Taxes on Earnings

12 Months Ended

Oct. 31, 2019

Income Tax Disclosure [Abstract]

Taxes on Earnings

Taxes on Earnings

Provision for Taxes

The domestic and foreign components of earnings (loss) from continuing operations before taxes were as follows:

	For the fiscal years ended October 31,
	2019			2018			2017
	In millions
U.S.(1)	$	(1,067	)	$	(2,805	)	$	(1,929	)
Non-U.S.(1)	2,620			3,073			2,201
	$	1,553		$	268		$	272

(1) Fiscal 2017 amount has been reclassified to conform with the current period presentation.

The provision (benefit) for taxes on earnings from continuing operations were as follows:

	For the fiscal years ended October 31,
	2019			2018			2017
	In millions
U.S. federal taxes:
Current	$	(763	)	$	(2,177	)	$	560
Deferred	1,046			150			(1,366		)
Non-U.S. taxes:
Current	246			419			64
Deferred	101			(188		)	25
State taxes:
Current	(58		)	52			(107		)
Deferred	(68		)	—			660
	$	504		$	(1,744	)	$	(164	)

The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate were as follows:

	For the fiscal years ended October 31,
	2019		2018		2017
U.S. federal statutory income tax rate	21.0	%	23.3	%	35.0	%
State income taxes, net of federal tax benefit	(0.1	)%	4.3	%	3.0	%
Lower rates in other jurisdictions, net	(7.3	)%	(121.4	)%	(426.3	)%
Valuation allowance	5.8	%	(59.8	)%	310.0	%
U.S. permanent differences	6.0	%	39.3	%	27.8	%
Uncertain tax positions	(14.7	)%	(694.8	)%	(8.4	)%
Impacts of the Tax Act(1)	24.5	%	158.0	%	—	%
Other, net	(2.7	)%	0.4	%	(1.4	)%
	32.5	%	(650.7	)%	(60.3	)%

(1) Impacts of the Tax Act is inclusive of valuation allowances recorded as a result of the U.S. law change under SAB 118.

The jurisdictions with favorable tax rates that had the most significant impact on the Company's effective tax rate in the periods presented include Puerto Rico and Singapore.

In fiscal 2019, the Company recorded $152 million of net income tax charges related to items unique to the year. These amounts primarily included $488 million of net income tax charges related to changes in U.S. federal and state valuation allowances

primarily as a result of impacts of the Tax Act and $40 million of income tax charges related to future withholding costs on potential intercompany distributions of earnings, the effects of which were partially offset by $274 million of income tax benefits related to the change in pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc., and $104 million of income tax benefits on transformation costs, and acquisition, disposition and other related charges.

In fiscal 2018, the Company recorded $2.0 billion of net income tax benefits related to items unique to the year. These amounts primarily included $2.0 billion of income tax benefits related to the settlement of certain pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was partially indemnified by HP Inc. under the Tax Matters Agreement, $208 million of income tax benefits related to Everett pre-divestiture tax matters and valuation allowances, $125 million of income tax benefits on restructuring charges, separation costs, transformation costs and acquisition and other related charges and $65 million of net excess tax benefits related to stock-based compensation, the effects of which were partially offset by $422 million of income tax charges related to impacts of the Tax Act. In addition, the Company recorded $5.0 billion of certain foreign loss carryforwards and U.S. domestic capital losses carryforwards against which a full valuation allowance was recorded; the effective tax rate above reflects this activity on a net basis.

In fiscal 2017, the Company recorded $554 million of net income tax benefits related to items unique to the year. These amounts primarily included $699 million of income tax benefits in connection with the Everett and Seattle Transactions and $326 million of income tax benefits on restructuring charges, separation costs, transformation costs and acquisition and other related charges, the effects of which were partially offset by $473 million of income tax charges to record valuation allowances on U.S. state deferred tax assets, and $88 million of income tax charges related to pre-Separation tax matters.

