Income Taxes

12 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The sources of income (loss) from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the United States, are as follows:

	Fiscal Years Ended
(in millions)	March 31, 2020			March 31, 2019		March 31, 2018
Domestic entities	$	(2,928	)	$	511	$	454
Entities outside the United States	(2,300		)	1,004		850
Total	$	(5,228	)	$	1,515	$	1,304

The income tax expense (benefit) on income (loss) from continuing operations is comprised of:

	Fiscal Years Ended
(in millions)	March 31, 2020			March 31, 2019			March 31, 2018
Current:
Federal	$	3		$	(50	)	$	392
State	16			42			16
Foreign	167			218			247
	186			210			655
Deferred:
Federal	(125		)	95			(899		)
State	17			23			(59		)
Foreign	52			(40		)	61
	(56		)	78			(897		)
Total income tax expense (benefit)	$	130		$	288		$	(242	)

The current federal (benefit) and tax expense for fiscal years 2020, 2019 and 2018 includes a $(31) million transition tax benefit, $(44) million transition tax benefit and $332 million transition tax expense, respectively. The current expense (benefit) for fiscal 2020, 2019 and 2018, includes interest and penalties of $2 million, $1 million and $2 million, respectively, for uncertain tax positions.

In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-HPES Merger tax liabilities including adjustments made by tax authorities to HPES U.S. and non-U.S. income tax returns. Likewise, DXC is liable to HPE for income tax receivables and refunds which it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a net receivable of $8 million due to $44 million of tax indemnification receivable related to uncertain tax positions net of related deferred tax benefits, $87 million of tax indemnification receivable related to other tax payables and $123 million of tax indemnification payable related to other tax receivables.

In connection with the USPS Separation, the Company entered into a tax matters agreement with Perspecta. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the USPS Separation. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE pursuant to the tax matters agreement between the Company and HPE. The Company remains liable to HPE for tax receivables and refunds which it receives from Perspecta related to pre-HPES Merger periods that were transferred to Perspecta. Pursuant to the tax matters agreement, the Company has recorded a tax indemnification receivable from Perspecta of $72 million and a tax indemnification payable to Perspecta of $45 million related to income tax and other tax liabilities.

The major elements contributing to the difference between the U.S. federal statutory tax rate and the effective tax rate ("ETR") for continuing operations is below. Due to the Company's fiscal year, the U.S. federal weighted statutory tax rate for the fiscal years ended March 31, 2020, March 31, 2019, and March 31, 2018 were of 21.0%, 21.0% and 31.5%, respectively.

	Fiscal Years Ended
	March 31, 2020		March 31, 2019		March 31, 2018
Statutory rate	(21.0	)%	21.0	%	31.5	%
State income tax, net of federal tax	(1.4	)	3.2		2.0
Foreign tax rate differential	(11.9	)	(18.4	)	(5.7	)
Goodwill impairment	28.3		—		—
Change in valuation allowances	12.1		16.9		(7.7	)
Income Tax and Foreign Tax Credits	(2.6	)	(0.6	)	(7.6	)
Arbitration Award	(3.6	)	—		—
Change in uncertain tax positions	1.1		(1.5	)	(0.2	)
Withholding Taxes	0.9		3.5		2.3
U.S. Tax on Foreign Income	0.4		2.4		2.1
Excess tax benefits for stock compensation	0.1		(1.1	)	(3.0	)
Capitalized transaction costs	0.1		0.1		1.0
United States Tax Reform	(0.7	)	(3.4	)	(40.6	)
Change in Indefinite Reinvestment Assertion	—		(3.1	)	3.3
Loss of attributes due to merger	—		—		5.1
Prepaid tax asset amortization	—		—		0.3
Other items, net	0.7		—		(1.4	)
Effective tax rate	2.5	%	19.0	%	(18.6	)%

In fiscal 2020, the ETR was primarily impacted by:

• Non-deductible goodwill impairment charge, which increased tax expense and increased the ETR by $1,482 million and 28.3%, respectively.

• Non-taxable gain on the arbitration award, which decreased income tax expense and decreased the ETR by $186 million and 3.6%, respectively.

