NOTE 19. INCOME TAXES

Income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax assets and liabilities, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, lowering the U.S. statutory federal tax rate to 21%. As the Company has a June 30 fiscal year-end, the impact of the lower tax rate will be phased in resulting in a U.S. statutory federal tax rate of approximately 28% for the fiscal year ended June 30, 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter. There are also certain transitional impacts of the Tax Act. As part of the transition to a new partial territorial tax system, the Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries (“transition tax”). In addition, the reduction of the U.S. corporate tax rate caused us to adjust our U.S. deferred tax assets and liabilities to the lower federal rate of 21%. The Tax Act also adds many new provisions, some of which do not apply until fiscal 2019, including changes to bonus depreciation, limits on deductions for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign-derived intangible income. The Company has elected to account for the tax on GILTI and BEAT as a period cost and thus has not adjusted any net deferred tax assets of its foreign subsidiaries for the new tax. However, the Company has considered the potential impact of GILTI and BEAT on its U.S. federal net operating loss (“NOL”) carryforward and determined that the projected tax benefit to be received from its NOL carryforward may be reduced due to these provisions.

The changes included in the Tax Act are broad and complex. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118), as amended by ASU 2018-05, which provides guidance for companies related to the Tax Act. ASU 2018-05 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company’s accounting for the tax effects of the Tax Act will be completed during this measurement period and is expected to be finalized in the second quarter of fiscal 2019 pending further SEC guidance. The final transition impacts of the Tax Act may differ from the Company’s current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts.

In accordance with ASU 2018-05, the Company has made provisional estimates related to (1) the re-measurement of U.S. deferred tax balances for the reduction in the tax rate, (2) the liability for the transition tax and (3) the partial valuation allowance recorded against its federal NOL carryforward due to the impact of the GILTI and BEAT provisions. As a result, the Company recognized a net provisional income tax expense of $237 million associated with these items in the fiscal year ended June 30, 2018.

The components of the provisional amounts recognized as part of the Tax Act are as follows:


	For the fiscal year ended June 30, 2018
	(in millions)
Re-measurement of U.S. deferred tax balances	$	141
Valuation allowance recorded due to impact of GILTI and BEAT		64
Transition tax		26
Other		6

Income tax expense	$	237

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


	For the fiscal years ended June 30,
	2018			2017			2016
	(in millions)
U.S.	$	(55	)	$	84		$	(125	)
Foreign		(1,034	)		(699	)		306

(Loss) income from continuing operations before income tax expense (benefit)	$	(1,089	)	$	(615	)	$	181

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


	For the fiscal years ended June 30,
	2018			2017			2016
	(in millions)
Current:
U.S.
Federal	$	4		$	1		$	15
State & Local		8			4			5
Foreign		107			118			102

Total current tax		119			123			122

Deferred:
U.S.
Federal		269			57			(71	)
State & Local		(9	)		(1	)		(106	)
Foreign		(24	)		(151	)		1

Total deferred tax		236			(95	)		(176	)

Total income tax expense (benefit)^(a)	$	355		$	28		$	(54	)

^(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 was recorded to discontinued operations in (Loss) income from discontinued operations, net of tax, in the Statement of Operations in fiscal year 2016. The tax expense (benefit) shown above excludes the tax benefit of the Company’s digital education business in fiscal year 2016.

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


	For the fiscal years ended June 30,
	2018			2017			2016
U.S. federal income tax rate^(a)		28	%		35	%		35	%
State and local taxes, net		(1	)		—			(8	)
Effect of foreign operations^(b)		(2	)		(17	)		(1	)
Change in valuation allowance^(c)		1			(7	)		(62	)
Non-deductible goodwill and asset impairments^(d)		(32	)		(7	)		—
Impact of the Tax Act^(e)		(22	)		—			—
Write-off of channel distribution agreement^(f)		(9	)		—			—
Income tax audit settlements^(g)		5			(10	)		—
Non-deductible compensation and benefits		(1	)		(1	)		3
R&D credits		—			1			(2	)
Other, net		—			1			5

Effective tax rate^(h)		(33	)%		(5	)%		(30	)%

^(a)	As the Company has a June 30 fiscal year-end, the impact of the lower tax rate from the Tax Act will be phased in resulting in a U.S. statutory federal tax rate of approximately 28% for the fiscal year ended June 30, 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter.

^(b)	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 prior to fiscal year ended June 30, 2018 had lower income tax rates than the U.S.

^(c)	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 NOLs 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.

^(d)

For the fiscal year ended June 30, 2018, the Company recorded non-cash charges of $218 million related to the impairment of goodwill and a write-down of assets and investments of approximately $1.1 billion, which reduced the Company’s tax benefit by $54 million and $301 million, respectively. These impairments and write-downs have an impact on our effective tax rate to the extent a tax benefit is not recorded.

For the fiscal year ended June 30, 2017, 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)

As a result of the Tax Act, the Company recognized a net provisional income tax expense of $237 million primarily related to the re-measurement of U.S. deferred tax balances for the reduction in tax rate, valuation allowances recorded on certain deferred tax assets, and the liability for the transition tax.

