Entity information:
Taxes on Earnings

Provision for Taxes
 
The domestic and foreign components of earnings from continuing operations before taxes were as follows:
 
For the fiscal years ended October 31
 
2017
 
2016
 
2015
 
In millions
U.S.
$
(14
)
 
$
468

 
$
216

Non-U.S.
3,290

 
3,293

 
3,316

 
$
3,276

 
$
3,761

 
$
3,532


The provision for (benefit from) taxes on earnings from continuing operations was as follows:
 
For the fiscal years ended October 31
 
2017
 
2016
 
2015
 
In millions
U.S. federal taxes:
 

 
 

 
 

Current
$
189

 
$
439

 
$
(2,206
)
Deferred
197

 
470

 
1,069

Non-U.S. taxes:
 

 
 

 
 

Current
302

 
288

 
431

Deferred
4

 
(123
)
 
76

State taxes:
 

 
 

 
 

Current
20

 
(35
)
 
362

Deferred
38

 
56

 
82

 
$
750

 
$
1,095

 
$
(186
)

 
The differences between the U.S. federal statutory income tax rate and HP’s effective tax rate were as follows:
 
For the fiscal years ended October 31
 
2017
 
2016
 
2015
U.S. federal statutory income tax rate from continuing operations
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes from continuing operations, net of federal tax benefit
1.4
 %
 
1.1
 %
 
(6.1
)%
Lower rates in other jurisdictions, net
(13.2
)%
 
(9.3
)%
 
(1.2
)%
Research and development (“R&D”) credit
(0.5
)%
 
(2.4
)%
 
(0.2
)%
Valuation allowances
(1.9
)%
 
(1.2
)%
 
(48.0
)%
Uncertain tax positions
0.4
 %
 
11.7
 %
 
11.1
 %
Indemnification related items
(0.3
)%
 
(4.1
)%
 
—
 %
Other, net
2.0
 %
 
(1.7
)%
 
4.1
 %
 
22.9
 %
 
29.1
 %
 
(5.3
)%

 
The jurisdictions with favorable tax rates that have the most significant effective tax rate impact in the periods presented include Puerto Rico, Singapore, China, Malaysia and Ireland. To the extent that HP plans to reinvest earnings of these jurisdictions indefinitely outside the United States, U.S. taxes have not been provided on those indefinitely reinvested earnings.

In fiscal year 2017, HP recorded $72 million of net income tax benefits related to discrete items in the provision for taxes. These amounts primarily include tax benefits of $84 million related to restructuring and other charges, $12 million related to U.S. federal provision to return adjustments, $45 million related to Samsung acquisition-related charges, and $13 million of other net tax benefits. In addition, HP recorded tax charges of $11 million related to changes in state valuation allowances, $22 million of state provision to return adjustments, and $49 million related to uncertain tax positions.

In fiscal year 2016, HP recorded $301 million of net income tax charges related to discrete items in the provision for taxes for continuing operations. These amounts primarily include uncertain tax positions charges of $525 million related to pre-separation tax matters. In addition, HP recorded $62 million of net tax benefits on restructuring and other charges, $52 million of net tax benefits related to the release of foreign valuation allowances and $41 million of net tax benefits arising from the retroactive research and development credit provided by the Consolidated Appropriations Act of 2016 signed into law in December 2015 and $70 million of other tax benefit.
In fiscal year 2015, HP recorded $1.2 billion of net income tax benefits related to discrete items in the provision for taxes for continuing operations. These amounts included $1.7 billion of tax benefits due to a release of valuation allowances pertaining to certain U.S. deferred tax assets, $449 million of tax charges related to uncertain tax positions on pension transfers, $70 million of tax benefits related to state tax impacts, and $6 million of income tax charges related to various other items. In addition, HP recorded $33 million of income tax charges on restructuring and pension-related costs.
In fiscal year 2017, in addition to the discrete items mentioned above, HP recorded excess tax benefits of $19 million on stock options, restricted stock and performance share units, which are reflected in the Consolidated Statements of Earnings as a component of the provision for income taxes as a result of the early adoption of ASU 2016-09 -“Improvements to Employee Share- Based Payment Accounting”. See Note 1, “Basis of Presentation”, for more details regarding the guidance.
As a result of certain employment actions and capital investments HP has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, through 2027. The gross income tax benefits attributable to these actions and investments were estimated to be $471 million ($0.28 diluted net EPS) in fiscal year 2017, $341 million ($0.20 diluted net EPS) in fiscal year 2016 and $322 million ($0.18 diluted net EPS) in fiscal year 2015. The gross income tax benefits were offset partially by accruals of U.S. income taxes on undistributed earnings, among other factors.
 
