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Income Taxes
9 Months Ended
Sep. 30, 2015
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
The Company accounts for its provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year.  The provision for income taxes represents federal, foreign, state and local income taxes.  Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in the mix of income by tax jurisdiction (as taxes are levied at relatively lower statutory rates in foreign regions and relatively higher statutory rates in the U.S.); changes in enacted tax laws and regulations, rulings and interpretations thereof, including with respect to tax credits, state and local income taxes; developments in tax audits and other matters;  and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
 
The income tax expense of $18 million for the three months ended September 30, 2015 reflects an effective tax rate of 13%, which is lower than the effective tax rate of 46% for the three months ended September 30, 2014.  This decrease is primarily due to an incremental tax benefit included in the three months ended September 30, 2014, from a lower estimated effective annual tax rate in 2015 due to the mix of foreign earnings taxed at relatively lower statutory rates as compared to domestic earnings, partially offset by certain non-tax benefited costs incurred during the prior year quarter.

The income tax expense of $186 million for the nine months ended September 30, 2015 reflects an effective tax rate of 20%, which is comparable to the effective tax rate of 20% for the nine months ended September 30, 2014.

The effective tax rates of 13% and 20% for the three and nine months ended September 30, 2015, respectively, differed from the U.S. statutory rate of 35%, primarily due to the tax benefit from foreign earnings taxed at relatively lower statutory rates, recognition of California research and development credits, federal domestic production deductions and favorable return to provision adjustments, partially offset by increases to the Company’s reserve for uncertain tax positions.
 
The overall effective income tax rate for the year could be different from the effective tax rate for the three and nine months ended September 30, 2015 and will be dependent, in part, on our profitability for the remainder of the year, as well as the other factors described above.
 
The Internal Revenue Service (“IRS”) is currently examining Activision Blizzard’s federal tax returns for the 2008 through 2011 tax years.  During the second quarter of 2015, the Company transitioned the review of its transfer pricing methodology from the advanced pricing agreement review process to the IRS examination team. Their review could result in a different allocation of profits and losses under the Company’s transfer pricing agreements. Such allocation could have a positive or negative impact on our provision for uncertain tax positions for the period in which such a determination is reached and the relevant periods thereafter.
 
In addition, Vivendi Games’ tax return for the 2008 tax year is under examination by the IRS and several state taxing authorities. While Vivendi Games’ results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Vivendi or its affiliates, Vivendi Games’ results for the period July 10, 2008 through December 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard. Additionally, the Company has several state and non-U.S. audits pending.

The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters are not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on our business and results of operations in the period in which the matters are ultimately resolved.
 
In connection with the Purchase Transaction, we assumed certain tax attributes of New VH, generally consisting of New VH’s net operating loss (“NOL”) carryforwards of approximately $760 million, which represent a potential future tax benefit of approximately $266 million. The utilization of such NOL carryforwards will be subject to certain annual limitations and will begin to expire in 2021. The Company also obtained indemnification from Vivendi against losses attributable to the disallowance of claimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate, limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was recorded upon the close of the Purchase Transaction, as the benefit from these tax attributes did not meet the “more-likely-than-not” standard.  For the nine months ended September 30, 2015, we utilized $248 million of the NOL, which resulted in a tax benefit of $87 million, reduced by $5 million for return to provision adjustments, and a corresponding reserve of $82 million was established as the position did not meet the “more-likely-than-not” standard.  As of September 30, 2015, an indemnification asset of $149 million has been recorded in “Other Assets,” and, correspondingly, the same amount has been recorded as a reduction to the consideration paid for the shares repurchased in “Treasury Stock” (see Note 1 of the Notes to Condensed Consolidated Financial Statements for details about the share repurchase).