Income Taxes
For purposes of these Consolidated and Combined Financial Statements, the taxes prior to the Spin-Off were computed and reported using the separate return method. Use of the separate return method may result in significant differences when the sum of the amounts allocated to standalone tax provisions are compared with amounts presented in historical combined financial statements. Furthermore, certain tax attributes (e.g., state tax credit carry forwards) reflected in the historical combined financial statements may not have existed at the standalone Computer Sciences GS Business level.
In general, prior to the Spin-Off, the taxable income of the Computer Sciences GS Business entities was included in CSC’s consolidated tax returns, where applicable in jurisdictions around the world. As such, separate income tax returns were not prepared for many the Computer Sciences GS Business entities. Consequently, income taxes payable for periods prior to the Spin-Off are deemed to have been settled with CSC.
The sources of income from continuing operations before taxes, classified between domestic entities and those entities domiciled outside of the U.S., are as follows: |
| | | | | | | | | | | |
| Fiscal Year Ended |
| March 31, 2017 | | April 1, 2016 | | April 3, 2015 |
Domestic entities | $ | 494 |
| | $ | 142 |
| | $ | 416 |
|
Entities outside the U.S. | 1 |
| | 7 |
| | 13 |
|
Total | $ | 495 |
| | $ | 149 |
| | $ | 429 |
|
The components of the provision for income taxes from continuing operations were: |
| | | | | | | | | | | |
| Fiscal Year Ended |
| March 31, 2017 | | April 1, 2016 | | April 3, 2015 |
Current: | | | | | |
Federal | $ | 55 |
| | $ | 79 |
| | $ | 132 |
|
State | 16 |
| | 12 |
| | 27 |
|
Foreign | 1 |
| | 2 |
| | 5 |
|
| 72 |
| | 93 |
| | 164 |
|
| | | | | |
Deferred: | | | | | |
Federal | 91 |
| | (42 | ) | | (4 | ) |
State | 16 |
| | (5 | ) | | 1 |
|
| 107 |
| | (47 | ) | | (3 | ) |
Total income tax expense | $ | 179 |
| | $ | 46 |
| | $ | 161 |
|
The major elements contributing to the difference between the U.S. federal statutory tax rate of 35% and the effective tax rate (“ETR”) for continuing operations are as follows: |
| | | | | | | | |
| Fiscal Year Ended |
| March 31, 2017 | | April 1, 2016 | | April 3, 2015 |
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income tax, net of federal tax | 3.9 |
| | 3.7 |
| | 4.2 |
|
Noncontrolling interest | (0.9 | ) | | (3.7 | ) | | (1.1 | ) |
Dividend paid to Employee Stock Ownership Plan | (0.1 | ) | | (9.5 | ) | | 0.0 |
|
Transaction Costs | — |
| | 5.6 |
| | 0.1 |
|
Other items, net | (1.7 | ) | | (0.2 | ) | | (0.6 | ) |
Effective tax rate | 36.2 | % | | 30.9 | % | | 37.6 | % |
The significant components of deferred tax assets and liabilities are as follows: |
| | | | | | | |
| As of |
| March 31, 2017 | | April 1, 2016 |
Deferred tax assets | | | |
Employee benefits | $ | 211 |
| | $ | 282 |
|
Accrued expenses | 19 |
| | 22 |
|
Net operating loss and tax credit carry forwards | 12 |
| | 65 |
|
Other assets | 1 |
| | 5 |
|
Total deferred tax assets | 243 |
| | 374 |
|
Valuation allowance | (11 | ) | | (9 | ) |
Net deferred tax assets | $ | 232 |
| | $ | 365 |
|
| | | |
Deferred tax liabilities | | | |
Depreciation and amortization | $ | (392 | ) | | $ | (403 | ) |
Contract accounting | (47 | ) | | (68 | ) |
Investment basis differences | (16 | ) | | (8 | ) |
Deferred project costs | (30 | ) | | (33 | ) |
Prepaid expenses | (6 | ) | | (16 | ) |
Other Liabilities | (13 | ) | | — |
|
Total deferred tax liabilities | (504 | ) | | (528 | ) |
Net deferred tax liabilities | $ | (272 | ) | | $ | (163 | ) |
Historically, it has been the practice and intention of CSRA to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of March 31, 2017 the cumulative undistributed positive earnings of the Company's foreign subsidiaries and the tax cost of repatriating the cumulative undistributed taxable earnings of these foreign subsidiaries to the U.S. is immaterial. Beginning in fiscal year 2018, CSRA is no longer permanently reinvested with respect to its non-U.S. subsidiaries.
