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Income Taxes | 12 Months Ended
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Mar. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes
| Years Ended March 31,
(In millions) | 2018 |  | 2017 |  | 2016
Income from continuing operations before income taxes |  |  |  |  |
U.S. | $ | 1,175 |  |  | $ | 5,772 |  |  | $ | 2,319 |
Foreign | (936 | ) |  | 1,119 |  |  | 931 |
Total income from continuing operations before income taxes | $ | 239 |  |  | $ | 6,891 |  |  | $ | 3,250 |
Income tax expense related to continuing operations consists of the following:
| Years Ended March 31,
(In millions) | 2018 |  | 2017 |  | 2016
Current |  |  |  |  |
Federal | $ | 577 |  |  | $ | 524 |  |  | $ | 658 |
State | 33 |  |  | 86 |  |  | 96 |
Foreign | 205 |  |  | 122 |  |  | 90 |
Total current | 815 |  |  | 732 |  |  | 844 |
Deferred |  |  |  |  |
Federal | (767 | ) |  | 767 |  |  | 95 |
State | 17 |  |  | 164 |  |  | 42 |
Foreign | (118 | ) |  | (49 | ) |  | (73 | )
Total deferred | (868 | ) |  | 882 |  |  | 64 |
Income tax (benefit) expense | $ | (53 | ) |  | $ | 1,614 |  |  | $ | 908 |
During 2018, income tax benefit was $53 million and during 2017 and 2016 income tax expenses were $1,614 million and $908 million related to continuing operations. Our reported income tax benefit rate was 22.2% in 2018 and income tax expense rates were 23.4%, and 27.9% in 2017 and 2016. Fluctuations in our reported income tax rates are primarily due to change in tax laws, including the recently enacted 2017 Tax Act, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate. The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 31.6% for 2018 and 35% for 2017 and 2016 to the income before income taxes is as follows:
| Years Ended March 31,
(In millions) | 2018 |  | 2017 |  | 2016
Income tax expense at federal statutory rate | $ | 75 |  |  | $ | 2,411 |  |  | $ | 1,137 |
State income taxes net of federal tax benefit | 50 |  |  | 153 |  |  | 92 |
Tax effect of foreign operations | (146 | ) |  | (326 | ) |  | (295 | )
Unrecognized tax benefits and settlements | 454 |  |  | 57 |  |  | (14 | )
Non-deductible goodwill | 585 |  |  | 106 |  |  | — |
Share-based compensation | (8 | ) |  | (54 | ) |  | — |
Net tax benefit on intellectual property transfer | (178 | ) |  | (137 | ) |  | — |
Rate differential on gain from Change Healthcare Net Asset Exchange | — |  |  | (587 | ) |  | — |
Remeasurement of U.S. deferred taxes | (1,324 | ) |  | — |  |  | — |
Transition tax on foreign earnings | 457 |  |  | — |  |  | — |
Other, net (1) | (18 | ) |  | (9 | ) |  | (12 | )
Income tax (benefit) expense | $ | (53 | ) |  | $ | 1,614 |  |  | $ | 908 |
(1) | Our 2018 effective tax rate was impacted by other favorable U.S. federal permanent differences including research and development credits of $11 million.
