Taxes on Earnings

Provision for Taxes

The Company's effective tax rate was 73.0% and 325.6% for the three months ended January 31, 2019 and 2018, respectively. The effective tax rates for the three months ended January 31, 2019 and 2018 were significantly impacted by the Tax Act in their respective periods. The effective tax rate for the three months ended January 31, 2018 also included the settlement of certain pre-Separation tax liabilities of HP Inc.

For the three months ended January 31, 2019, the Company recorded $428 million of net income tax charges related to various items discrete to the period. The amounts primarily included $375 million of income tax charges related to changes in U.S. federal and state valuation allowances as a result of impacts of the Tax Act, $37 million of income tax charges related to future withholding tax costs on distributions of earnings, and $34 million of income tax charges related to the change in pre-Separation tax liabilities for which the Company shares joint and several liability with HP Inc. and for which the Company is partially indemnified by HP Inc. under the Tax Matters Agreement, partially offset by $30 million of income tax benefits on restructuring charges and acquisition, disposition and other related charges.

For the three months ended January 31, 2018, the Company recorded $2.2 billion of net income tax benefits related to various items discrete to the period. The amounts primarily included $920 million of income tax benefits for the effects of the settlement of certain pre-Separation Hewlett-Packard Company income tax liabilities, $806 million of net income tax benefits for impacts related to the Tax Act, $203 million of income tax benefits related to the liquidation of an insolvent non-U.S. subsidiary, $244 million of income tax benefits from foreign tax credits and from the release of certain non-U.S. valuation allowances on deferred tax assets and liabilities established in connection with the Everett Transaction following changes in foreign tax laws, $44 million of income tax benefits on restructuring charges, separation costs and acquisition, disposition and other related charges, and $14 million of income tax benefits for net excess tax benefits related to stock-based compensation.

Recent Tax Legislation

The Tax Act required the Company to incur a one-time Transition Tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets and 8% on the remaining income. The GILTI and BEAT provisions of the Tax Act became effective for the Company beginning November 1, 2018.

The Company has an October 31 fiscal year end; therefore, the lower corporate tax rate enacted by the Tax Act was phased in, resulting in a U.S. statutory federal rate of 23.3% for the fiscal year ending October 31, 2018 and 21% for the current and subsequent fiscal years.

The Company completed its accounting for the tax effects of the Tax Act based on currently available legislative and regulatory updates in the first quarter of fiscal 2019, resulting in an additional tax charge of $426 million. This amount includes $438 million of income tax charges relating to additional valuation allowances against certain U.S. federal deferred tax assets, $56 million of income tax benefits resulting from the release of valuation allowances against certain U.S. state deferred tax assets, an additional $7 million of Transition Tax and $37 million of income tax charges related to future withholding tax costs on distributions of earnings. No cash payment is anticipated due to the availability of sufficient tax credits to offset the Transition Tax. The Company has elected to treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred.

Uncertain Tax Positions

As of January 31, 2019 and October 31, 2018, the amount of unrecognized tax benefits was $8.9 billion and $8.8 billion, respectively, of which up to $1.1 billion would affect the Company's effective tax rate if realized as of their respective periods. The Company is joint and severally liable for certain pre-Separation tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by federal, state and foreign tax authorities.

The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. As of January 31, 2019 and October 31, 2018, the Company has recorded $167 million and $142 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. The Company does not expect complete resolution of any 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 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 $6.4 billion within the next 12 months, which will not materially affect the Company’s effective tax rate.

Deferred Tax Assets and Liabilities

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



	As of
	January 31, 2019			October 31, 2018
	In millions
Deferred tax assets - long-term	$	2,210		$	2,403
Deferred tax liabilities - long-term	(300		)	(228		)
Deferred tax assets net of deferred tax liabilities	$	1,910		$	2,175

Tax Matters Agreement and Other Income Tax Matters

In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc. In connection with the Everett and Seattle Transactions, the Company entered into a DXC Tax Matters Agreement with DXC and a Micro Focus Tax Matters Agreement with Micro Focus, respectively. For more details, see the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2018.