HEWLETT PACKARD CO | 2013 | FY |

Note 13: Taxes on Earnings

• Provision for Taxes

        The domestic and foreign components of earnings (loss) before taxes were as follows for the following fiscal years ended October 31:

        The provision for (benefit from) taxes on earnings was as follows for the following fiscal years ended October 31:

        There was no net excess tax benefit recorded as a result of the exercise of employee stock options and other employee stock programs in fiscal 2013. Deficits of approximately $149 million and $175 million were recorded as a decrease in stockholders' equity in fiscal 2013 and 2012, respectively, and excess tax benefits of $128 million were recorded in fiscal 2011.

        The differences between the U.S. federal statutory income tax rate and HP's effective tax rate were as follows for the following fiscal years ended October 31:

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

        In fiscal 2013, HP recorded $471 million of net income tax charges related to items unique to the year. These amounts included $214 million of net increases to valuation allowances, $406 million of tax charges for adjustments to uncertain tax positions and the settlement of tax audit matters and $47 million of tax charges for various prior period adjustments. In addition, HP recorded $146 million of tax benefits from adjustments to prior year foreign income tax accruals and a tax benefit of $50 million arising from the retroactive research and development credit resulting from the American Taxpayer Relief Act of 2012, which was signed into law in January 2013.

        In fiscal 2012, HP recorded a $1.3 billion income tax charge to record valuation allowances on certain U.S. deferred tax assets related to the enterprise services business, which was unique to the year. Other unique items included charges of $297 million for various foreign valuation allowances, as well as $26 million of income tax benefits related to adjustments to prior year foreign income tax accruals, settlement of tax audit matters, and miscellaneous other items.

        In fiscal 2011, HP recorded $325 million of net income tax charges related to items unique to the year. These amounts included $468 million of tax charges for increases to foreign and state valuation allowances, offset by $78 million of income tax benefits for adjustments to prior year foreign income tax accruals, $63 million of income tax benefits for uncertain tax position reserve adjustments and settlement of tax audit matters, and $2 million of tax benefits associated with miscellaneous prior period items.

        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 2024. The gross income tax benefits attributable to these actions and investments were estimated to be $827 million ($0.42 diluted net earnings per share) in fiscal 2013, $900 million ($0.46 diluted net earnings per share) in fiscal 2012 and $1.3 billion ($0.62 diluted net earnings per share) in fiscal 2011. 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:

        Up to $1.9 billion, $1.4 billion and $1.1 billion of HP's unrecognized tax benefits at October 31, 2013, 2012 and 2011, respectively, would affect HP's effective tax rate if realized.

        HP recognizes interest income from favorable settlements and income tax receivables and interest expense and penalties accrued on unrecognized tax benefits within income tax expense. As of October 31, 2013, HP had accrued $196 million for interest and penalties.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $1.1 billion within the next 12 months.

        HP is subject to income tax in the United States and approximately 80 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 state and foreign tax authorities. The IRS is conducting an audit of HP's 2009, 2010 and 2011 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's Reports ("RAR") for its fiscal 2001, 2002, 2006, 2007 and 2008 tax years. The proposed IRS adjustments for these tax years 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 $446 million.

        HP has filed petitions with the U.S. Tax Court regarding certain proposed IRS adjustments regarding tax years 1999 through 2003 and is continuing to contest additional adjustments proposed by the IRS for other tax years. The U.S. Tax Court ruled in May 2012 against HP regarding one of the IRS adjustments. HP intends to appeal the decision.

        Tax years of HP's U.S. group of subsidiaries providing enterprise services through 2002 have been audited by the IRS, and all proposed adjustments have been resolved. RARs have been received for exam years 2003, 2004, 2005, 2006, 2007 and the short period ended August 26, 2008, proposing total tax deficiencies of $320 million. HP is contesting certain of these issues.

        The IRS began an audit in 2013 of the 2010 income tax return of HP's U.S. group of subsidiaries providing enterprise services, and has issued an RAR for the short period ended October 31, 2008 and the period ending October 31, 2009 proposing a total tax deficiency of $62 million. HP is contesting certain of these issues.

        With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP is subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009. The relevant taxing authority has proposed an assessment of approximately $680 million. HP is contesting this proposed assessment.

        HP believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from IRS, foreign and state tax audit matters.

        HP has not provided for U.S. federal income and foreign withholding taxes on $38.2 billion of undistributed earnings from non-U.S. operations as of October 31, 2013 because HP intends to reinvest such earnings indefinitely outside of the United States. 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 it 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 for the following fiscal years ended October 31:

        Current and long-term deferred tax assets and liabilities are presented in the Consolidated Balance Sheets as follows for the following fiscal years ended October 31:

        As of October 31, 2013, HP had $1.4 billion, $5.6 billion and $30.8 billion of federal, state and foreign net operating loss carryforwards, respectively. Amounts included in each of these respective totals will begin to expire in fiscal 2014. HP also has a capital loss carryforward of approximately $272 million which will expire in fiscal 2015. HP has provided a valuation allowance of $162 million for deferred tax assets related to state net operating losses, $104 million for deferred tax assets related to capital loss carryforwards and $8.9 billion for deferred tax assets related to foreign net operating loss carryforwards that HP does not expect to realize.

        As of October 31, 2012, HP had $2.9 billion, $6.2 billion and $25.7 billion of federal, state and foreign net operating loss carryforwards, respectively. HP had a capital loss carryforward of approximately $286 million at October 31, 2012. HP provided a valuation allowance of $166 million for deferred tax assets related to federal and state net operating losses, $104 million for deferred tax assets related to capital loss carryforwards and $7.6 billion for deferred tax assets related to foreign net operating loss carryforwards that HP did not expect to realize as of October 31, 2012.

        As of October 31, 2013, HP had recorded deferred tax assets for various tax credit carryforwards as follows:

• Deferred Tax Asset Valuation Allowance

        Valuation allowance balance as of October 31, 2013, 2012 and 2011 and changes during fiscal 2013, 2012 and 2011 were as follows:

        Total valuation allowances increased by $1.2 billion in fiscal 2013 associated primarily with foreign net operating losses. Total valuation allowances increased by $1.1 billion in fiscal 2012 associated primarily with the net effects of increases of $1.3 billion, $317 million, and $669 million, respectively, in valuation allowances on certain U.S. deferred tax assets related to legal entities within the enterprise services business, other U.S. deferred tax assets, and certain foreign deferred tax assets, respectively, and a $1.1 billion decrease in foreign valuation allowance attributable to foreign currency translation.