7. Income Taxes
The domestic and foreign pretax (loss) income from continuing operations is as follows:
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
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|||
|
|
|
September 30, |
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|
September 30, |
|
|
September 30, |
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|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Domestic |
|
$ |
(37 |
) |
|
$ |
35 |
|
|
$ |
(18 |
) |
|
Foreign |
|
|
35 |
|
|
|
6 |
|
|
|
(57 |
) |
|
Total |
|
$ |
(2 |
) |
|
$ |
41 |
|
|
$ |
(75 |
) |
Current and deferred income taxes (tax benefits) provided are as follows:
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|||
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
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|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
|
|
(in millions) |
|
|||||||||
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Deferred |
|
|
(169 |
) |
|
|
3 |
|
|
|
4 |
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current (a) |
|
|
41 |
|
|
|
39 |
|
|
|
40 |
|
|
Deferred |
|
|
(12 |
) |
|
|
(30 |
) |
|
|
(33 |
) |
|
U.S. State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
Deferred |
|
|
(13 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
|
Total |
|
$ |
(151 |
) |
|
$ |
11 |
|
|
$ |
13 |
|
|
|
|
(a) |
Includes withholding taxes of $13 million, $17 million and $13 million for the fiscal year ended September 30, 2017, for the fiscal year ended September 30, 2016, and for the fiscal year ended September 30, 2015, respectively. |
The differences between the U.S. federal statutory income tax rate of 35% and income taxes provided are as follows:
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|||
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Taxes on income at the U.S. federal statutory rate |
|
$ |
(1 |
) |
|
$ |
14 |
|
|
$ |
(26 |
) |
|
U.S. state and local taxes |
|
|
3 |
|
|
|
(1 |
) |
|
|
2 |
|
|
Foreign income taxed at different rates, including withholding taxes |
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
Increase in valuation allowance |
|
|
18 |
|
|
|
19 |
|
|
|
34 |
|
|
Release of valuation allowance |
|
|
(134 |
) |
|
|
(26 |
) |
|
|
(5 |
) |
|
Change in tax rates |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
(2 |
) |
|
Foreign Currency Losses on Intra-Entity Loans |
|
|
(59 |
) |
|
|
— |
|
|
|
— |
|
|
Non-deductible share based compensation |
|
|
10 |
|
|
|
1 |
|
|
|
— |
|
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
(1 |
) |
|
Total income tax (benefit) expense |
|
$ |
(151 |
) |
|
$ |
11 |
|
|
$ |
13 |
|
During the year ended September 30, 2017, the Company recognized a U.S. tax benefit of $59 million related to foreign currency losses on intra-entity loans. The foreign currency loss was previously reported in accumulated other comprehensive loss as the intra-entity loans were previously considered long-term investment in nature.
For the fiscal year ended September 30, 2017 and for the fiscal year ended September 30, 2016, the Company incurred losses in certain foreign territories and has offset the tax benefit associated with these losses with a valuation allowance as the Company has determined that it is more likely than not that these losses will not be utilized. In the U.S., the Company has released $125 million of the US valuation allowance related to US tax attributes. Significant components of the Company’s net deferred tax assets (liabilities) are summarized below:
|
|
|
September 30, |
|
|
September 30, |
|
||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in millions) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Allowances and reserves |
|
$ |
35 |
|
|
$ |
34 |
|
|
Employee benefits and compensation |
|
|
91 |
|
|
|
47 |
|
|
Other accruals |
|
|
68 |
|
|
|
82 |
|
|
Tax attribute carry forwards |
|
|
482 |
|
|
|
475 |
|
|
Other |
|
|
13 |
|
|
|
3 |
|
|
Total deferred tax assets |
|
|
689 |
|
|
|
641 |
|
|
Valuation allowance |
|
|
(193 |
) |
|
|
(310 |
) |
|
Net deferred tax assets |
|
|
496 |
|
|
|
331 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Depreciation, amortization and artist advances |
|
|
(15 |
) |
|
|
(26 |
) |
|
Intangible assets |
|
|
(574 |
) |
|
|
(572 |
) |
|
Total deferred tax liabilities |
|
|
(589 |
) |
|
|
(598 |
) |
|
Net deferred tax liabilities |
|
$ |
(93 |
) |
|
$ |
(267 |
) |
In the third quarter ended June 30, 2017 the Company emerged from cumulative U.S. losses in the most recent three-year period. The emergence from cumulative three-year losses, projections of sufficient future taxable income in the U.S., and the reversal of future taxable temporary differences represents significant positive evidence, which outweighed our historical negative evidence. The Company concluded that it is more likely than not that the Company’s deferred tax assets, except for a portion of the Company’s deferred tax assets relating to foreign tax credit (“FTC”) carryforwards and U.S. State net operating loss (“NOL”) carryforwards, will be realized. As a result, the Company released $125 million of its valuation allowance recorded on its deferred tax assets as of the year-ended September 30, 2016. The Company has retained a portion of its valuation allowance of $119 million against its U.S. tax attributes of which $108 million relates to our FTC carryforwards, $4 million relates to our U.S. State NOL carryforwards and $7 million relates to outside basis differences in investments due to its expectation of realizing the benefits of these tax attributes during the limited carryforward period does not meet the “more likely than not” threshold.
