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INCOME TAXES | 12 Months Ended
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Oct. 31, 2020
Income Tax Disclosure [Abstract] |
INCOME TAXES | 6. INCOME TAXES The domestic and foreign components of income (loss) before taxes are:
| Year Ended October 31,
| 2020 |  | 2019 |  | 2018
| (in millions)
U.S. operations | $ | 68 |  |  | $ | 20 |  |  | $ | (532 | )
Non-U.S. operations | 693 |  |  | 695 |  |  | 121 |
Total income (loss) before taxes | $ | 761 |  |  | $ | 715 |  |  | $ | (411 | )
The provision (benefit) for income taxes is comprised of:
| Year Ended October 31,
| 2020 |  | 2019 |  | 2018
| (in millions)
U.S. federal taxes: |  |  |  |  |
Current | $ | 16 |  |  | $ | 10 |  |  | $ | 131 |
Deferred | 1 |  |  | (8 | ) |  | 46 |
Non-U.S. taxes: |  |  |  |  |
Current | 77 |  |  | 91 |  |  | 75 |
Deferred | 36 |  |  | 14 |  |  | (832 | )
State taxes, net of federal benefit: |  |  |  |  |
Current | — |  |  | (5 | ) |  | 7 |
Deferred | 4 |  |  | (8 | ) |  | (3 | )
Total provision (benefit) for income taxes | $ | 134 |  |  | $ | 94 |  |  | $ | (576 | )
The significant components of deferred tax assets and deferred tax liabilities included in the consolidated balance sheet are:
| October 31,
| 2020 |  | 2019
| Deferred Tax Assets |  | Deferred Tax Liabilities |  | Deferred Tax Assets |  | Deferred Tax Liabilities
| (in millions)
Inventory | $ | 10 |  |  | $ | — |  |  | $ | 10 |  |  | $ | (2 | )
Intangibles | 597 |  |  | (38 | ) |  | 630 |  |  | (38 | )
Property, plant and equipment | 21 |  |  | (31 | ) |  | 17 |  |  | (24 | )
Warranty reserves | 8 |  |  | (1 | ) |  | 9 |  |  | (1 | )
Pension benefits | 90 |  |  | (84 | ) |  | 86 |  |  | (76 | )
Employee benefits, other than retirement | 28 |  |  | (1 | ) |  | 29 |  |  | (1 | )
Net operating loss, capital loss, and credit carryforwards | 286 |  |  | — |  |  | 283 |  |  | — |
Unremitted earnings of foreign subsidiaries | — |  |  | (37 | ) |  | — |  |  | (12 | )
Share-based compensation | 16 |  |  | — |  |  | 15 |  |  | — |
Deferred revenue | 32 |  |  | (3 | ) |  | 25 |  |  | (5 | )
Other | 10 |  |  | (11 | ) |  | 14 |  |  | (12 | )
Subtotal | 1,098 |  |  | (206 | ) |  | 1,118 |  |  | (171 | )
Tax valuation allowance | (238 | ) |  | — |  |  | (240 | ) |  | — |
Total deferred tax assets or deferred tax liabilities | $ | 860 |  |  | $ | (206 | ) |  | $ | 878 |  |  | $ | (171 | )
The decrease in deferred tax assets in 2020 as compared to 2019 primarily relates to a decrease in intangible assets in Singapore due to amortization, partially offset by increases in U.K. net operating losses. The increase in deferred tax liabilities in 2020 as compared to 2019 primarily relates to an increase in taxes on unremitted earnings of foreign subsidiaries and a decrease in future pension liabilities in Japan. We have revised the 2019 deferred tax assets in the table above to increase by $167 million both the net operating loss deferred tax asset balance and offsetting valuation allowance for a net change of zero. This change is the result of the correction of an error that has no impact on the balance sheet or statement of operations. Accordingly, we have concluded that this 2019 error is not material. As of October 31, 2020, there was a deferred tax liability of $37 million for the tax liability expected to be imposed upon the repatriation of unremitted foreign earnings that are not considered indefinitely reinvested. As of October 31, 2020, the cumulative amount of undistributed earnings considered indefinitely reinvested was $105 million. 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. The amount of the unrecognized deferred tax liability on the indefinitely reinvested earnings was $4 million. 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 $238 million and $240 million valuation allowances as of October 31, 2020 and 2019, respectively, are mainly related to net operating losses in Luxembourg, Netherlands and the U.K., capital losses in the U.K., and California research credits. The decrease in valuation allowance from October 31, 2019 to October 31, 2020 is primarily due to a decrease in valuation allowance on Netherlands net operating losses. We will maintain a valuation allowance until sufficient positive evidence exists to support reversal. At October 31, 2020, we had U.S. federal net operating loss carryforwards of approximately $7 million and U.S. state