Income Taxes

The Company’s effective tax rate (“ETR”) was approximately 21% and 27% for the three and nine months ended December 31, 2018, respectively, as compared to an estimated (131)% and (8)% for the three and nine months ended December 31, 2017, which was presented on a carve-out basis. The increase in the ETR for the three and nine months ended December 31, 2018 compared to the same periods in the prior year, was primarily driven by the revaluation of deferred tax items and the initial impacts of the Tax Cuts and Jobs Act of 2017 by the predecessor parent company tax groups that were recorded in prior periods, partially offset by the reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes significant changes to the Internal Revenue Code with varying effective dates and reduces the maximum corporate income tax rate to 21% effective as of January 1, 2018, creates a new limitation on the deductibility of interest expense, limits the deductibility of certain executive compensation and allows for immediate capital expensing of certain qualified property, among other changes.

Under SEC staff issued Staff Accounting Bulletin No 118, the Company made reasonable estimates and recorded provisional amounts during the Company’s fiscal year ending March 31, 2018. The Company has not made any adjustments during the nine months ended December 31, 2018 to the provisional amounts recorded. As of December 31, 2018, we have completed the accounting for all the impacts of the Tax Act. DXC is still in the process of calculating return to provision adjustments for USPS for tax years ending prior to the enactment of the Tax Act. The Company will recognize the return to provision adjustments in the period in which they are finalized and provided by the former parent.

The Tax Matters Agreement entered into with DXC in connection with the Spin-Off (the “TMA”) states each company’s rights and responsibilities with respect to payment of taxes, tax return filings and control of tax examinations. Except for Vencore HC and KeyPoint HC, the Company is generally only responsible for tax assessments, penalties and interest allocable to periods (or portions of periods) related to USPS beginning after the Spin-Off and Mergers. The Company has income tax refunds receivable from the Internal Revenue Service (“IRS”) and various state tax authorities of approximately $33 million at December 31, 2018, for which it must remit to DXC under the TMA and has a corresponding payable. These amounts are included in other receivables and the related indemnification is included in accrued expenses and other current liabilities. During the third quarter, Perspecta received a refund of $72 million that included interest in excess of the initial receivable amount. The corresponding TMA indemnification payable was adjusted for the additional interest, which was then immediately paid to DXC during the quarter.

The Company’s entities included in the Spin-Off are currently under examination or in appeals in several tax jurisdictions. The tax years that remain open under statute of limitations and currently under IRS review include:



Jurisdiction		Tax Years Subject to Examination
U.S. Federal		2005 and forward
Various U.S. States		2003 and forward

The IRS is not currently examining Vencore HC or KeyPoint HC for any open years, but entities related to these businesses are open to examination in various state and local jurisdictions.