• A change in the net valuation allowance on certain deferred tax assets, primarily in Australia, Brazil, China, Luxembourg, and Singapore, which increased income tax expense and increased the ETR by $631 million and 12.1%, respectively.

• An increase in Income Tax and Foreign Tax Credits, primarily relating to research and development credits recognized for prior years, which decreased income tax expense and decreased the ETR by $135 million and 2.6%, respectively.

• Local losses on investments in Luxembourg that increased the foreign rate differential and decreased the ETR by $637 million and 12.2%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount.

In fiscal 2019, the ETR was primarily impacted by:

• Local tax losses on investments in Luxembourg that decreased the foreign tax rate differential and decreased the ETR by $360 million and 23.7%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount.

• A change in the net valuation allowance on certain deferred tax assets, primarily in Luxembourg, Germany, Spain, UK, and Switzerland, which increased income tax expense and increased the ETR by $256 million and 16.9%, respectively.

• A decrease in the transition tax liability and a change in tax accounting method for deferred revenue, which decreased income tax expense and decreased the ETR by $66 million and 4.3%, respectively.

In fiscal 2018, the ETR was primarily impacted by:

• Due to the Company's change in repatriation policy, the reversal of a deferred tax liability relating to the outside basis difference of foreign subsidiaries which increased the income tax benefit and decreased the ETR by $554 million and 42.5%, respectively.

• The accrual of the one-time transition tax imposed by the Act on estimated unremitted foreign earnings, which decreased the income tax benefit and increased the ETR by $361 million and 27.7%, respectively.

• The remeasurement of deferred tax assets and liabilities as a result of the Act, which increased the income tax benefit and decreased the ETR by $338 million and 25.9%, respectively.

The deferred tax assets (liabilities) were as follows:

	As of
(in millions)	March 31, 2020			March 31, 2019
Deferred tax assets
Employee benefits	$	—		$	79
Tax loss/credit carryforwards	2,516			1,917
Accrued interest	12			16
Operating lease liabilities	370			—
Contract accounting	126			130
Other assets	144			139
Total deferred tax assets	3,168			2,281
Valuation allowance	(2,162		)	(1,575		)
Net deferred tax assets	1,006			706
Deferred tax liabilities
Depreciation and amortization	(850		)	(994		)
Operating right-of-use asset	(343		)	—
Investment basis differences	(68		)	(61		)
Employee benefits	(48		)	—
Other liabilities	(150		)	(63		)
Total deferred tax liabilities	(1,459		)	(1,118		)
Total net deferred tax assets (liabilities)	$	(453	)	$	(412	)

Income tax related assets are included in the accompanying balance sheets as follows:

	As of
(in millions)	March 31, 2020		March 31, 2019
Current:
Income tax receivables and prepaid taxes	$	58	$	113
	$	58	$	113
Non-current:
Income taxes receivable and prepaid taxes	$	180	$	137
Deferred tax assets	265		355
	$	445	$	492
Total	$	503	$	605

Income tax related liabilities are included in the accompanying balance sheet as follows:

	As of
(in millions)	March 31, 2020			March 31, 2019
Current:
Liability for uncertain tax positions	$	(12	)	$	—
Income taxes payable	(75		)	(208		)
	$	(87	)	$	(208	)
Non-current:
Deferred taxes	(718		)	(767		)
Income taxes payable	(168		)	(201		)
Liability for uncertain tax positions	(271		)	(216		)
	$	(1,157	)	$	(1,184	)
Total	$	(1,244	)	$	(1,392	)

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. As of each reporting date, management weighs new evidence, both positive and negative, that could affect its view of the future realization of its net deferred tax assets. Objective verifiable evidence, which is historical in nature, carries more weight than subjective evidence, which is forward looking in nature.

A valuation allowance has been recorded against deferred tax assets of approximately $2.2 billion as of March 31, 2020 due to uncertainties related to the ability to utilize these assets. In assessing whether its deferred tax assets are realizable, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. The Company considers all available positive and negative evidence including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations.