At September 30, 2017, the Company has U.S. federal tax net operating loss carry-forwards of $558 million, which will begin to expire in fiscal year 2027. The Company also has tax net operating loss carry-forwards, with no expiration date, in the U.K., France and Spain of $23 million, $120 million and $45 million, respectively, and other tax net operating loss carry forwards in state, local and foreign jurisdictions that expire in various periods. In addition, the Company has foreign tax credit carry-forwards for U.S. tax purposes of $158 million. The US foreign tax credits will begin to expire in fiscal year 2018.
U.S. income and foreign withholding taxes have not been recorded on indefinitely reinvested earnings of certain foreign subsidiaries of approximately $218 million at September 30, 2017. As such, no deferred income taxes have been provided for these undistributed earnings. Should these earnings be distributed, foreign tax credits and net operating losses may be available to reduce the additional federal income tax that would be payable. However, availability of these foreign tax credits is subject to limitations which make it impracticable to estimate the amount of the ultimate tax liability, if any, on these accumulated foreign earnings.
The Company classifies interest and penalties related to uncertain tax position as a component of income tax expense. As of September 30, 2017 and September 30, 2016, the Company had accrued $3 million and $3 million of interest and penalties, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including interest and penalties, are as follows (in millions):
|
Balance at September 30, 2014 |
|
$ |
27 |
|
|
Additions for current year tax positions |
|
|
8 |
|
|
Additions for prior year tax positions |
|
|
9 |
|
|
Subtractions for prior year tax positions |
|
|
(9 |
) |
|
Balance at September 30, 2015 |
|
$ |
35 |
|
|
Additions for current year tax positions |
|
|
7 |
|
|
Additions for prior year tax positions |
|
|
1 |
|
|
Subtractions for prior year tax positions |
|
|
(13 |
) |
|
Balance at September 30, 2016 |
|
$ |
30 |
|
|
Additions for current year tax positions |
|
|
2 |
|
|
Additions for prior year tax positions |
|
|
1 |
|
|
Subtractions for prior year tax positions |
|
|
(14 |
) |
|
Balance at September 30, 2017 |
|
$ |
19 |
|
Included in the total unrecognized tax benefits at September 30, 2017 and 2016 are $19 million and $30 million, respectively, that if recognized, would favorably affect the effective income tax rate. The Company’s gross unrecognized tax benefits decreased during the year ended September 30, 2017 by $14 million due primarily to the finalization of an agreement with the United Kingdom (“U.K.”) tax authorities. The Company has determined that is reasonably possible that its existing reserve for uncertain tax positions as of September 30, 2017 could decrease by up to approximately $3 million related to various ongoing audits and settlement discussions in various foreign jurisdictions.
The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company has completed tax audits in the U.S. for tax years ended through September 30, 2013, in the U.K. for the tax years ending through September 30, 2013, in Canada for tax years ended through September 30, 2013, in Germany for the tax years ending through September 30, 2009 and in Japan for the tax years ending through September 30, 2007. The Company is at various stages in the tax audit process in certain foreign and local jurisdictions.