Note 19—Income Taxes

The Company’s income before taxes by fiscal year consisted of the following:



	2015		2014		2013
	(in millions)
U.S.	$	7,214	$	6,140	$	5,992
Non-U.S.	1,781		1,584		1,265
Total income before taxes	$	8,995	$	7,724	$	7,257

U.S. income before taxes included $2.4 billion, $2.3 billion and $2.0 billion of the Company's U.S. entities' income from operations outside of the U.S. for fiscal 2015, 2014 and 2013, respectively.

Income tax provision by fiscal year consisted of the following:



	2015		2014			2013
	(in millions)
Current:
U.S. federal	$	1,991	$	2,353		$	568
State and local	168		237			(58		)
Non-U.S.	300		274			239
Total current taxes	2,459		2,864			749
Deferred:
U.S. federal	181		(576		)	1,401
State and local	1		(31		)	114
Non-U.S.	26		29			13
Total deferred taxes	208		(578		)	1,528
Total income tax provision	$	2,667	$	2,286		$	2,277

The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30, 2015 and 2014, are presented below:



	2015			2014
	(in millions)
Deferred Tax Assets:
Accrued compensation and benefits	$	141		$	134
Comprehensive (income) loss	51			14
Investments in joint ventures	20			14
Accrued litigation obligation	391			558
Client incentives	191			235
Net operating loss carryforward	50			35
Tax credits	1			21
Federal benefit of state taxes	203			210
Other	164			139
Valuation allowance	(40		)	(34		)
Deferred tax assets	1,172			1,326
Deferred Tax Liabilities:
Property, equipment and technology, net	(315		)	(298		)
Intangible assets	(3,964		)	(4,000		)
Foreign taxes	(153		)	(125		)
Other	—			(12		)
Deferred tax liabilities	(4,432		)	(4,435		)
Net deferred tax liabilities	$	(3,260	)	$	(3,109	)

Total net deferred tax assets and liabilities are included in the Company’s consolidated balance sheets as follows:



	September 30, 2015			September 30, 2014
	(in millions)
Current deferred tax assets	$	871		$	1,028
Non-current deferred tax assets⁽¹⁾	11			8
Current deferred tax liabilities⁽¹⁾	(19		)	—
Non-current deferred tax liabilities	(4,123		)	(4,145		)
Net deferred tax liabilities	$	(3,260	)	$	(3,109	)


⁽¹⁾	Non-current deferred tax assets are reflected in other assets and current deferred tax liabilities are reflected in accrued liabilities on the consolidated balance sheets.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The fiscal 2015 and 2014 valuation allowances relate primarily to foreign net operating losses from subsidiaries acquired in recent years.

As of September 30, 2015, the Company had $30 million federal, $19 million state and $177 million foreign net operating loss carryforwards. The federal and state net operating loss carryforwards will expire in fiscal 2028 through 2035. The foreign net operating loss may be carried forward indefinitely. The Company expects to fully utilize the federal and state net operating loss carryforwards in future years.

The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory rate of 35% to pretax income, as a result of the following:



	For the Years Ended September 30,
	2015					2014					2013
	Dollars			Percent		Dollars			Percent		Dollars			Percent
	(in millions, except percentages)
U.S. federal income tax at statutory rate	$	3,148		35	%	$	2,704		35	%	$	2,540		35	%
State income taxes, net of federal benefit	194			2	%	129			2	%	42			1	%
Non-U.S. tax effect, net of federal benefit	(327		)	(4	)%	(278		)	(4	)%	(328		)	(5	)%
Prior years U.S. domestic production activities deduction	—			—	%	(191		)	(2	)%	—			—	%
Reversal of prior years tax reserves related to the resolution of uncertain tax positions	(239		)	(2	)%	—			—	%	—			—	%
Other, net	(109		)	(1	)%	(78		)	(1	)%	23			—	%
Income tax provision	$	2,667		30	%	$	2,286		30	%	$	2,277		31	%

The effective income tax rates were 30% in fiscal 2015 and 2014. The following highlights the significant tax items recorded in each respective year:


•	a $296 million tax benefit recognized in fiscal 2015 resulting from the resolution of uncertain tax positions with taxing authorities. Included in the $296 million is a one-time $239 million tax benefit that relates to prior fiscal years; and


•	a $264 million tax benefit recognized in fiscal 2014 related to a deduction for U.S. domestic production activities, of which $191 million was a one-time tax benefit related to prior fiscal years.