^(f)	Represents the tax effect of the write-off of the FOX SPORTS Australia channel distribution agreement intangible asset as a result of the Transaction as well as other costs directly attributable to the Transaction.

^(g)

In the fiscal year ended June 30, 2018, certain pre-Separation tax matters were effectively settled with the Internal Revenue Service. As a result of the settlement, the Company recorded a net income tax benefit of $49 million, comprised of a current tax benefit of $2 million and a deferred tax benefit of $47 million.

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.

^(h)

For the fiscal years ended June 30, 2018 and June 30, 2017, the effective tax rates of (33)% and (5)%, respectively, 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.

The Company recognized deferred income taxes in the Balance Sheets at June 30, 2018 and 2017, respectively, as follows:


	As of June 30,
	2018			2017
	(in millions)
Deferred income tax assets	$	279		$	525
Deferred income tax liabilities		(389	)		(61	)

Net deferred tax (liabilities) assets	$	(110	)	$	464

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


	As of June 30,
	2018			2017
	(in millions)
Deferred tax assets:
Accrued liabilities	$	95		$	80
Capital loss carryforwards		889			904
Retirement benefit obligations		38			101
Net operating loss carryforwards		348			473
Business tax credits		62			69
Other		294			284

Total deferred tax assets		1,726			1,911

Deferred tax liabilities:
Asset basis difference and amortization		(362	)		(204	)
Other		(89	)		(56	)

Total deferred tax liabilities		(451	)		(260	)

Net deferred tax asset before valuation allowance		1,275			1,651
Less: valuation allowance (See Note 22—Valuation and Qualifying Accounts)		(1,385	)		(1,187	)

Net deferred tax (liabilities) assets	$	(110	)	$	464

As of June 30, 2018, the Company had income tax NOL Carryforwards (gross, net of uncertain tax benefits), in various jurisdictions as follows:


Jurisdiction	Expiration	Amount (in millions)
U.S. Federal	2021 to 2037	$	635
U.S. States	Various		455
Australia	Indefinite		304
U.K.	Indefinite		4
Other Foreign	Various		423

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 $348 million and $473 million associated with its NOLs (net of approximately $45 million and $46 million, respectively, of unrecognized tax benefits recorded against deferred tax assets) as of June 30, 2018 and 2017, respectively. Significant judgment is applied in assessing our ability to realize our NOLs. 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 $195 million and $149 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, 2018 and 2017, respectively. In the fiscal year ended June 30, 2018, the increase in valuation allowance includes $64 million related to the impacts of the GILTI and BEAT provisions under the Tax Act.

As of June 30, 2018, 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. The capital loss carryforwards are also subject to review by relevant tax authorities in the jurisdictions to which they relate. 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 $889 million and $904 million as of June 30, 2018 and 2017, 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 $889 million and $904 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, 2018 and 2017, respectively.

As of June 30, 2018, the Company had approximately $36 million of U.S. federal tax credit carryforwards which includes $24 million of foreign tax credits and $9 million of research and development credits, which begin to expire in 2025 and 2036, respectively, and $3 million of alternative minimum tax credits which will be carried forward indefinitely.

As of June 30, 2018, the Company had approximately $19 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 $45 million has been established to reduce the deferred tax asset associated with the Company’s U.S. foreign tax credits, non-U.S. and state credit carryforwards to an amount that will more likely than not be realized as of June 30, 2018.

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,
	2018			2017			2016
	(in millions)
Balance, beginning of period	$	64		$	86		$	129
Additions for prior year tax positions		2			107			6
Additions for current year tax positions		3			5			4
Reduction for prior year tax positions		(4	)		(9	)		(40	)
Lapse of the statute of limitations		(3	)		(8	)		(2	)
Settlement—cash		—			(21	)		(2	)
Settlement—tax attributes		(2	)		(94	)		—
Impact of currency translations		2			(2	)		(9	)

Balance, end of period	$	62		$	64		$	86

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 $1 million and $11 million for the fiscal years ended June 30, 2018 and June 30, 2017, 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, $3 million and $6 million as of June 30, 2018, 2017, and 2016, respectively.

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, 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 the U.S., various states and foreign jurisdictions. During the year ended June 30, 2018, the Internal Revenue Service commenced an audit of the Company for the year ended June 30, 2014. 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		2014-2017
U.S. state		Various
Australia		2014-2017
U.K.		2011-2017

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, 2018, approximately $35 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 $18 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

Prior to the passage of the Tax Act, the Company asserted that substantially all of the undistributed earnings were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions promulgated in the Tax Act these earnings were subjected to the one-time transition tax, for which a provisional charge was recorded. It is the Company’s intention to reinvest in these subsidiaries indefinitely as the Company does not anticipate the need to repatriate funds to satisfy domestic liquidity needs. An actual repatriation from these subsidiaries could be subject to foreign withholding taxes and U.S. state taxes. Calculation of the unrecognized tax liabilities is not practicable. Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested amounted to approximately $2.6 billion as of June 30, 2018.

During the fiscal years ended June 30, 2018, 2017 and 2016, the Company paid gross income taxes of $160 million, $132 million and $103 million, respectively, and received income tax refunds of $7 million, $9 million and $10 million, respectively.