As of March 31, 2018, the Company's net deferred tax assets in Singapore were primarily the result of $80 million indefinitely lived net operating loss carryforwards. A partial valuation allowance was recorded against the net operating losses as of the reporting date based upon the negative evidence of a three-year cumulative loss, uncertainty of predicting loss of contracts and an estimated forty-year net operating loss utilization period. For the period ended March 31, 2020, management has determined that the positive evidence of a three-year cumulative profit, ten consecutive quarters of profitability, and expansion of customer contract base outweighs the negative evidence of an estimated seventeen-year net operating loss utilization period. Therefore, as of March 31, 2020 management has had a change in judgment that it is now more likely than not that the net operating loss carryforwards in Singapore will be fully utilized. As a result, we recorded a valuation allowance release of $47.7 million to the income statement as deferred tax benefit in the current period.

The net increase in the valuation allowance of $587 million in fiscal 2020, is primarily due to the local losses in Luxembourg for the write-down on foreign investment carrying value of $637 million, valuation allowance releases of $(6) million, and an adjustment for currency translation of $(44) million.

The following table provides information on the Company's various tax carryforwards:

	As of March 31, 2020							As of March 31, 2019
(in millions)	Total		With No Expiration		With Expiration		Expiration Dates Through	Total		With No Expiration		With Expiration		Expiration Dates Through
Net operating loss carryforwards
Federal	$	15	$	3	$	12	2033	$	25	$	—	$	25	2037
State	$	673	$	6	$	667	2040	$	845	$	9	$	836	2039
Foreign	$	10,512	$	6,471	$	4,041	2040	$	7,595	$	7,292	$	303	2039
Tax credit carryforwards
Federal	$	9	$	—	$	9	2040	$	—	$	—	$	—	N/A
State	$	16	$	7	$	9	2039	$	23	$	7	$	16	2039
Foreign	$	16	$	—	$	16	2020	$	18	$	—	$	18	2020
Capital loss carryforwards
Federal	$	—	$	—	$	—	N/A	$	—	$	—	$	—	N/A
State	$	—	$	—	$	—	N/A	$	—	$	—	$	—	N/A
Foreign	$	59	$	40	$	19	2023	$	236	$	211	$	25	2023

The Company was a beneficiary of tax holiday incentives in India in fiscal 2019 and 2018 and was a beneficiary of Malaysian tax holiday incentives in fiscal 2018. As a result of these tax holiday incentives, the Company recorded an income tax benefit of approximately, $0 million, $2 million and $5 million, during fiscal 2020, 2019 and 2018, respectively. The per share effects were $0.0, $0.01 and $0.02, for fiscal, 2020, 2019 and 2018, respectively.

The majority of unremitted earnings has been taxed in the U.S. through the transition tax and global intangible low tax income tax in connection with 2017 U.S. tax reform. The Company was not permanently reinvested in all jurisdictions with the exception of India as of March 31, 2019. As a result of the issuance of new U.S. Treasury regulations in the first quarter of fiscal 2020, the Company changed its permanent reinvestment assertions with respect to certain foreign corporations, reducing the amount that will ultimately be repatriated to the U.S. by approximately $492 million. However, as of March 31, 2020, the Company anticipates that future earnings in India will not be indefinitely reinvested. This change resulted from the Company's determination that it is now efficient to repatriate earnings in India as a result of the enactment of India Finance Act, 2020 on March 27, 2020 and the change in cash needs resulting from economic consequences of the COVID-19 pandemic. We expect a significant portion of the cash held by our foreign subsidiaries will no longer be subject to U.S. federal income tax upon repatriation to the U.S., however, a portion of this cash may still be subject to foreign and U.S. state tax consequences when remitted.

The Company accounts for income tax uncertainties in accordance with ASC 740 Income Taxes, which prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of liabilities for uncertain tax positions, interest and penalties.