In 2018, as a result of the 2017 Tax Act, we recognized a provisional tax benefit of $1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries. Our reported income tax benefit rate for 2018 was unfavorably impacted by non-cash pre-tax charges of $1,738 million to impair the carrying value of goodwill related to our McKesson Europe and Rexall Health reporting units within our Distribution Solutions segment, given that no tax benefit was recognized for these charges. Our reported income tax expense rate for 2017 was unfavorably impacted by the non-cash pre-tax charge of $290 million to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment, given that the majority of this charge was not deductible for income tax purposes. Refer to Financial Note 3, “Goodwill Impairment Charges,” for more information. On December 19, 2016, we sold various software relating to our Technology Solutions business between wholly owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. A McKesson entity based in the U.S. was the recipient of the software and is entitled to amortize the fair value of the assets for book and tax purposes. The tax benefit associated with the amortization of these assets is being recognized over the tax lives of the assets. As a result, we recognized a net tax benefit of $178 million and $137 million in 2018 and 2017. On March 1, 2017, we contributed assets to Change Healthcare as described in Financial Note 2, “Healthcare Technology Net Asset Exchange”. While this transaction was predominantly structured as a tax free asset contribution for U.S. federal income tax purposes under Section 721(a) of the Internal Revenue Code, we recorded tax expense of $929 million on the gain. The tax expense was primarily driven by the recognition of a deferred tax liability on the excess book over tax basis in our equity investment in Change Healthcare. In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all windfalls and shortfalls related to employee share-based compensation arrangements are recognized within income tax expense. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of excess tax benefits in the income statement on a prospective basis, rather than APIC. As a result, we recognized a net tax benefit of $8 million and $54 million in 2018 and 2017. In 2016, we recognized a $19 million tax benefit due to a reduction in our deferred tax liabilities as a result of enacted tax law changes in certain foreign jurisdictions and a $25 million tax benefit associated with the U.S. Tax Court’s decision in Altera Corp. v. Commissioner related to the treatment of share-based compensation expense in an intercompany cost-sharing agreement. Deferred tax balances consisted of the following:
| March 31,
(In millions) | 2018 |  | 2017
Assets |  |  |
Receivable allowances | $ | 58 |  |  | $ | 124 |
Compensation and benefit related accruals | 345 |  |  | 593 |
Net operating loss and credit carryforwards | 811 |  |  | 594 |
Long-term contractual obligations | 59 |  |  | 107 |
Other | 279 |  |  | 241 |
Subtotal | 1,552 |  |  | 1,659 |
Less: valuation allowance | (751 | ) |  | (503 | )
Total assets | 801 |  |  | 1,156 |
Liabilities |  |  |
Inventory valuation and other assets | (1,869 | ) |  | (2,818 | )
Fixed assets and systems development costs | (158 | ) |  | (224 | )
Intangibles | (644 | ) |  | (921 | )
Change Healthcare Equity Investment | (814 | ) |  | (773 | )
Other | (71 | ) |  | (70 | )
Total liabilities | (3,556 | ) |  | (4,806 | )
Net deferred tax liability | $ | (2,755 | ) |  | $ | (3,650 | )
Long-term deferred tax asset | 49 |  |  | 28 |
Long-term deferred tax liability | (2,804 | ) |  | (3,678 | )
Net deferred tax liability | $ | (2,755 | ) |  | $ | (3,650 | )
We assess the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowance was approximately $751 million and $503 million in 2018 and 2017. The increase of $248 million in valuation allowances in the current year relate primarily to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. We have federal, state and foreign net operating loss carryforwards of $111 million, $2,787 million and $1,806 million. Federal and state net operating losses will expire at various dates from 2019 through 2039. Substantially all our foreign net operating losses have indefinite lives. In addition, we have foreign capital loss carryforwards of $756 million with indefinite lives. The following table summarizes the activity related to our gross unrecognized tax benefits for the last three years:
| Years Ended March 31,
(In millions) | 2018 |  | 2017 |  | 2016
Unrecognized tax benefits at beginning of period | $ | 486 |  |  | $ | 555 |  |  | $ | 616 |
Additions based on tax positions related to prior years | 47 |  |  | 7 |  |  | 116 |
Reductions based on tax positions related to prior years | (124 | ) |  | (67 | ) |  | (62 | )
Additions based on tax positions related to current year | 778 |  |  | 105 |  |  | 28 |
Reductions based on settlements | (7 | ) |  | (113 | ) |  | (141 | )
Reductions based on the lapse of the applicable statutes of limitations | — |  |  | — |  |  | (6 | )
Exchange rate fluctuations | 3 |  |  | (1 | ) |  | 4 |
Unrecognized tax benefits at end of period | $ | 1,183 |  |  | $ | 486 |  |  | $ | 555 |
