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INCOME TAXES | 12 Months Ended
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Oct. 31, 2016
Income Tax Disclosure [Abstract] |
INCOME TAXES | 5. INCOME TAXES The domestic and foreign components of income from continuing operations before taxes are:
| Years Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in millions)
U.S. operations | $ | 27 |  |  | $ | 77 |  |  | $ | (72 | )
Non-U.S. operations | 517 |  |  | 403 |  |  | 301 |
Total income from continuing operations before taxes | $ | 544 |  |  | $ | 480 |  |  | $ | 229 |
The provision (benefit) for income taxes is comprised of:
| Years Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in millions)
U.S. federal taxes: |  |  |  |  |
Current | $ | (1 | ) |  | $ | (91 | ) |  | $ | 17 |
Deferred | 19 |  |  | 97 |  |  | (80 | )
Non-U.S. taxes: |  |  |  |  |
Current | 77 |  |  | 62 |  |  | 176 |
Deferred | (14 | ) |  | (27 | ) |  | (111 | )
State taxes, net of federal benefit: |  |  |  |  |
Current | 3 |  |  | 1 |  |  | — |
Deferred | (2 | ) |  | — |  |  | (5 | )
Total provision (benefit) | $ | 82 |  |  | $ | 42 |  |  | $ | (3 | )
The income tax provision (benefit) 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 on the consolidated balance sheet are:
| October 31,
| 2016 |  | 2015
| Deferred Tax Assets |  | Deferred Tax Liabilities |  | Deferred Tax Assets |  | Deferred Tax Liabilities
| (in millions)
Inventory | $ | 13 |  |  | $ | — |  |  | $ | 13 |  |  | $ | — |
Intangibles | — |  |  | 92 |  |  | — |  |  | 95 |
Property, plant and equipment | 16 |  |  | — |  |  | 17 |  |  | — |
Warranty reserves | 14 |  |  | — |  |  | 11 |  |  | — |
Pension benefits and retiree medical benefits | 136 |  |  | — |  |  | 93 |  |  | — |
Employee benefits, other than retirement | 28 |  |  | — |  |  | 26 |  |  | — |
Net operating loss, capital loss, and credit carryforwards | 293 |  |  | — |  |  | 173 |  |  | — |
Unremitted earnings of foreign subsidiaries | — |  |  | 53 |  |  | — |  |  | 33 |
Share-based compensation | 41 |  |  | — |  |  | 39 |  |  | — |
Deferred revenue | 42 |  |  | — |  |  | 41 |  |  | — |
Other | 12 |  |  | — |  |  | 4 |  |  | — |
Subtotal | 595 |  |  | 145 |  |  | 417 |  |  | 128 |
Tax valuation allowance | (129 | ) |  | — |  |  | (131 | ) |  | — |
Total deferred tax assets or deferred tax liabilities | $ | 466 |  |  | $ | 145 |  |  | $ | 286 |  |  | $ | 128 |
The increase in 2016 as compared to 2015 for the deferred tax asset relating to pension benefits is due mainly to the tax effect of changes in pension plans recognized in other comprehensive income (loss). The increase in net operating losses and tax credits is due mainly to the early adoption of Accounting Standard Update (“ASU”) 2016-09 “Improvements to Employees Share-Based Payment Accounting". Agilent records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the U.S. As of October 31, 2016 the Company recognized a $53 million deferred tax liability for the overall residual tax expected to be imposed upon the repatriation of unremitted foreign earnings that are not considered permanently reinvested. As of October 31, 2016, the cumulative amount of undistributed earnings considered indefinitely reinvested was $5.5 billion. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to utilize 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. In November 2015, the FASB issued guidance to simplify accounting for deferred taxes. Beginning on November 1, 2017 and including the interim periods following that date, we will be required to present all deferred tax balances as non-current. Prior GAAP guidance required us to record deferred tax balances as either current or non-current in accordance with the classification of the underlying attributes. Early adoption of this guidance was permitted and could be applied either prospectively or retrospectively to all periods presented. We adopted this guidance at the end of the period ended April 30, 2016 prospectively. Therefore, the October 31, 2016 consolidated balance sheet reflects the new disclosure requirements but prior periods have not been adjusted. The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows for the years 2016 and 2015:
| October 31,
| 2016 |  | 2015
| (in millions)
Current deferred tax assets (included within other current assets) | $ | — |  |  | $ | 84 |
Long-term deferred tax assets (included within other assets) | 386 |  |  | 180 |
Current deferred tax liabilities (included within other accrued liabilities) | — |  |  | (10 | )
Long-term deferred tax liabilities (included within other long-term liabilities) | (65 | ) |  | (96 | )
Total | $ | 321 |  |  | $ | 158 |