As a result of certain employment actions and capital investments the Company has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates through 2024. The gross income tax benefits attributable to these actions and investments were $837 million ($0.61 diluted net EPS) in fiscal 2019, $792 million ($0.51 diluted net EPS) in fiscal 2018 and $378 million ($0.23 diluted net EPS) in fiscal 2017. Refer to Note 17, "Net Earnings Per Share" for details on shares used to compute diluted net EPS.

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 8.0% on the remaining income. No cash payment was required for Transition Tax due to the availability of sufficient tax credits to offset the liability. 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 21.0% 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 charges and $37 million of income tax charges related to future withholding tax costs on potential intercompany distributions of earnings. 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

A reconciliation of unrecognized tax benefits is as follows:

	As of October 31,
	2019			2018			2017
	In millions
Balance at beginning of year	$	8,826		$	11,262		$	11,411
Increases:
For current year's tax positions	43			163			28
For prior years' tax positions	37			66			311
Decreases:
For prior years' tax positions	(17		)	(82		)	(202		)
Statute of limitations expiration	(38		)	(86		)	(70		)
Settlements with taxing authorities	(7		)	(2		)	(216		)
Settlements related to joint and several positions of former Parent	(6,575		)	(2,495		)	—
Balance at end of year	$	2,269		$	8,826		$	11,262

Up to $772 million, $1.1 billion and $3.0 billion of Hewlett Packard Enterprise's unrecognized tax benefits at October 31, 2019, 2018 and 2017, respectively, would affect the Company's effective tax rate if realized. The $6.6 billion decrease in the amount of unrecognized tax benefits for the year ended October 31, 2019, is primarily related to the settlement of certain pre-Separation tax liabilities of HP Inc. for which the Company shared joint and several liability and for which the Company was partially indemnified by HP Inc. The Company continues to record $131 million of pre-Separation unrecognized state tax positions, inclusive of interest and penalties, for which it is joint and severally liable and continues to be indemnified under the Termination and Mutual Release Agreement. The $274 million of joint and several income tax benefits recognized in the Company's effective tax rate includes interest, penalties, and offsetting benefits not included in the table above.

The $2.4 billion decrease in the amount of unrecognized tax benefits for the year ended October 31, 2018, is primarily related to the settlement of certain pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was partially indemnified by HP Inc. under the Tax Matters Agreement. The $2.0 billion of income tax benefits recognized in the Company's effective tax rate includes interest, penalties, and offsetting benefits not included in the table above.

Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Consolidated Statements of Earnings. The Company recognized interest and penalties related to uncertain tax positions of $13 million, $161 million, and $89 million in fiscal 2019, 2018, and 2017, respectively. As of October 31, 2019 and 2018, the Company had accrued $129 million and $142 million, respectively, for interest and penalties in the 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 resolution of certain intercompany transactions, joint and several tax liabilities 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 $56 million within the next 12 months.

Hewlett Packard Enterprise is subject to income tax in the U.S. and approximately 95 other countries and is subject to routine corporate income tax audits in many of these jurisdictions.

With the resolution of the 2013 through 2015 IRS tax audits of its former parent in fiscal 2019, Hewlett Packard Enterprise is no longer subject to U.S. federal tax audits for years prior to 2016. With respect to major state and foreign tax jurisdictions, HPE is no longer subject to tax authority examinations for years prior to 2005.

Hewlett Packard Enterprise is joint and severally liable for certain pre-Separation state tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by state tax authorities.

Hewlett Packard Enterprise 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 earnings or cash flows.

Hewlett Packard Enterprise has not provided for U.S. federal and state income and foreign withholding taxes on $10.2 billion of undistributed earnings and basis differences from non-U.S. operations as of October 31, 2019 because the Company intends to reinvest such earnings indefinitely outside of the U.S. Determination of the amount of unrecognized deferred tax liability related to these earnings and basis differences is not practicable. The Company will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. state income and foreign withholding taxes have been provided where excess cash has accumulated and the Company determines that it is advantageous for business operations, tax or cash management reasons.

Deferred Income Taxes

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.

