Entity information:
INCOME TAXES
The domestic and foreign components of income before taxes are:
 
Year Ended October 31,
 
2017
 
2016
 
2015
 
(in millions)
U.S. operations
$
(147
)
 
$
(30
)
 
$
(6
)
Non-U.S. operations
326

 
396

 
394

Total income before taxes
$
179

 
$
366

 
$
388


The provision (benefit) for income taxes is comprised of:
 
Year Ended October 31,
 
2017
 
2016
 
2015
 
(in millions)
U.S. federal taxes:
 
 
 
 
 
Current
$
21

 
$
(15
)
 
$
12

Deferred
(56
)
 
(13
)
 
(7
)
Non-U.S. taxes:
 
 
 
 
 
Current
101

 
32

 
24

Deferred
9

 
28

 
(158
)
State taxes, net of federal benefit:
 
 
 
 
 
Current
2

 
(1
)
 
1

Deferred
—

 
—

 
3

Total provision (benefit) for income taxes
$
77

 
$
31

 
$
(125
)

The income tax provision does not reflect potential future tax savings resulting from excess deductions associated with our various share-based award plans.
The significant components of deferred tax assets and deferred tax liabilities included in the consolidated balance sheet are:
 
October 31,
 
2017
 
2016
 
Deferred
Tax Assets
 
Deferred Tax
Liabilities
 
Deferred
Tax Assets
 
Deferred Tax
Liabilities
 
(in millions)
Inventory
$
16

 
$
(3
)
 
$
14

 
$
(1
)
Intangibles
55

 
(158
)
 
88

 
(15
)
Property, plant and equipment
16

 
(20
)
 
15

 
(13
)
Warranty reserves
17

 
(1
)
 
17

 
—

Pension benefits
90

 
(58
)
 
110

 
(3
)
Employee benefits, other than retirement
29

 
(1
)
 
25

 
—

Net operating loss, capital loss, and credit carryforwards
257

 
—

 
165

 
—

Unremitted earnings of foreign subsidiaries
—

 
(305
)
 
—

 
(38
)
Share-based compensation
26

 
—

 
23

 
—

Deferred revenue
24

 
(3
)
 
38

 
(1
)
Other
10

 
(10
)
 
10

 
(5
)
Subtotal
540

 
(559
)
 
505

 
(76
)
Tax valuation allowance
(63
)
 
—

 
(38
)
 
—

Total deferred tax assets or deferred tax liabilities
$
477

 
$
(559
)
 
$
467

 
$
(76
)