net operating loss carryforwards, primarily acquired in the Ixia acquisition, of approximately $58 million. The U.S. federal net operating losses will expire in years beginning 2027 through 2029 if not utilized. Of the total U.S. state net operating loss carryforwards, $51 million was acquired in the Ixia acquisition. The U.S. state net operating loss carryforwards will begin to expire in 2029, if not utilized. At October 31, 2020, we had California research credit carryforwards of approximately $19 million. The California research credits can be carried forward indefinitely. The U.S. federal and state net operating losses and tax credit carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. At October 31, 2020, we also had foreign net operating loss carryforwards of approximately $979 million. Of this total foreign loss, $93 million will expire in years beginning 2023 through 2034 if not utilized, and $670 million will expire in years beginning 2035 through 2037 if not utilized. The remaining $216 million has an indefinite life. Of the $979 million of foreign net operating loss carryforward, $758 million is subject to a valuation allowance. At October 31, 2020, we had foreign capital loss carryforwards of approximately $145 million with an indefinite life and $4 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 differences between the U.S. federal statutory income tax rate and our effective tax rate are:
| Year Ended October 31,
| 2020 |  | 2019 |  | 2018
| (in millions)
Profit(loss) before tax times statutory rate | $ | 160 |  |  | $ | 150 |  |  | $ | (96 | )
State income taxes, net of federal benefit | 4 |  |  | (6 | ) |  | 2 |
Current U.S. tax on foreign earnings | 39 |  |  | 48 |  |  | 210 |
Deferred taxes on foreign earnings not considered indefinitely reinvested | 8 |  |  | 2 |  |  | (300 | )
U.S. benefit on foreign sales | (8 | ) |  | (13 | ) |  | — |
U.S. research credits | (14 | ) |  | (12 | ) |  | (10 | )
Non-U.S. income taxed at different rates | (64 | ) |  | (70 | ) |  | 16 |
Change in unrecognized tax benefits | 8 |  |  | (12 | ) |  | 86 |
Share-based compensation | (7 | ) |  | (5 | ) |  | (2 | )
Officers’ compensation | 5 |  |  | 4 |  |  | 2 |
Singapore tax incentive and amortization | — |  |  | — |  |  | (591 | )
Goodwill impairment | — |  |  | — |  |  | 99 |
U.S. federal statutory tax rate change | — |  |  | — |  |  | 10 |
Other, net | 3 |  |  | 8 |  |  | (2 | )
Provision (benefit) for income taxes | $ | 134 |  |  | $ | 94 |  |  | $ | (576 | )
Effective tax rate | 18 | % |  | 13 | % |  | 140 | %
We benefit from tax incentives in several jurisdictions, most significantly in Singapore, that have granted us 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 thresholds of investments and employment or specific types of income in those jurisdictions. Singapore tax incentives are due for renewal in 2024. The incentive in Malaysia was due for renewal in 2020 for the period from 2021 to 2025. Keysight has received confirmation from the Malaysian Investment Development Authority that this incentive will be renewed for the period from 2021 to 2025. The impact of the tax incentives decreased income taxes by $53 million, $47 million and $567 million in 2020, 2019 and 2018, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.28, $0.25 and $2.97 in 2020, 2019 and 2018, respectively. The decrease in the tax benefit from 2018 to 2019 is primarily due to the one-time impacts included in 2018 of the Singapore restructuring and tax incentive modifications that were completed in that year in response to Singapore tax law changes. Of the $2.97 benefit from the tax incentives on net income per share (diluted) in 2018, $2.75 relates to one-time items resulting from the Singapore restructuring. For 2020, the effective tax rate was 18 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. For 2019, the effective tax rate was 13 percent, which is lower than the U.S. statutory rate primarily due a higher percentage of earnings in the non-U.S. jurisdictions taxed at lower statutory rates. The increase in the effective tax rate from 2019 to 2020 is primarily due to a one-time rate benefit from a release of tax reserves in 2019 and an increase in 2020 of taxes in non-U.S. jurisdictions due to acquired entity integration offset by a decrease in U.S. taxes on non-U.S. earnings. For 2018, the effective tax rate was 140 percent, which is higher than the U.S. statutory rate primarily due to the impact of U.S. tax law changes, the Singapore restructuring and tax incentive modifications completed in 2018 in response to Singapore tax law changes, and the tax impact of goodwill impairment. The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows for the years 2020 and 2019:
