Taxes on Earnings

Provision for Taxes

The Company's effective tax rate was(306.6)% and 4.2% for the three months ended July 31, 2017 and 2016, respectively, and 96.8% and 5.0% for the nine months ended July 31, 2017 and 2016, respectively. During the three months ended July 31, 2017, the Company recorded income tax benefits of $164 million from divestiture related taxes in connection with the Everett Transaction, which had a favorable impact on the Company's effective tax rate. During the nine months ended July 31, 2017, as a result of the Everett Transaction, the Company recorded valuation allowances of $473 million, which had an unfavorable impact on the Company's effective tax rate. The Company'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. The Company has not provided U.S. taxes for all foreign earnings because it plans to reinvest some of those earnings indefinitely outside the U.S.

For the three and nine months ended July 31, 2017, the Company recorded net income tax benefits of $250 million and net income tax charges of $221 million, respectively, related to various items discrete to the period. For the three months ended July 31, 2017, the Company recorded income tax benefits of $164 million from divestiture related taxes in connection with the Everett Transaction, $110 million on restructuring charges, separation costs, transformation costs and acquisition and other related charges, $29 million related to U.S. provision-to-return adjustments, and $25 million related to the expiration of statute of limitations on uncertain tax reserves, partially offset primarily by income tax charges of $44 million related to net settlements with the taxing authorities and $26 million related to pre-Separation tax matters. For the nine months ended July 31, 2017, the Company recorded income tax charges of $473 million from valuation allowances on U.S. state deferred tax assets, $57 million related to pre-Separation tax matters and $44 million related to net settlements with the taxing authorities, partially offset primarily by income tax benefits of $251 million on restructuring charges, separation costs, transformation costs and acquisition and other related charges, $54 million from divestiture related taxes in connection with the Everett Transaction, $29 million related to U.S. provision-to-return adjustments, and $25 million related to the expiration of statute of limitations on uncertain tax reserves.

For the three and nine months ended July 31, 2016, the Company recorded net income tax charges of $125 million and net income tax benefits of $49 million, respectively, related to various items discrete to the period. For the three months ended July 31, 2016, these amounts include income tax charges of $123 million related to the H3C divestiture and $61 million for tax indemnifications, the effects of which were partially offset primarily by income tax benefits of $54 million on restructuring charges, separation costs, acquisition and other related charges. For the nine months ended July 31, 2016, these amounts include income tax benefits of $188 million on restructuring charges, separation costs, acquisition and other related charges, the effects of which were partially offset primarily by income tax charges of $123 million related to the H3C divestiture and $22 million related to tax indemnification.

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 Benefit (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, 2017 and October 31, 2016, the amount of unrecognized tax benefits was $11.2 billion and $11.4 billion, respectively, of which up to $3.0 billion and $2.9 billion would affect the Company's effective tax rate if realized as of their respective periods. HPE was subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009 which the Company settled with the relevant taxing authority for $455 million during the third quarter of fiscal 2017. The settlement amount is due to be paid in semi-annual installments over the next three fiscal years.

The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Benefit (provision) for taxes in the Condensed Consolidated Statements of Earnings. As of July 31, 2017 and October 31, 2016, the Company recorded $287 million and $394 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.

The Company engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. HPE 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, joint and several tax liabilities related to the Separation from former Parent and other matters. Accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $2.5 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
	July 31, 2017			October 31, 2016
	In millions
Deferred tax assets - long-term	$	3,920		$	3,830
Deferred tax liabilities - long-term	(92		)	(98		)
Deferred tax assets net of deferred tax liabilities	$	3,828		$	3,732

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 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. In connection with the Everett Transaction, the Company entered into a DXC Tax Matters Agreement with DXC. See Note 19, "Guarantees, Indemnifications and Warranties", for a full description of the Tax Matters Agreement and the DXC Tax Matters Agreement.