In accordance with ASC 740, the Company’s liability for uncertain tax positions was as follows:

	Fiscal Years Ended
(in millions)	March 31, 2020			March 31, 2019
Tax	$	253		$	165
Interest	45			41
Penalties	21			25
Offset to receivable	(24		)	—
Net of tax attributes	(12		)	(15		)
Total	$	283		$	216

The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):

	Fiscal Years Ended
(in millions)	March 31, 2020			March 31, 2019			March 31, 2018
Balance at beginning of fiscal year	$	165		$	219		$	192
Gross increases related to prior year tax positions	74			4			10
Gross decreases related to prior year tax positions	(9		)	(27		)	(12		)
Gross increases related to current year tax positions	15			—			7
Settlements and statute of limitation expirations	(7		)	(23		)	(19		)
Acquisitions	18			—			39
Foreign exchange and others	(3		)	(8		)	2
Balance at end of fiscal year	$	253		$	165		$	219

The Company’s liability for uncertain tax positions at March 31, 2020, March 31, 2019 and March 31, 2018, includes $210 million, $138 million and $170 million, respectively, related to amounts that, if recognized, would affect the effective tax rate (excluding related interest and penalties). The increase relating to the prior year tax positions primarily relate to the Company's increase in research and development credits and reserves relating to certain legacy CSC foreign restructuring expenses deducted on the U.S. tax return for the year ending March 31, 2013.

The Company recognizes interest accrued related to uncertain tax positions and penalties as a component of income tax expense. During the year ended March 31, 2020, the Company had a net increase in interest expense of $5 million ($3 million net of tax) and a net decrease in accrued expense for penalties of $3 million and, as of March 31, 2020, recognized a liability for interest of $45 million ($40 million net of tax) and penalties of $21 million. During the year ended March 31, 2019, the Company had a net increase in interest expense of $2 million ($1 million net of tax) and a net decrease in accrued expense for penalties of $1 million and, as of March 31, 2019, recognized a liability for interest of $41 million ($36 million net of tax) and penalties of $25 million. The following table presents the change in interest and penalties from the previous reported period, as well as the liability at the end of each period presented:

	As of and for the Fiscal Years Ended
	March 31, 2020			March 31, 2019			March 31, 2018
(in millions)	Increase (Decrease)
Interest	$	5		$	2		$	2
Interest, net of tax	$	3		$	1		$	2
Accrued penalties	$	(3	)	$	(1	)	$	—
Liability for interest	$	45		$	41		$	40
Liability for interest, net of tax	$	40		$	36		$	36
Liability for penalties	$	21		$	25		$	25

The Company is currently under examination in several tax jurisdictions. A summary of the tax years that remain subject to examination in certain of the Company’s major tax jurisdictions are:

Jurisdiction:	Tax Years that Remain Subject to Examination (Fiscal Year Ending):
United States – Federal	2008 and forward
United States – Various States	2008 and forward
Australia	2012 and forward
Canada	2006 and forward
France	2015 and forward
Germany	2010 and forward
India	1999 and forward
United Kingdom	2011 and forward

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2017. With respect to CSC's fiscal 2008 through 2010 federal tax returns, the Company previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to some but not all of these adjustments. The Company has agreed to extend the statute of limitations associated with this audit through September 30, 2020.

In the first quarter of fiscal 2020, we filed for competent authority relief relating to certain legacy CSC foreign restructuring expenses deducted for the U.S. federal tax return for tax year March 31, 2013. The Company has agreed to extend the statute of limitations associated with the fiscal years 2011 through 2013 through December 31, 2020. In the second quarter of fiscal 2020, the Company received a Revenue Agent's Report with proposed adjustments to CSC's fiscal 2014 through 2017 federal returns. The Company has filed a protest for certain of these adjustments with the IRS Office of Appeals. The Company has agreed to extend the statute of limitations for the fiscal 2014 through fiscal 2016 through December 31, 2020 and for the employment tax audit of fiscal years 2015 and 2016 until January 31, 2021. The Company expects to reach a resolution for all years no earlier than the first quarter of fiscal 2022 except agreed issues related to fiscal 2008 through 2010 and fiscal 2011 through 2013 federal tax returns, which are expected to be resolved within twelve months.

In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more likely than not standard if such positions are not upheld. Conversely, the Company could settle positions with the tax authorities for amounts lower than those that have been accrued or extinguish a position though payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in liability for uncertain tax positions of $25 million to $27 million, excluding interest, penalties, and tax carryforwards.