As of March 31, 2018, we had $1,183 million of unrecognized tax benefits, of which $1,042 million would reduce income tax expense and the effective tax rate, if recognized. The increase in unrecognized tax benefits in 2018 compared to 2017 is primarily attributable to provisional amounts relating to the application of certain provisions of the 2017 Tax Act, partially offset by a decrease in unrecognized tax benefit due to the resolution of the Internal Revenue Services (“IRS”) relating to the fiscal years 2010 through 2012. During the next twelve months, we do not expect any material reduction in our unrecognized tax benefits. However, this may change as we continue to have ongoing negotiations with various taxing authorities throughout the year. We report interest and penalties on income taxes as income tax expense. We recognized income tax benefits of $1 million and $6 million in 2018 and 2017 and income tax expense of $12 million in 2016, related to interest and penalties in our consolidated statements of operations. The income tax benefit for interest and penalties recognized in 2018 and 2017 was primarily due to concluding certain tax authority examinations and lapses of statutes of limitations. As of March 31, 2018 and 2017, we had accrued $37 million and $45 million cumulatively in interest and penalties on unrecognized tax benefits. We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. During the third quarter of 2018, we signed the Revenue Agent’s Report from the U.S. IRS relating to their audit of the fiscal years 2010 through 2012 and recorded a $39 million tax benefit due to the favorable resolution of various uncertain tax positions for those years. During the first quarter of 2017, we reached an agreement with the IRS to settle all outstanding issues relating to the fiscal years 2007 through 2009 without a material impact to our provision for income taxes. We are subject to audit by the IRS for fiscal years 2013 through the current fiscal year. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2010 through the current fiscal year. On December 22, 2017, the U.S. government enacted comprehensive new tax legislation under the Tax Cuts and Jobs Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year 2018 in multiple ways, including but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; and (2) requiring companies to pay a one-time tax on certain unrepatriated earnings of foreign subsidiaries. The 2017 Tax Act also establishes new tax provisions that will affect our fiscal year 2019, including, but not limited to, (1) eliminating the corporate alternative minimum tax; (2) creating the base erosion anti-abuse tax (“BEAT”); (3) establishing new limitations on deductible interest expense and certain executive compensation; (4) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. On December 22, 2017, the SEC staff issued guidance on income tax accounting for the 2017 Tax Act, which was further incorporated into the U.S. GAAP guidance on income taxes in the fourth quarter of 2018. Refer to Financial Note 1, “Significant Accounting Policies - Recently Adopted Accounting Pronouncements.” Regarding the new GILTI tax rules, which apply to fiscal years beginning after December 31, 2017, we are allowed to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred or (2) reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the company’s current measurement of deferred taxes. Our analysis of the new GILTI rules and how they may impact us is incomplete. Accordingly, we have not made a policy election regarding the treatment of the GILTI tax. We will finalize our evaluation of the GILTI tax rules during the measurement period. Although our accounting for the impact of the 2017 Tax Act is incomplete, we have made reasonable estimates and recorded provisional amounts as follows: Reduction of U.S. federal corporate tax rate: The 2017 Tax Act reduces the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. U.S. tax law stipulates that our fiscal year 2018 is subject to a blended tax rate of 31.6 percent, which is based on the pro rata number of days in the fiscal year before and after the effective date. For the fiscal year 2019, the tax rate will be 21 percent. As a result, we have remeasured certain deferred tax assets and deferred tax liabilities and recorded a provisional net tax benefit of $1,324 million, mainly driven by a decrease in our deferred tax liabilities for inventories and investments. During the fourth quarter of 2018, this provisional tax benefit increased by $68 million mainly due to changes to the state effect of adjustments made to federal temporary differences. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, it may be affected by, among other items, changes to estimates the Company has made to calculate our existing temporary differences. Deemed Repatriation Transition Tax (“Transition Tax”): The 2017 Tax Act imposes a tax on certain accumulated E&P of our foreign subsidiaries. We were able to make a reasonable estimate of the impact of the new tax and recorded a provisional tax expense of $457 million. During the fourth quarter of 2018, this provisional tax expense increased by $23 million mainly due to changes in estimated amounts of post-1986 E&P of the relevant subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. This estimate may change as we gather additional information to more precisely compute the amount of tax. Prior to the 2017 Tax Act, undistributed earnings of our foreign operations totaling $5,854 million were considered indefinitely reinvested. While the Company has accrued the 2017 Tax Act’s new tax on these earnings, we were unable to determine a reasonable estimate of the remaining tax liability, if any, for its remaining outside basis differences or assess how the 2017 Tax Act will impact the Company's existing assertion of indefinite reinvestment. As such, no change has been made with respect to this assertion for the year ended March 31, 2018. The Company will complete its analysis of the impact of the 2017 Tax Act on our indefinite reinvestment assertion and record amounts, such as foreign withholding taxes and state income taxes, if necessary, during the measurement period. Our accounting for the income tax effects of the 2017 Tax Act will be completed during the measurement period and we will record any necessary adjustments in the period such adjustments are identified.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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