Income Taxes

9 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s effective tax rate (“ETR”) was 38.6% and 44.2% for the three months ended December 31, 2021 and December 31, 2020, respectively, and 42.4% and 54.5% for the nine months ended December 31, 2021 and December 31, 2020, respectively. For the three months ended December 31, 2021, the primary drivers of the ETR were the global mix of income, an increase in unrecognized tax benefits primarily related to deductions taken in prior tax returns and tax rate changes in non-U.S. jurisdictions. For the nine months ended December 31, 2021, the primary drivers of the ETR were the global mix of income, gain on sale of HPS business, tax rate changes in non-U.S. jurisdictions and recording a valuation allowance on certain deferred tax assets in non-U.S. jurisdictions. For the three and nine months ended December 31, 2020, the primary drivers of the ETR were the gain on sale of HHS Business, global mix of income and foreign tax credits.

The majority of our global unremitted foreign earnings have been taxed in the U.S. or would be exempt from U.S. tax upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The following foreign earnings are considered indefinitely reinvested: approximately $504 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and our accumulated earnings in India as of March 31, 2021. A portion of these indefinitely reinvested earnings may be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position based on its strategic objectives and future cash needs.

In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for tax liabilities arising prior to the HPES Merger, and DXC is liable to HPE for income tax receivables it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded $34 million of tax indemnification receivable related to uncertain tax positions, $68 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 spin-off of the Company’s former U.S. public sector business (the “USPS Separation”), the Company entered into a tax matters agreement with Peraton (formerly Perspecta Inc). The Company generally will be responsible for tax liabilities arising prior to the USPS Separation, and Peraton is liable to the Company for income tax receivables related to pre-spin-off periods. Income tax liabilities transferred to Peraton 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 transferred to Peraton related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company has recorded a tax indemnification receivable from Peraton of $74 million related to other tax payables and a tax indemnification payable to Peraton of $29 million related to income tax and other tax receivables.

In connection with the sale of HPS business, the Company entered into a tax matters agreement with Dedalus. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the sale of HPS business.

The Internal Revenue Service (the “IRS”) has examined, or is examining, the Company’s federal income tax returns for fiscal 2008 through the tax year ended October 31, 2018. With respect to CSC’s fiscal 2008 through 2017 federal tax returns, the Company participated in settlement negotiations with the IRS Office of Appeals. The IRS examined several issues for these tax years that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to various audit adjustments, and we disagree with the IRS’ disallowance of certain losses and deductions resulting from restructuring costs and tax planning strategies in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and are challenging them in the IRS Office of Appeals or Tax Court, these matters are not fully reserved and would result in a federal and state tax expense of $456 million (including estimated interest and penalties) for the unreserved portion of these items and related cash cost if we do not prevail. We have received notices of deficiency with respect to fiscal 2009, 2010, 2011 and 2013 and have timely filed petitions in Tax Court with respect to fiscal 2010, 2011 and 2013. We expect to file timely petitions in Tax Court for fiscal 2009 by the fourth quarter of fiscal 2022. We do not expect the Tax Court matters to be resolved in the next 12 months.

The Company has agreed to extend the statute of limitations for fiscal years 2008 through 2010 to April 30, 2022, for fiscal years 2014 through fiscal 2017 to October 31, 2022, and for the tax year ended October 31, 2017 to September 30, 2022. The statute of limitations on assessments for fiscal years 2011 through 2013 has expired. However, as previously noted, fiscal years 2011 and 2013 are in Tax Court and consequently these years will remain open until the Tax Court proceedings have concluded.

The Company expects to reach resolution with regard to disagreed items for fiscal years 2009 through 2013 no earlier than fiscal 2025, and to reach resolution for fiscal years 2014 through 2017, within 12 months.

The Company may settle certain other tax examinations or have lapses in statutes of limitations for different amounts than the Company has accrued as uncertain tax positions. Consequently, 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 or pay lower amounts than previously estimated and accrued. In the third quarter of fiscal 2022, the Company’s liability for uncertain tax positions increased by $19 million (excluding interest and penalties and related tax attributes) primarily related to deductions taken in prior tax years. The Company believes the outcomes that are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of $46 million, excluding interest, penalties, and tax carry-forwards.