| October 31,
| 2020 |  | 2019
| (in millions)
Current income tax assets (included within other current assets) | $ | 53 |  |  | $ | 40 |
Current income tax liabilities (included within income and other taxes payable) | (40 | ) |  | (35 | )
Long-term income tax assets (included within other assets) | — |  |  | — |
Long-term income tax liabilities (included within other long-term liabilities) | (212 | ) |  | (198 | )
Total | $ | (199 | ) |  | $ | (193 | )
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 the payment of these additional 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. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the consolidated statements of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet. The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
| 2020 |  | 2019 |  | 2018
| (in millions)
Gross Balance, beginning of year | $ | 226 |  |  | $ | 234 |  |  | $ | 146 |
Additions due to acquisition | — |  |  | 9 |  |  | — |
Additions for tax positions related to the current year | 13 |  |  | 18 |  |  | 100 |
Additions for tax positions from prior years | 2 |  |  | — |  |  | 2 |
Reductions for tax positions from prior years | (1 | ) |  | (32 | ) |  | (1 | )
Settlements with taxing authorities | — |  |  | — |  |  | (12 | )
Statute of limitations expirations | (3 | ) |  | (3 | ) |  | (1 | )
Gross Balance, end of year | $ | 237 |  |  | $ | 226 |  |  | $ | 234 |
As of October 31, 2020, the total amount of gross unrecognized tax benefits, excluding interest and penalties, was $237 million, that, if recognized, $221 million would impact our effective tax rate. However, approximately $5 million of the unrecognized tax benefits were related to acquisitions, which if recognized within certain agreed upon time periods, would be offset due to an indemnification asset recognized. As of October 31, 2019, the total amount of gross unrecognized tax benefits, excluding interest and penalties, was $226 million, that if recognized, $216 million would impact our effective tax rate. As of October 31, 2018, the total amount of gross unrecognized tax benefits was $234 million, that if recognized, $227 million would impact our effective tax rate. Cumulatively, interest and penalties accrued as of the end of October 31, 2020, 2019 and 2018 were $33 million, $28 million and $22 million, respectively. We recognized tax expense of $5 million, $2 million, and $2 million of interest and penalties related to unrecognized tax benefits in 2020, 2019 and 2018, respectively. We recorded an additional $4 million of interest and penalties related to unrecognized tax benefits in 2019 through purchase accounting related to acquisitions. The open tax years for the IRS and most states are from November 1, 2015 through the current tax year. Keysight’s 2018 U.S. federal income tax return is currently under audit by the IRS. This is the year in which the Tax Cuts and Jobs Act was enacted and the one-time U.S. tax on earnings not previously repatriated to the U.S., known as the Transition Tax, was reported. For the majority of our foreign entities, the open tax years are from November 1, 2015 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. 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. This tax year pre-dates our separation from Agilent (the "Separation"). However, pursuant to the tax matters agreement between Agilent and Keysight that was finalized at the time of the Separation, for certain entities, including Malaysia, any historical tax liability is the responsibility of Keysight. In the fourth quarter of fiscal 2017, Keysight paid income taxes and penalties to the Malaysian Tax Authority of $68 million on gains related to intellectual property rights. Our appeal to the Special Commissioners of Income Tax in Malaysia was unsuccessful. An appeal has now been lodged with the High Court of Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed, and the income in question is exempt from tax in Malaysia. The company is pursuing all avenues to resolve this issue favorably for the company.

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