The effective income tax rate of 30% in fiscal 2014 differs from the effective income tax rate of 31% in fiscal 2013 mainly due to:


•	the aforementioned $264 million tax benefit recognized in fiscal 2014; and


•	the absence of the following in fiscal 2014:


•	a tax benefit recognized in fiscal 2013 as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012; and


•	certain foreign tax credit benefits related to prior years recognized in fiscal 2013.

Current income taxes receivable were $77 million and $91 million at September 30, 2015 and 2014, respectively. Non-current income taxes receivable of $627 million and $597 million were included in other assets at September 30, 2015 and 2014, respectively. See Note 5—Prepaid Expenses and Other Assets. At September 30, 2015 and 2014, income taxes payable of $75 million and $73 million, respectively, were included in accrued income taxes as part of accrued liabilities, and accrued income taxes of $752 million and $855 million, respectively, were included in other long-term liabilities. See Note 8—Accrued and Other Liabilities.

Cumulative undistributed earnings of the Company’s international subsidiaries that are intended to be reinvested indefinitely outside the United States amounted to $6.4 billion at September 30, 2015. The amount of income taxes that would have resulted had such earnings been repatriated is not practicably determinable.

The Company’s largest operating hub outside the United States is located in Singapore. It operates under a tax incentive agreement which is effective through September 30, 2023, and is conditional upon meeting certain business operations and employment thresholds in Singapore. The tax incentive agreement decreased Singapore tax by $192 million, $168 million and $158 million, and the benefit of the tax incentive agreement on diluted earnings per share was $0.08, $0.07 and $0.06 in fiscal 2015, 2014 and 2013, respectively.

In accordance with Accounting Standards Codification 740—Income Taxes, the Company is required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.

At September 30, 2015 and 2014, the Company’s total gross unrecognized tax benefits were $1.1 billion and $1.3 billion, respectively, exclusive of interest and penalties described below. Included in the $1.1 billion and $1.3 billion are $859 million and $1.1 billion of unrecognized tax benefits, respectively, that if recognized, would reduce the effective tax rate in a future period.

A reconciliation of beginning and ending unrecognized tax benefits by fiscal year is as follows:



	2015			2014
	(in millions)
Beginning balance at October 1	$	1,303		$	1,023
Increases of unrecognized tax benefits related to prior years	44			139
Decreases of unrecognized tax benefits related to prior years	(413		)	(54		)
Increases of unrecognized tax benefits related to current year	120			199
Reductions related to lapsing statute of limitations	(3		)	(4		)
Ending balance at September 30	$	1,051		$	1,303

It is the Company’s policy to account for interest expense and penalties related to uncertain tax positions in non-operating expense in its consolidated statements of operations. The Company reversed $6 million of interest expense in fiscal 2015 and recognized $10 million and $9 million of interest expense in fiscal 2014 and 2013, respectively, related to uncertain tax positions. The Company accrued $1 million and $2 million of penalties in fiscal 2015 and 2014, respectively, and reversed $4 million of penalties in fiscal 2013, related to uncertain tax positions. At September 30, 2015 and 2014, the Company had accrued interest of $33 million and $39 million, respectively, and accrued penalties of $6 million and $5 million, respectively, related to uncertain tax positions in its other long-term liabilities.

The Company's fiscal 2009, 2010 and 2011 U.S. federal income tax returns are currently under Internal Revenue Service ("IRS") examination. The Company has filed a federal refund claim for fiscal year 2008, which is also currently under IRS examination. Except for the refund claim, the federal statutes of limitations have expired for fiscal years prior to 2009. The Company's fiscal 2006, 2007 and 2008 California tax returns are currently under examination. Except for certain outstanding refund claims, the California statutes of limitations have expired for fiscal years prior to 2006.

During fiscal 2013, the Canada Revenue Agency ("CRA") completed its examination of the Company's fiscal 2003 through 2009 Canadian tax returns and proposed certain assessments. Based on the findings of its examination, the CRA also proposed certain assessments to the Company's fiscal 2010 through 2014 Canadian tax returns. The Company filed notices of objection against these assessments and, in fiscal 2015, completed the appeals process without reaching a settlement with the CRA. The Company intends to petition the Tax Court of Canada to overturn the CRA's assessments, and continues to believe that its income tax provision adequately reflects its obligations to the CRA.

The Company is also subject to examinations by various state and foreign tax authorities. All material state and foreign tax matters have been concluded for years through fiscal 2002. The timing and outcome of the final resolutions of the federal, state and foreign tax examinations and refund claims are uncertain. As such, it is not reasonably possible to estimate the impact that the final outcomes could have on the Company's unrecognized tax benefits in the next 12 months.