Taxes on Earnings

Provision for Taxes

The Company's effective tax rate was 22.6% and 16.3% for the three months ended January 31, 2017 and 2016, 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. 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 months ended January 31, 2017, HPE recorded $108 million of net income tax benefits related to various items discrete to the period. The amounts primarily included a tax benefit of $138 million on restructuring charges, separation costs and acquisition and other related charges, partially offset by $19 million of income tax charges related to pre-Separation tax matters.

For the three months ended January 31, 2016, HPE recorded $110 million of net income tax benefits related to various items discrete to the period. These amounts primarily included a tax benefit of $104 million on restructuring charges, separation costs and acquisition and other related charges.

Uncertain Tax Positions

The Company is subject to income tax in the U.S. and approximately 110 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 January 31, 2017 and October 31, 2016, the amount of unrecognized tax benefits was $11.7 billion and $11.6 billion, respectively, of which up to $3.1 billion would affect the Company's effective tax rate if realized as of their respective periods.

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 Statements of Earnings. As of January 31, 2017 and October 31, 2016, the Company recorded $426 million and $423 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.

Hewlett Packard Enterprise engages in continuous discussions and negotiations 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 $2.7 billion within the next 12 months.

Deferred Tax Assets and Liabilities

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



	As of
	January 31, 2017			October 31, 2016
	In millions
Deferred tax assets - long-term	$	4,477		$	4,430
Deferred tax liabilities - long-term	(140		)	(143		)
Deferred tax assets net of deferred tax liabilities	$	4,337		$	4,287

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 $439 million during the first quarter of fiscal 2017 and $3.7 billion during fiscal 2016. 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.