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. As of October 31, 2016, we continued to maintain a valuation allowance of $129 million until sufficient positive evidence exists to support reversal. The valuation allowance is mainly related to deferred tax assets for California R&D credits, net operating losses in the Netherlands and capital losses in the U.S. and Australia. At October 31, 2016, we had federal net operating loss carryforwards of approximately $19 million and $142 million tax credit carryforwards. The federal net operating losses expire in years beginning 2020 through 2034. At October 31, 2016, we had state net operating loss carryforwards of approximately $200 million which expire in years beginning 2017 through 2033, if not utilized. In addition, we had net state tax credit carryforwards of $36 million that do not expire. All of the federal and some of the state net operating loss carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. At October 31, 2016, we also had foreign net operating loss carryforwards of approximately $296 million. Of this foreign loss, $148 million will expire in years beginning 2017 through 2026, if not utilized. The remaining $148 million has an indefinite life. Some of the foreign losses are subject to annual loss limitation rules. These annual loss limitations in the U.S. and foreign jurisdictions may result in the expiration or reduced utilization of the net operating losses. In March 2016, the Financial Accounting Standards Board (“FASB”) issued amendments that change the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Under the new guidance the benefit will be recorded when it arises with a cumulative effect adjustment to opening retained earnings for previously unrecognized benefits. The new guidance is effective for us beginning November 1, 2017, with early adoption permitted. We elected to early adopt the new guidance in the third quarter of fiscal year 2016, on a retrospective basis, which required us to reflect any adjustments as of November 1, 2015, the beginning of the annual period that includes the interim period of adoption. The impact of adoption on previously reported quarterly results was the recognition of tax shortfalls of $2 million in our provision for income taxes for the first quarter of fiscal year 2016. Additional amendments to the accounting for income taxes on previously reported quarterly results was the recognition of the windfall tax benefits as a cumulative effect adjustment to opening retained earnings of $196 million together with an increase in deferred tax assets included in other assets of $98 million, an increase in additional paid in capital of $4 million, a reduction in other accrued liabilities of $1 million and a decrease of $99 million in other long term liabilities. See Note 2 "New Accounting Pronouncements" for additional information. The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
| Years Ended October 31,
| 2016 |  | 2015 |  | 2014
| (in millions)
Profit before tax times statutory rate | $ | 190 |  |  | $ | 167 |  |  | $ | 80 |
State income taxes, net of federal benefit | 2 |  |  | (8 | ) |  | (7 | )
Non-U.S. income taxed at different rates | (68 | ) |  | (72 | ) |  | (39 | )
Change in unrecognized U.S. tax benefits | (27 | ) |  | (116 | ) |  | (111 | )
Repatriation of foreign earnings | — |  |  | 68 |  |  | 75 |
Valuation allowances | 18 |  |  | (2 | ) |  | 2 |
Adjustments to earnings of foreign subsidiaries | (11 | ) |  | — |  |  | — |
Adjustment to income taxes payable | — |  |  | — |  |  | (6 | )
Other, net | (22 | ) |  | 5 |  |  | 3 |
Provision (benefit) for income taxes | $ | 82 |  |  | $ | 42 |  |  | $ | (3 | )
Effective tax rate | 15.1 | % |  | 8.7 | % |  | (1.3 | )%
Agilent enjoys tax holidays in several different jurisdictions, most significantly in Singapore. The tax holidays 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 holidays are due for renewal between 2018 and 2023. As a result of the incentives, the impact of the tax holidays decreased income taxes by $86 million, $65 million, and $27 million in 2016, 2015, and 2014, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $0.26, $0.19, and $0.08 in 2016, 2015 and 2014, respectively. For 2016, the company’s effective tax rate from continuing operations was 15.1%. The income tax expense from continuing operations was $82 million. The income tax provision from continuing operations for the year ended October 31, 2016 included net discrete tax expense of $17 million. The net discrete tax expense for the year ended October 31, 2016 included $5 million of tax benefit for the extension of the U.S. research and development tax credit attributable to the company's prior fiscal year, $6 million of tax expense related to the curtailment gain recognized with respect to the U.S. retirement plan and Supplemental Benefits Plan, $18 million of tax expense related to the establishment of a valuation allowance on an equity method impairment that would generate a capital loss when realized, and a net $2 million of other discrete tax benefit. Included in the net $2 million discrete tax benefit are $9 million of out-of-period correcting tax expense entries recorded in the