Uncertain Tax Positions
 
A reconciliation of unrecognized tax benefits is as follows:
 
As of October 31
 
2017
 
2016
 
2015
 
In millions
Balance at beginning of year
$
10,858

 
$
6,546

 
$
1,545

Increases:
 
 
 

 
 

For current year’s tax positions
52

 
468

 
2,102

For prior years’ tax positions
85

 
4,004

 
5,208

Decreases:
 
 
 

 
 

For prior years’ tax positions
(181
)
 
(62
)
 
(2,063
)
Statute of limitations expirations
(1
)
 
—

 
(46
)
Settlements with taxing authorities
(5
)
 
(98
)
 
(200
)
Balance at end of year
$
10,808

 
$
10,858

 
$
6,546


 
As of October 31, 2017, the amount of unrecognized tax benefits was $10.8 billion, of which up to $3.9 billion would affect HP’s effective tax rate if realized. As of October 31, 2016 the amount of unrecognized tax benefits was $10.9 billion of which up to $3.9 billion would affect HP’s effective tax rate if realized. HP continues to record its tax liabilities related to uncertain tax positions and certain liabilities for which it has joint and several liability with Hewlett Packard Enterprise. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in the provision for taxes in the Consolidated Statements of Earnings. As of October 31, 2017, HP had accrued $257 million for interest and penalties.
 
HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP expects to complete resolution of certain tax years with various tax authorities within the next 12 months. It is also possible that other federal, foreign and state tax issues may be concluded within the next 12 months. HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $2.7 billion within the next 12 months.
 
HP is subject to income tax in the United States and approximately 58 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. The IRS is conducting an audit of HP’s 2009, 2010, 2011, 2012, 2013, 2014 and 2015 income tax returns. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent Reports (“RAR”) for its fiscal years 2001, 2002, 2006, 2007 and 2008 tax years. The IRS adjustments would, if sustained, reduce the benefits of tax refund claims HP has filed for net operating loss carrybacks to earlier fiscal years and tax credit carryforwards to subsequent years by approximately $377 million.

The U.S. Tax Court ruled in May 2012 against HP related to certain tax attributes claimed by HP for the tax years 1999 through 2003. HP appealed the U.S. Tax Court determination by filing a formal Notice of Appeal with the Ninth Circuit Court of Appeals. This case was argued before the Ninth Circuit in November 2016. The Ninth Circuit Court of Appeals issued its opinion in November 2017 affirming the Tax Court determinations. HP is currently assessing whether or not to further appeal.
     
With respect to major state and foreign tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. No material tax deficiencies have been assessed in major state or foreign tax jurisdictions as of the reporting period.
    
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.
 
HP has not provided for U.S. federal income and foreign withholding taxes on $21.7 billion of undistributed earnings from non-U.S. operations as of October 31, 2017 because HP intends to reinvest such earnings indefinitely outside of the U.S. If HP were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. HP will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. federal and withholding taxes have been provided where excess cash has accumulated and HP determines that it is advantageous for business operations, tax or cash management reasons.
 
Deferred Income Taxes
 
The significant components of deferred tax assets and deferred tax liabilities were as follows:
 
As of October 31
 
2017
 
2016
 
Deferred
Tax
Assets
 
Deferred
Tax
Liabilities
 
Deferred
Tax
Assets
 
Deferred
Tax
Liabilities
 
In millions
Loss and credit carryforwards
$
9,914

 
$
—

 
$
8,725

 
$
—

Unremitted earnings of foreign subsidiaries
—

 
(5,554
)
 
—

 
(5,179
)
Inventory valuation
7

 
(34
)
 
—

 
(12
)
Intercompany transactions—excluding inventory
1,901

 
—

 
2,560

 
—

Fixed assets
256

 
(8
)
 
274

 
—

Warranty
219

 
—

 
248

 
—

Employee and retiree benefits
519

 
(3
)
 
592

 
—

Accounts receivable allowance
103

 
—

 
117

 
—

Intangible assets
16

 
(209
)
 
23

 
(213
)
Restructuring and other
13

 
—

 
17

 
—

Deferred revenue
231

 
—

 
206

 
—

Other
372

 
(4
)
 
399

 
(99
)
Gross deferred tax assets and liabilities
13,551

 
(5,812
)
 
13,161

 
(5,503
)
Valuation allowances
(8,807
)
 
—

 
(8,520
)
 
—

Net deferred tax assets and liabilities
$
4,744

 
$
(5,812
)
 