The increase in 2017 as compared to 2016 for the deferred tax liability primarily relates to an increase in unremitted earnings of foreign subsidiaries from the Ixia acquisition, Ixia and ScienLab deferred tax liabilities established for acquired intangible assets which are not deductible for tax purposes when amortized, and decreases in future pension liabilities primarily in Japan and the U.K. This is offset by an increase in the deferred tax asset for net operating losses primarily in Singapore and credit carryforwards primarily in the U.S.
Excess foreign tax credits associated with unremitted earnings are not recorded as an asset as they do not represent a separate deferred tax asset until earnings are remitted. However, unremitted foreign taxes reduce deferred tax liabilities associated with outside basis differences related to the investment in a foreign subsidiary to the extent the credit reduces a deferred tax liability of the investment.
We record U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the U.S. For the fiscal year ending October 31, 2017, we increased our deferred tax liability to $305 million for the U.S. tax liability expected to be imposed upon the repatriation of unremitted foreign earnings that are not considered indefinitely reinvested. As of October 31, 2017, the cumulative amount of undistributed earnings considered indefinitely reinvested was $1.5 billion. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to indefinitely reinvest those earnings in the company’s foreign operations. Because of the availability of U.S. foreign tax credits, the determination of the unrecognized deferred tax liability on these earnings is not practicable.
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis.
The $63 million valuation allowance as of October 31, 2017 is mainly related to capital losses in the U.K., California research credits, and net operating losses in the U.K. and Netherlands. The $38 million valuation allowance as of October 31, 2016 was mainly related to deferred tax assets for capital losses in the U.K. and net operating losses in the Netherlands. The increase in valuation allowance from October 31, 2016 to October 31, 2017 is primarily due to an increase in the valuation allowance on California research credits and U.S. state net operating losses that were both acquired in the Ixia acquisition. We will maintain a valuation allowance until sufficient positive evidence exists to support reversal.
At October 31, 2017, we had U.S. federal net operating loss carryforwards of approximately $10 million, U.S. capital loss carryforwards of approximately $3 million, and U.S. state net operating loss carryforwards, primarily acquired in the Ixia acquisition, of approximately $91 million. The U.S. federal net operating losses will expire in years beginning 2028 through 2030 if not utilized and capital loss carryforwards will expire in beginning in 2018 if not utilized. The U.S. state net operating loss carryforwards will begin to expire in 2018 if not utilized. At October 31, 2017, we had U.S. foreign tax credit carryforwards of approximately $43 million, U.S. research credit carryfowards of approximately $40 million, U.S. AMT carryfowards of $1 million, and California research credits of approximately $15 million. The U.S. federal credits begin to expire in 2025, if not utilized. The California research credits can be carried forward indefinitely. The U.S. federal and state net operating loss and tax credit carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. At October 31, 2017, we also had foreign net operating loss carryforwards of approximately $2,608 million. Of this foreign loss, $112 million will expire in years beginning 2023 through 2026 if not utilized. The remaining $2,496 million has an indefinite life. At October 31, 2017, we had foreign capital loss carryforwards of approximately $152 million with an indefinite life and $3 million of tax credits in foreign jurisdictions with an indefinite life. Some of the foreign losses are subject to annual loss limitation rules. These annual loss limitations in foreign jurisdictions may result in the expiration or reduced utilization of the net operating losses.
The authoritative guidance prohibits recognition of a deferred tax asset for excess tax benefits related to stock and stock option plans that have not yet been realized through reduction in income taxes payable. Such unrecognized deferred tax benefit totals $6 million as of October 31, 2017 and will be accounted for as a credit to retained earnings, upon the adoption of ASU 2016-09 on November 1, 2017. We have recognized approximately $2 million as a credit to shareholders' equity for cumulative excess tax benefits related to stock and stock option plans that have been realized as of October 31, 2017.
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
 
Year Ended October 31,
 
2017
 
2016
 
2015
 
(in millions)
Profit before tax times statutory rate
$
63

 
$
128

 
$
136

State income taxes, net of federal benefit
1

 
(1
)
 
3

Non-U.S. income taxed at different rates
(83
)
 
(88
)
 
(107
)
Singapore tax incentives through amortization
—

 
—

 
(219
)
Retroactive Singapore tax rate incentive impact
—

 
—

 
(15
)
Repatriation of foreign earnings
—

 
(45
)
 
—

Foreign earnings not considered indefinitely reinvested
3

 
39

 
33

Change in unrecognized tax benefits
23

 
1

 
33

U.S. research credits
(7
)
 
(5
)
 
(1
)
Share-based compensation adjustment for non-U.S. employees
6

 
4

 
4

Deemed repatriation of foreign earnings
5

 
3

 
3

Malaysia tax assessment
68

 
—

 
—

Other, net
(2
)
 
(5
)
 