second and fourth quarters of fiscal year 2016 associated with German return-to-provision corrections. These are offset by an $11 million out-of-period correcting tax benefit associated with an adjustment to the deferred tax liability for unremitted foreign earnings. The out-of-period corrections were determined to be immaterial to the previously issued and current period financial statements. For 2015, the company’s effective tax rate from continuing operations was 8.7 percent. The income tax expense from continuing operations was $42 million. The income tax expense from continuing operations for the year ended October 31, 2015 included net discrete tax benefits of $55 million primarily due to the settlement of an Internal Revenue Service (“IRS) audit in the U.S. and the recognition of tax expense related to the repatriation of dividends. For 2014, the company's effective tax rate from continuing operations was (1.3) percent. The income tax benefit from continuing operations was $3 million. The income tax benefit for the year ended October 31, 2014 included a net discrete benefit of $33 million Internal Revenue Service ("IRS") audit in the U.S. and the recognition of tax expense related to the repatriation of dividends. The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows for the years 2016 and 2015:
| October 31,
| 2016 |  | 2015
| (in millions)
Current income tax assets (included within other current assets) | $ | 83 |  |  | $ | 104 |
Long-term income tax assets (included within other assets) | 19 |  |  | 20 |
Current income tax liabilities (included within other accrued liabilities) | (49 | ) |  | (62 | )
Long-term income tax liabilities (included within other long-term liabilities) | (190 | ) |  | (227 | )
Total | $ | (137 | ) |  | $ | (165 | )
The calculation of our tax liabilities involves dealing with 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:
| 2016 |  | 2015 |  | 2014
| (in millions)
Balance, beginning of year | $ | 289 |  |  | $ | 417 |  |  | $ | 512 |
Additions for tax positions related to the current year | 31 |  |  | 33 |  |  | 45 |
Additions for tax positions from prior years | 1 |  |  | 3 |  |  | 11 |
Reductions for tax positions from prior years | (27 | ) |  | (156 | ) |  | (141 | )
Settlements with taxing authorities | — |  |  | (4 | ) |  | (2 | )
Statute of limitations expirations | (1 | ) |  | (4 | ) |  | (8 | )
Balance, end of year | $ | 293 |  |  | $ | 289 |  |  | $ | 417 |
As of October 31, 2016, we had $293 million of unrecognized tax benefits of which $271 million, if recognized, would affect our effective tax rate. We recognized a tax expense of $2 million, a tax benefit of $2 million and a tax benefit $10 million of interest and penalties related to unrecognized tax benefits in 2016, 2015 and 2014, respectively. Interest and penalties accrued as of October 31, 2016 and 2015 were $25 million and $24 million, respectively. On November 1, 2014, Agilent transferred deferred tax assets of $237 million, deferred tax liabilities of $37 million, current income tax payable of $40 million, and other long-term liabilities related to uncertain tax positions totaling $8 million to Keysight as part of its separation from Agilent. A current prepaid income tax asset of $19 million and long-term prepaid income tax asset of $3 million related to sales of intercompany assets was also transferred to Keysight upon separation from Agilent. In the U.S., tax years remain open back to the year 2012 for federal income tax purposes and the year 2000 for significant states. On September 22, 2015, we reached an agreement with the Internal Revenue Service ("IRS") for the tax years 2008 through 2011. During the first quarter of 2016, we made a payment of approximately $9 million of tax plus interest as part of closing the exam. This amount was partially offset by a prepaid tax account of approximately $3 million that the IRS allowed as an offset to the $12 million in incremental taxes. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $119 million, offset by a tax liability on foreign distributions of approximately $99 million principally related to the repatriation of foreign earnings. On January 29, 2014 we reached an agreement with the IRS for the tax years 2006 through 2007. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $111 million, offset by a tax liability on foreign distributions of approximately $75 million principally related to the repatriation of foreign earnings. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2001. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits. On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation. The IRS notified the U.S. Court of Appeals for the Ninth Circuit on February 19, 2016 of its intent to appeal the Tax Court's decision in the case. We concluded that no adjustment to our consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.

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