$
4,641

 
$
(5,503
)


 Long-term deferred tax assets and liabilities included in the Consolidated Balance Sheets as follows:
 
As of October 31
 
2017
 
2016
 
In millions
Long-term deferred tax assets
$
342

 
$
254

Long-term deferred tax liabilities
(1,410
)
 
(1,116
)
Total
$
(1,068
)
 
$
(862
)

 
HP periodically engages in intercompany advanced royalty payment 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 U.S. GAAP treatment, deferred taxes are recognized. During fiscal year 2017, fiscal year 2016 and fiscal year 2015, HP executed intercompany advanced royalty payment arrangements resulting in advanced payments of $26 million, $1.2 billion, and $3.8 billion, respectively, the result of which was the recognition of zero net U.S. deferred tax assets in fiscal year 2017, 2016 and 2015. In these transactions, the payments were received in the United States from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, which is approximately 12 months for fiscal year 2017, 18 months for fiscal year 2016 and 5 years for fiscal year 2015. Intercompany royalty revenue is eliminated in consolidation.

As of October 31, 2017, HP had $678 million, $2.5 billion and $28.1 billion of federal, state and foreign net operating loss carryforwards, respectively. Amounts included in state and foreign net operating loss carryforwards will begin to expire in fiscal year 2018 and amounts included in federal net operating loss carryforwards will begin to expire in 2024. HP also has capital loss carryforwards of approximately $8 million, which will expire in 2021, and charitable contributions of $30 million, which will expire in 2022. HP has provided a valuation allowance of $93 million and $8.5 billion for deferred tax assets related to state and foreign net operating loss carryforwards, respectively, that HP does not expect to realize.
 
As of October 31, 2017, HP had recorded deferred tax assets for various tax credit carryforwards as follows:
 
Carryforward
 
Valuation
Allowance
 
Initial
Year of
Expiration
 
In millions
U.S. foreign tax credits
$
1,050

 
$
—

 
2022
U.S. R&D and other credits
920

 
—

 
2018
Tax credits in state and foreign jurisdictions
288

 
(115
)
 
2021
Balance at end of year
$
2,258

 
$
(115
)
 
 

 
Deferred Tax Asset Valuation Allowance
 
The deferred tax asset valuation allowance and changes were as follows:
 
As of October 31
 
2017
 
2016
 
2015
 
In millions
Balance at beginning of year
$
8,520

 
$
7,114

 
$
8,231

Income tax expense (benefit)
297

 
1,421

 
(2,183
)
Other comprehensive income, currency translation and charges to other accounts
(10
)
 
(15
)
 
1,066

Balance at end of year
$
8,807

 
$
8,520

 
$
7,114


 
Gross deferred tax assets at October 31, 2017, 2016 and 2015, were reduced by valuation allowances of $8.8 billion, $8.5 billion and $7.1 billion, respectively. Total valuation allowance increased by $0.3 billion in fiscal year 2017, and increased by $1.4 billion in fiscal year 2016, both years associated primarily with foreign net operating losses, and decreased by $1.1 billion in fiscal 2015, associated with the release of a valuation allowance against deferred tax assets in the United States.
 
Tax Matters Agreement and Other Income Tax Matters
 
In connection with the Separation, HP entered into the tax matters agreement (“TMA”) with Hewlett Packard Enterprise, effective on November 1, 2015, that governs the rights and obligations of HP and Hewlett Packard Enterprise for certain pre-Separation tax liabilities. The TMA provides that HP and Hewlett Packard Enterprise will share certain pre-Separation income tax liabilities. In certain jurisdictions, HP and Hewlett Packard Enterprise have joint and several liability for past income tax liabilities and accordingly, HP could be legally liable under applicable tax law for such liabilities and required to make additional tax payments.
 
In addition, if the distribution of Hewlett Packard Enterprise’s common shares to the HP stockholders is determined to be taxable, Hewlett Packard Enterprise and HP would share the tax liability equally, unless the taxability of the distribution is the direct result of action taken by either Hewlett Packard Enterprise or HP subsequent to the distribution, in which case the party causing the distribution to be taxable would be responsible for any taxes imposed on the distribution.
 
Upon completion of the Separation on November 1, 2015, HP recorded income tax indemnification receivables from Hewlett Packard Enterprise for certain income tax liabilities that HP is jointly and severally liable for, but for which it is indemnified by Hewlett Packard Enterprise under the TMA. The actual amount that Hewlett Packard Enterprise may be obligated to pay HP could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years. The net receivable as of October 31, 2017 and October 31, 2016 was $1.7 billion and $1.6 billion, respectively.