5

Provision (benefit) for income taxes
$
77

 
$
31

 
$
(125
)
Effective tax rate
43
%
 
8
%
 
(32
)%

We benefit from tax incentives in several different jurisdictions, most significantly in Singapore, and several jurisdictions have granted tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific types of income in those jurisdictions. The tax incentives are due for renewal between 2024 and 2025. The impact of the tax incentives decreased income taxes by $49 million, $34 million and $250 million in 2017, 2016, and 2015, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.27, $0.20 and $1.46 in 2017, 2016 and 2015, respectively. The increase in the benefit from the tax incentive from 2016 to 2017 is primarily due to an increase in pre-tax book income earned in Singapore. Of the $1.46 benefit of the tax incentives on net income per share (diluted) in 2015, $1.21 benefit relates to one- time items due to the retroactive granting of the Singapore tax incentives.
For 2017, the effective tax rate was 43 percent, which is higher than the U.S. statutory rate primarily due to the payment of a prior year Malaysia tax assessment of $68 million, including tax and penalties, which we are currently in the process of appealing to the Special Commissioners of Income Tax (“SCIT”) in Malaysia.
For 2016, the effective tax rate was 8 percent, which is lower than the U.S. statutory rate primarily due to a higher percentage of earnings in the non-U.S. jurisdictions taxed at lower statutory tax rates. Also, the tax rate was lower than the U.S. statutory rate due to the net tax benefit of $45 million resulting from the repatriation of earnings from Japan, which includes a U.S. tax expense of $27 million offset by $72 million of foreign tax credits recorded in connection with the repatriation.
For 2015, the effective tax rate was a benefit of 32 percent, which is lower than the U.S. statutory rate primarily due to the retroactive benefit of two tax incentives in Singapore approved during 2015. Also, the tax rate was lower than the U.S. statutory rate due to a higher percentage of earnings in the non-U.S. jurisdictions taxed at lower statutory tax rates.
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows for the years 2017 and 2016:
 
October 31,
 
2017
 
2016
 
(in millions)
Current income tax assets (included within other current assets)
$
40

 
$
29

Current income tax liabilities (included within income and other taxes payable)
(7
)
 
(19
)
Long-term income tax assets (included within other assets)
—

 
6

Long-term income tax liabilities (included within other long-term liabilities)
(39
)
 
(21
)
Total
$
(6
)
 
$
(5
)

The calculation of our tax liabilities involves uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
 
2017
 
2016
 
2015
 
(in millions)
Balance, beginning of year
$
51

 
$
50

 
$
129

Reductions due to spin transaction
—

 
—

 
(113
)
Additions due to acquisition
22

 
—

 
2

Additions for tax positions related to the current year
31

 
5

 
34

Additions for tax positions from prior years
52

 
1

 
2

Reductions for tax positions from prior years
(9
)
 
(4
)
 
(4
)
Settlements with taxing authorities
—

 
—

 
—

Statute of limitations expirations
(1
)
 
(1
)
 
—

Balance, end of year
$
146

 
$
51

 
$
50


As of October 31, 2017, we had $166 million of unrecognized tax benefits including interest and penalties which, if recognized, would affect our effective tax rate. However, approximately $4 million of the unrecognized tax benefits were related to state income tax positions which, if recognized, would be in the form of a deferred tax asset that would likely not affect our effective tax rate due to a valuation allowance. Under the terms of the agreement between Agilent and Keysight pertaining to tax matters, as finalized at the time of separation, the unrecognized tax benefits as of separation differed from the amount allocated using the separate return methodology, therefore, a $113 million reduction in the unrecognized tax benefits occurred as of November 1, 2014 upon separation.
We recognized a tax expense of $18 million, $1 million, and zero of interest and penalties related to unrecognized tax benefits in 2017, 2016 and 2015, respectively. Cumulatively, interest and penalties accrued as of the end of October 31, 2017, 2016 and 2015 were $20 million, $2 million and $1 million, respectively. The increase in interest and penalties from October 31, 2016 to October 31, 2017 is primarily due to $18 million of penalties paid for the Malaysia tax assessment relating to the 2008 tax year.
For the majority of our entities, the open tax years for the IRS, state and most foreign audit authorities are from August 1, 2014 through the current tax year. For certain foreign entities, the tax years generally remain open, at most, back to the year 2007. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
The company is being audited in Malaysia for the 2008 tax year. Although this tax year pre-dates our spin-off from Agilent, pursuant to the agreement between Agilent and Keysight pertaining to tax matters, as finalized at the time of separation, for certain entities including Malaysia, any historical tax liability is the responsibility of Keysight. In the fourth quarter of this year, Keysight paid income taxes and penalties of $68 million on gains related to intellectual property rights, although we are currently in the process of appealing to the Special Commissioners of Income Tax (“SCIT”) in Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia is closed and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company.