The significant components of deferred tax assets and deferred tax liabilities were as follows:

	As of October 31,
	2019			2018
	In millions
Deferred tax assets:
Loss and credit carry-forwards	$	8,110		$	9,149
Inventory valuation	59			77
Intercompany prepayments	179			48
Other intercompany transactions	41			63
Warranty	72			81
Employee and retiree benefits	584			498
Restructuring	65			101
Deferred revenue	531			518
Intangible assets	130			48
Other	243			432
Total deferred tax assets	10,014			11,015
Valuation allowance	(8,225		)	(8,209		)
Total deferred tax assets net of valuation allowance	1,789			2,806
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries	(233		)	(161		)
Fixed assets	(352		)	(470		)
Total deferred tax liabilities	(585		)	(631		)
Net deferred tax assets and liabilities	$	1,204		$	2,175

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

	As of October 31,
	2019			2018
	In millions
Long-term deferred tax assets	$	1,515		$	2,403
Long-term deferred tax liabilities	(311		)	(228		)
Net deferred tax assets net of deferred tax liabilities	$	1,204		$	2,175

As of October 31, 2019, the Company had $783 million, $3.0 billion and $21.8 billion of federal, state and foreign net operating loss carryforwards, respectively. Amounts included in federal, state and foreign net operating loss carryforwards will begin to expire in years 2030, 2020, and 2021, respectively. Hewlett Packard Enterprise has provided a valuation allowance of $154 million and $4.6 billion for deferred tax assets related to state and foreign net operating losses carryforwards, respectively. As of October 31, 2019, the Company also had $6.0 billion, $5.6 billion, and $34 million of federal, state, and foreign capital loss carryforwards, respectively. Amounts included in federal and state capital loss carryforwards will begin to expire in 2023; foreign capital losses can carry forward indefinitely. Hewlett Packard Enterprise has provided a valuation allowance of $1.3 billion, $189 million, and $9 million for deferred tax assets related to federal, state, and foreign capital loss carryforwards, respectively.

As of October 31, 2019, Hewlett Packard Enterprise had recorded deferred tax assets for various tax credit carryforwards as follows:

	Carryforward		Valuation Allowance			Initial Year of Expiration
	In millions
U.S. foreign tax credits	$	1,271	$	(1,227	)	2026
U.S. research and development and other credits	149		(2		)	2021
Tax credits in state and foreign jurisdictions	174		(91		)	2022
Balance at end of year	$	1,594	$	(1,320	)

Deferred Tax Asset Valuation Allowance

The deferred tax asset valuation allowance and changes were as follows:

	As of October 31,
	2019			2018			2017
	In millions
Balance at beginning of year	$	8,209		$	2,789		$	2,095
Income tax expense	(10		)	(166		)	848
Income tax expense related to the Tax Act	488			687			—
Valuation allowance offsetting current activity	(738		)	5,028			—
Other comprehensive income, currency translation and charges to other accounts	276			(129		)	(154		)
Balance at end of year	$	8,225		$	8,209		$	2,789

Total valuation allowances increased by $16 million in fiscal 2019, due primarily to the increases in valuation allowance recorded against U.S. foreign tax credit carryforwards as a result of the Tax Act. These were offset by partial state valuation allowance releases as a result of newly enacted state legislation and decreases as a result of remeasurement of the deferred tax assets on certain foreign loss carryforwards against which valuation allowances are required.

Total valuation allowances increased by $5.4 billion in fiscal 2018 due primarily to the increases in certain foreign loss carryforwards recognized in the current year and increases in U.S. domestic capital loss carryforwards recognized in the current year against which valuation allowances were required, and a partial valuation allowance recorded against U.S. foreign tax credit carryforwards as a result of the Tax Act. These were offset by partial valuation allowance releases against loss carryforwards in certain foreign jurisdictions due to law changes.

Tax Matters Agreement and Other Income Tax Matters

In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc., which was terminated with the Termination and Mutual Release Agreement in fiscal 2019. 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. See Note 19, "Guarantees, Indemnifications and Warranties", for a description of the Tax Matters Agreement, DXC Tax Matters Agreement and Micro Focus Tax Matters Agreement.