those currently expected. As of June 30, 2015, approximately $52 million would affect the Company’s effective income tax rate, if and when recognized in future fiscal years. It is reasonably possible, the amount of uncertain tax liabilities which may be resolved within the next fiscal year is between the range of approximately nil and $23 million.

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 $3.5 billion as of June 30, 2015. 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 and 2014 tax returns.

During the fiscal year ended June 30, 2015, 2014 and 2013, the Company paid gross income taxes of $134 million, $116 million and $107 million, respectively, and received income tax refunds of $8 million, $837 million and $22 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.