NOTE 18. INCOME TAXES

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


	For the fiscal years ended June 30,
	2017			2016			2015
	(in millions)
U.S.	$	84		$	(125	)	$	148
Foreign		(699	)		306			404

(Loss) income from continuing operations before income tax expense (benefit)	$	(615	)	$	181		$	552

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


	For the fiscal years ended June 30,
	2017			2016			2015
	(in millions)
Current:
U.S.
Federal	$	1		$	15		$	35
State & local		4			5			11
Foreign		118			102			135

Total current tax		123			122			181

Deferred:
U.S.
Federal		57			(71	)		16
State & local		(1	)		(106	)		1
Foreign		(151	)		1			(13	)

Total deferred tax		(95	)		(176	)		4

Total income tax expense (benefit)^(a)	$	28		$	(54	)	$	185

^a)

The Company recognized a tax benefit of approximately $144 million upon reclassification of the Digital Education segment to discontinued operations in (Loss) income from discontinued operations, net of tax, in the Statement of Operations in fiscal year 2016. In addition, a tax benefit of $30 million related to the operations of the Digital Education segment for the period was recorded to discontinued operations in (Loss) income from discontinued operations, net of tax, in the Statement of Operations in fiscal 2016. The tax expense (benefit) shown above excludes the tax benefit of the Company’s digital education business. The Company will not have a current federal tax expense after accounting for the federal current tax benefits attributed to discontinued 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,
	2017			2016			2015
U.S. federal income tax rate		35	%		35	%		35	%
State and local taxes, net		—			(8	)		1
Effect of foreign operations^(a)		(17	)		(1	)		(2	)
Change in valuation allowance^(b)		(7	)		(62	)		—
Income tax audit settlements^(c)		(10	)		—			—
Non-deductible goodwill and asset impairment^(d)		(7	)		—			—
Non-deductible compensation and benefits		(1	)		3			1
R&D credits		1			(2	)		(1	)
Other, net		1			5			—

Effective tax rate^(e)		(5	)%		(30	)%		34	%

^(a)

The Company’s effective tax rate is impacted by the geographic mix of its pre-tax income. The Company’s foreign operations are located primarily in Australia and the United Kingdom (“U.K.”) which have lower income tax rates than the U.S. As indicated in the pre-tax income table above, for the fiscal year ended June 30, 2017, the Company recorded a pre-tax loss on a consolidated basis comprised of pre-tax income in the U.S. and pre-tax losses in foreign jurisdictions which includes impairments and write-downs of approximately $1 billion. The losses in our foreign operations had the effect of reducing the tax benefit of consolidated pre-tax losses measured at the U.S. statutory rate by $98 million resulting in a lower effective tax rate. For the fiscal years ended June 30, 2016 and June 30, 2015, the Company recorded pre-tax book income on a consolidated basis with pre-tax income in foreign jurisdictions. Accordingly, the effect of foreign operations at lower tax rates decreased the Company’s effective tax rate.

^(b)

For the fiscal year ended June 30, 2017, valuation allowance increased by $40 million related to foreign net operating losses, which more likely than not will not be utilized. For the fiscal year ended June 30, 2016, included in the change in valuation allowance is a tax benefit of $106 million related to the release of previously established valuation allowances related to certain U.S. Federal net operating losses and state deferred tax assets. This benefit was recognized in conjunction with management’s plan to dispose of the Company’s digital education business during fiscal 2016, as the Company now expects to generate sufficient U.S. taxable income to utilize these deferred tax assets prior to expiration.

^(c)	In the fiscal year ended June 30, 2017, the Company reached an agreement with a foreign tax authority to settle certain tax issues related to fiscal years 2010 through 2015. As a result of the settlement, the Company recorded net income tax expense of $63 million. See Uncertain Tax Positions below.

^(d)

The Company recorded non-cash charges of $48 million related to the impairment of Goodwill, which was non-deductible, and a write-down of $360 million on U.K. fixed assets, a portion of which were non-deductible, which reduced the Company’s tax benefit by $12 million and $29 million, respectively. These impairments and write-downs have an impact on our effective tax rate to the extent a tax benefit is not recorded.

^(e)

For the fiscal year ended June 30, 2017, the effective tax rate of (5)% represents income tax expense when compared to consolidated pre-tax book loss. For the fiscal year ended June 30, 2016, the effective tax rate of (30)% represents income tax benefit when compared to consolidated pre-tax book income. For the fiscal year ended June 30, 2015, the effective tax rate of 34% represents an income tax expense when compared to consolidated pre-tax book income. 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.

