Note 12: Income Taxes

Provision for Taxes

HP's effective tax rate was 25.0% and 18.7% for the three months ended July 31, 2014 and 2013, respectively, and 23.2% and 21.1% for the nine months ended July 31, 2014 and 2013, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the U.S.

In the three and nine months ended July 31, 2014, HP recorded discrete items resulting in net tax benefits of $88 million and $53 million, respectively. These amounts include tax benefits of $100 million and $145 million related to restructuring charges, respectively.

In the three and nine months ended July 31, 2013, HP recorded discrete items resulting in net tax charges of $63 million and net tax benefits of $40 million, respectively. These amounts included tax benefits of $13 million and $76 million, respectively, related to restructuring charges. The nine month period ended July 31, 2013 also included a tax benefit of $50 million from the retroactive research and development credit provided by the American Taxpayer Relief Act of 2012 and a tax charge of $150 million related to a past uncertain tax position.

Uncertain Tax Positions

HP is subject to income tax in the U.S. and approximately 80 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by federal, state and foreign tax authorities. HP 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. HP regularly assesses the likely outcomes of these audits in order to determine the appropriateness of HP's tax provision. HP 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 HP 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 income or cash flows.

As of July 31, 2014, the amount of unrecognized tax benefits was $4.0 billion, of which up to $1.9 billion would affect HP's effective tax rate if realized. HP recognizes interest income from favorable settlements and income tax receivables and interest expense and penalties accrued on unrecognized tax benefits in Provision for taxes in the Consolidated Condensed Statements of Earnings. As of July 31, 2014, HP had accrued $228 million for interest and penalties.

HP engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any U.S. Internal Revenue Service 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 and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by up to $1.3 billion within the next 12 months.

Deferred Tax Assets and Liabilities

Current and long-term deferred tax assets and liabilities are presented in the Consolidated Condensed Balance Sheets as follows:

	As of

	July 31, 2014			October 31, 2013
	In millions
Current deferred tax assets	$	2,712		$	3,893
Current deferred tax liabilities		(418	)		(375	)
Long-term deferred tax assets		1,086			1,346
Long-term deferred tax liabilities		(1,228	)		(2,668	)


Net deferred tax position	$	2,152		$	2,196

HP periodically engages in intercompany licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from their U.S. GAAP treatment, deferred taxes are recognized. For U.S. GAAP purposes, revenue from intercompany licensing arrangements is deferred and recognized ratably over the term of the arrangement. The decline in current deferred tax assets as of July 31, 2014 reflects the reversal of certain of these timing differences. Further, during the second quarter of fiscal 2014, HP executed a multi-year intercompany licensing arrangement on which advanced royalty payments were received, the result of which was the recognition of net long-term deferred tax assets of $1.3 billion. This increase in long-term deferred tax assets is presented as a component of HP's long-term deferred tax liabilities due to the effects of jurisdictional netting.