Taxes on Earnings

Provision for Taxes

Prior to the separation, Hewlett Packard Enterprise's operating results were included in former Parent's various consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For the Company's Condensed Consolidated and Combined Financial Statements for the periods prior to the separation, income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis separate from former Parent. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise for the periods presented.

The Company's effective tax rate was 5.6% and 9.7% for the three months ended July 31, 2016 and 2015, respectively, and 7.4% and 20.9% for the nine months ended July 31, 2016 and 2015, respectively. HPE's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from the Company's operations in lower-tax jurisdictions throughout the world. In addition, the Company’s effective tax rate for the three and nine months ended July 31, 2016 was further reduced due to the impact of foreign tax credits generated in relation to foreign earnings taxable in the U.S. primarily related to the divestitures occurring within the quarter. HPE has not provided U.S. taxes for all foreign earnings because the Company plans to reinvest some of those earnings indefinitely outside the U.S.

For the three and nine months ended July 31, 2016, HPE recorded $37 million of net income tax charges and $160 million of net income tax benefits, respectively, related to items discrete to the periods. For the three months ended July 31, 2016, these amounts include tax expense of $123 million related to the H3C divestiture and $61 million for tax indemnifications, the effects of which were partially offset primarily by tax benefits of $131 million on restructuring charges, separation costs, acquisition and other divestiture charges. For the nine months ended July 31, 2016, these amounts include tax benefits of $305 million on restructuring charges, separation costs, acquisition and other divestiture charges, the effects of which were partially offset primarily by tax expense of $123 million related to the H3C divestiture and $22 million related to tax indemnification.

For the three and nine months ended July 31, 2015, HPE recorded $33 million and $146 million, respectively, of net income tax benefits related to discrete items. These amounts primarily included tax benefits on restructuring charges, separation costs and a tax benefit arising from retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 signed into law in December 2014.

Uncertain Tax Positions

The Company is subject to income tax in the U.S. and approximately 105 other countries, and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, former Parent, whose liabilities for which the Company is jointly and severally liable, is subject to numerous ongoing audits by federal, state and foreign tax authorities. The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of the Company's tax provision. The Company adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.

As of July 31, 2016 and October 31, 2015, the amount of unrecognized tax benefits was $11.1 billion and $4.9 billion, respectively, of which up to $2.4 billion and $0.6 billion would affect the Company's effective tax rate if realized as of their respective periods. The $6.2 billion increase in the amount of unrecognized tax benefits for the nine months ended July 31, 2016 are primarily related to the impact of the Company's joint and several liabilities with HP Inc. that resulted from the separation as well as the unrecognized tax benefits related to the timing of intercompany royalty revenue recognition.

Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Provision for taxes in the Condensed Consolidated and Combined Statements of Earnings. As of July 31, 2016, and October 31, 2015, the Company recognized $328 million and $269 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.

Hewlett Packard Enterprise engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Hewlett Packard Enterprise does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, Hewlett Packard Enterprise believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $78 million within the next 12 months.

Deferred Tax Assets and Liabilities

In the first quarter of fiscal 2016, the Company adopted the amendment to the existing accounting standards for income taxes issued by the FASB in November 2015, and elected to apply it on a retrospective basis. As a result, all of the Company's deferred tax assets and liabilities are classified as non-current as of July 31, 2016 and retrospectively as of October 31, 2015. See Note 1, "Overview and Basis of Presentation", for more details.

Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets as follows:



	As of
	July 31, 2016			October 31, 2015
	In millions
Long-term deferred tax assets	$	3,958		$	3,925
Long-term deferred tax liabilities	(121		)	(41		)
Deferred tax assets net of deferred tax liabilities	$	3,837		$	3,884

The Company periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $3.7 billion and $5.0 billion during fiscal 2016 and 2015, respectively. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in consolidation.

Tax Matters Agreement and Other Income Tax Matters

In connection with the separation, the Company entered into a Tax Matters Agreement with HP Inc., formerly Hewlett-Packard Company. See Note 18, "Guarantees, Indemnifications and Warranties", for a full description of the Tax Matters Agreement.