The Company recognized current and deferred income taxes in the Balance Sheets at June 30, 2017 and 2016, respectively, as follows:


	As of June 30,
	2017			2016
	(in millions)
Deferred income tax assets	$	525		$	602
Deferred income tax liabilities		(61	)		(171	)

Net deferred tax assets	$	464		$	431

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


	As of June 30,
	2017			2016
	(in millions)
Deferred tax assets:
Accrued liabilities	$	80		$	185
Capital loss carryforwards		904			803
Retirement benefit obligations		101			112
Net operating loss carryforwards		473			580
Business credits		69			38
Other		284			213

Total deferred tax assets		1,911			1,931

Deferred tax liabilities:
Asset basis difference and amortization		(204	)		(421	)
Other		(56	)		(65	)

Total deferred tax liabilities		(260	)		(486	)

Net deferred tax asset before valuation allowance		1,651			1,445
Less: valuation allowance (See Note 21—Valuation and Qualifying Accounts)		(1,187	)		(1,014	)

Net deferred tax assets	$	464		$	431

As of June 30, 2017, 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	2021 to 2037	$	783
U.S. States	Various		530
Australia	Indefinite		239
U.K.	Indefinite		10
Other Foreign	Various		388

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 tax filing methodologies and limitations and/or restrictions on our ability to use them. Certain of our U.S. Federal NOLs were acquired 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”). Section 382 of the Code limits the amount of NOL that we can use on an annual basis to offset consolidated U.S. taxable income. The NOLs are also subject to review by relevant tax authorities in the jurisdictions to which they relate.

The Company recorded a deferred tax asset of $473 million and $580 million (net of approximately $46 million and $53 million, respectively, of unrecognized tax benefits) associated with its NOLs as of June 30, 2017 and 2016, 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 $149 million and $97 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, 2017 and 2016, respectively. In the fiscal year ended June 30, 2017, the increase in valuation allowance includes $40 million related to certain accumulated net operating losses that were agreed to as part of a settlement with a foreign tax authority.

As of June 30, 2017, the Company had approximately $2.0 billion and $1.7 billion of capital loss carryforwards in Australia and the U.K., respectively, which may be carried forward indefinitely and which are subject to tax authority review. Realization of our capital losses is dependent on generating capital gain taxable income and satisfying certain continuity of business requirements. The Company recorded a deferred tax asset of $904 million and $803 million as of June 30, 2017 and 2016, respectively, for these capital loss carryforwards, however, it is more likely than not that the Company will not generate capital gain income in the normal course of business in these jurisdictions. Accordingly, valuation allowances of $904 million and $803 million 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, 2017 and 2016, respectively.

As of June 30, 2017, the Company had approximately $36 million of U.S. Federal tax credit carryforwards which includes $23 million of foreign tax credits and $13 million of research and development credits which begin to expire in 2025 and 2036, respectively.

As of June 30, 2017, the Company had approximately $26 million of non-U.S. tax credit carryforwards which expire in various amounts beginning in 2025 and $7 million of state tax credit carryforwards (net of U.S. federal benefit), which expire in various amounts beginning in 2018. In accordance with the Company’s accounting policy, a valuation allowance of $7 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, 2017.

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,
	2017			2016			2015
	(in millions)
Balance, beginning of period	$	86		$	129		$	58
Additions for prior year tax positions		107			6			79
Additions for current year tax positions		5			4			4
Reduction for prior year tax positions		(9	)		(40	)		(7	)
Lapse of the statute of limitations		(8	)		(2	)		—
Settlement—cash		(21	)		(2	)		—
Settlement—tax attributes		(94	)		—			—
Impact of currency translations		(2	)		(9	)		(5	)

Balance, end of period	$	64		$	86		$	129

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 and penalty charges of $11 million and $6 million for the fiscal years ended June 30, 2017 and June 30, 2015, respectively, and a benefit related to interest and penalties of $1 million for the fiscal year ended June 30, 2016. The Company recorded liabilities for accrued interest and penalties of approximately $3 million, $6 million and $8 million as of June 30, 2017, 2016, and 2015, respectively.

In fiscal year ended June 30, 2017, the Company reached an agreement with a foreign tax authority to settle certain tax issues related to fiscal years 2010 through 2015. As a result of the settlement, the Company recorded net income tax expense, including interest and penalties of $63 million comprised of a current tax expense of $20 million and a deferred tax expense of $43 million.

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 examinations 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, the Company may need to accrue additional income tax expense and our liability may need to be adjusted as new information becomes known and as these tax examinations continue to progress, or as settlements or litigations occur.

The following is a summary of major tax jurisdictions for which tax authorities may assert additional taxes based upon tax years currently under audit and subsequent years that could be audited by the respective taxing authorities.


Jurisdiction		Fiscal Years Open to Examination
U.S. Federal		2009-2016
U.S. States		Various
Australia		2012-2016
U.K.		2011-2016

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, 2017, approximately $34 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 $19 million, a portion of which will affect our effective income tax rate, primarily as a result of the settlement of tax examinations and the lapsing of statutes of limitations.

Other

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 $2.4 billion as of June 30, 2017. The amount of undistributed earnings reflects adjustments related to the Separation from 21st Century Fox that were finalized with the filing of our income tax returns in periods after the Separation.

During the fiscal years ended June 30, 2017, 2016 and 2015, the Company paid gross income taxes of $132 million, $103 million and $134 million, respectively, and received income tax refunds of $9 million, $10 million and $8 million, respectively.