As of March 31, 2017, CSRA had a state net operating loss (“NOL”) carryforward for tax purposes of $30.4, which expires in 2036. As of April 1, 2016, CSRA had federal and state net operating loss (“NOL”) carryforwards for tax purposes of $115.5 and $131.6, respectively. These losses were materially incurred by SRA prior to the acquisition. CSRA had available foreign NOL carryforwards totaling approximately $1.8 and $2.0 as of March 31, 2017 and April 1, 2016, respectively. CSRA has a valuation allowance equal to the full amount of its foreign NOL carryforwards. CSRA did not have a federal credit carryforward for fiscal year 2017 but had a federal credit carryforward of $11.0 as of April 1, 2016. CSRA also did not have a federal Alternative Minimum Tax credit carryforward during fiscal year 2017 but had a federal Alternative Minimum Tax credit carryforward of $0.7 as of April 1, 2016. CSRA had state credit carryforwards of $15.7 and $12.7 as of March 31, 2017 and April 1, 2016, respectively, which expire at various dates through 2026. CSRA has established a valuation allowance equal to the full amount of the state tax credit carryforwards because CSRA believes it is more likely than not that the state tax credit carryforwards will not be utilized in future carryforward periods.
Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. Valuation allowances are evaluated periodically and are subject to change in each future reporting period as a result of changes in various factors. In determining whether the deferred tax assets are realizable, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies, and recent financial operations.
Upon audit, taxing authorities may challenge all or part of an uncertain income tax position. The Computer Sciences GS Business has no history of tax audits on a standalone basis. The Company’s effective income tax rate reflects changes to the tax reserves that management considers appropriate. It is reasonably possible that changes to the Computer Sciences GS Business’s global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that could occur within the next twelve months is not expected to be material.
Our Tax Matters Agreement, entered into with CSC in connection with the Spin-Off, states each company’s rights and responsibilities with respect to payment of taxes, tax return filings and control of tax examinations. Except for historic SRA tax liabilities and certain separate state liabilities, we are generally only responsible for taxes allocable to periods (or portions of periods) beginning after the Spin-Off. Prior periods included uncertain tax positions allocated from CSC to CSRA on a stand-alone basis that are not reflected in the post-Spin-Off period.
CSRA is subject to U.S. federal income tax, various state and local taxes, and international income taxes in numerous jurisdictions. As of March 31, 2017 and April 1, 2016, CSRA’s liability for uncertain tax positions was $45.4 and $39.0, respectively, including interest of $0.5 and $0.2, respectively.
The following table summarizes the activity related to CSRA’s uncertain tax positions (excluding interest and penalties and related tax attributes): |
| | | | | | | | | | | |
| Fiscal Year Ended |
| March 31, 2017 | | April 1, 2016 | | April 3, 2015 |
Balance, at beginning of year | $ | 39 |
| | $ | 24 |
| | $ | 25 |
|
Net increase related to Spin | — |
| | 7 |
| | — |
|
Increase related to acquisition | — |
| | 7 |
| | — |
|
Gross increases related to prior year tax positions | 5 |
| | 1 |
| | 1 |
|
Gross decreases related to prior year tax positions | — |
| | — |
| | (3 | ) |
Gross increases related to current year tax positions | 1 |
| | — |
| | 1 |
|
Balance, at end of year | $ | 45 |
| | $ | 39 |
| | $ | 24 |
|
CSRA’s liability for uncertain tax positions at March 31, 2017, April 1, 2016 and April 3, 2015, include $45.4, and $39.0 and $8.2, respectively, related to amounts that, if recognized, would affect the effective tax rate (excluding related interest and penalties).
During the year ended March 31, 2017, CSRA had a net increase in accrued interest of $0.3 ($0.2 net of tax) and as of March 31, 2017, has recognized a liability for accrued interest of $0.5 ($0.3 net of tax). During the year ended April 1, 2016, CSRA had a net reduction in accrued interest of $0.5 ($0.3 net of tax) and as of April 1, 2016, recognized a liability for accrued interest of $0.2 ($0.1 net of tax).
Tax Examination Status
CSRA is currently under examination in several tax jurisdictions. As a result of the Mergers, the tax years that remain subject to examination in certain of CSRA’s major tax jurisdictions are as follows: |
| | |
Jurisdiction: | | Tax Years that Remain
Subject to Examination
(Fiscal Year Ending): |
United States - federal | | 2008 and forward |
United States - various states | | 2008 and forward |
One disputed matter remains unresolved in connection with the Internal Revenue Service’s (“IRS”) examination of SRA’s federal income tax return for 2011. The disputed matter concerns a $136.7 worthless stock deduction for a disposed subsidiary in that period. CSRA believes its tax positions are appropriate and is prepared to defend them vigorously. Furthermore, a tax insurance policy obtained pursuant to the terms of the Merger Agreement limits SRA’s exposure related to this position. It is reasonably possible that changes to CSRA’s unrecognized tax benefits could be significant; however, due to the uncertainty regarding the IRS administrative appeals process and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next 12 months is not expected to be material.