Note 12—Income and Other Taxes

NOTE 12—INCOME AND OTHER TAXES

The provision (benefit) for income taxes consisted of the following for the respective periods:

		Successor												Predecessor
		Fiscal Year Ended January 29, 2016				Fiscal Year Ended January 30, 2015				October 29, 2013 through  January 31, 2014				February 2, 2013 through  October 28, 2013
						(in millions)
Current:
Federal		$	(126	)		$	118			$	73			$	420
State/local			3				4				35				36
Foreign			257				218				46				196
Current			134				340				154				652
Deferred:
Federal			(149	)			(405	)			(428	)			(339	)
State/local			(18	)			(29	)			(75	)			(15	)
Foreign			(38	)			(31	)			(41	)			115
Deferred			(205	)			(465	)			(544	)			(239	)
Provision (benefit) for income taxes		$	(71	)		$	(125	)		$	(390	)		$	413

Income before provision for income taxes consisted of the following for the respective periods:

		Successor												Predecessor
		Fiscal Year Ended January 29, 2016				Fiscal Year Ended January 30, 2015				October 29, 2013 through  January 31, 2014				February 2, 2013 through  October 28, 2013
						(in millions)
Domestic		$	(3,581	)		$	(3,316	)		$	(1,680	)		$	(448	)
Foreign			2,406				1,970				(322	)			768
Income (loss) before income taxes		$	(1,175	)		$	(1,346	)		$	(2,002	)		$	320

- F-46 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The components of the Company’s net deferred tax assets (liabilities) were as follows as of January 29, 2016 and January 30, 2015:

		Successor
		January 29, 2016				January 30, 2015
		(in millions)
Deferred tax assets:
Deferred revenue and warranty provisions		$	865			$	1,018
Provisions for product returns and doubtful accounts			130				142
Credit carryforwards			176				86
Loss carryforwards			744				334
Operating and compensation related accruals			283				321
Other			149				166
Deferred tax assets			2,347				2,067
Valuation allowance			(816	)			(432	)
Deferred tax assets, net of valuation allowance			1,531				1,635
Deferred tax liabilities:
Leasing and financing			(125	)			(140	)
Property and equipment			(180	)			(254	)
Acquired intangibles			(1,720	)			(2,014	)
Other			(231	)			(138	)
Deferred tax liabilities			(2,256	)			(2,546	)
Net deferred tax assets (liabilities)		$	(725	)		$	(911	)

The tables below summarize the net operating losses, tax credit carryforwards, and other deferred tax assets with related valuation allowances recognized as of January 29, 2016 and January 30, 2015.

		Successor
		January 29, 2016
		(in millions)
		Deferred Tax Assets				Valuation Allowance				Net Deferred Tax Assets				First Year Expiring
Credit carryforwards		$	176			$	(59	)		$	117				Fiscal 2017
Loss carryforwards			744				(614	)			130				Fiscal 2017
Other deferred tax assets			1,427				(143	)			1,284				NA
Total		$	2,347			$	(816	)		$	1,531

		Successor
		January 30, 2015
		(in millions)
		Deferred Tax Assets				Valuation Allowance				Net Deferred Tax Assets				First Year Expiring
Credit carryforwards		$	86			$	(38	)		$	48				Fiscal 2016
Loss carryforwards			334				(177	)			157				Fiscal 2016
Other deferred tax assets			1,647				(217	)			1,430				NA
Total		$	2,067			$	(432	)		$	1,635

- F-47 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company had deferred tax assets related to federal, state, and foreign net operating loss carryforwards of $97 million, $49 million, and $598 million, respectively, as of January 29, 2016, and $100 million, $41 million, and $193 million, respectively, as of January 30, 2015. The increase in foreign net operating loss carryforwards is due to a foreign exchange loss for tax purposes only, recorded for the year ended January 29, 2016 in a jurisdiction subject to a full valuation allowance, and as a result it is not reflected in the U.S. GAAP rate reconciliation below. The Company’s credit carryforwards as of January 29, 2016 and January 30, 2015, relate primarily to U.S. tax credits. The valuation allowances for other deferred tax assets as of January 29, 2016 and January 30, 2015, are primarily related to foreign jurisdictions. The Company has determined that it will be able to realize the remainder of its deferred tax assets.

Deferred taxes have not been recorded on the excess book basis in the shares of certain foreign subsidiaries because these basis differences are not expected to reverse in the foreseeable future and are expected to be permanent in duration. The basis differences in the amount of approximately $22.5 billion as of January 29, 2016 arose primarily from undistributed book earnings, which the Company intends to reinvest indefinitely. The basis differences could be reversed through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events. Net of available foreign tax credits, residual income tax of approximately $6.9 billion would be due upon reversal of this excess book basis as of January 29, 2016.

A portion of the Company’s operations is subject to a reduced tax rate or is free of tax under various tax holidays. For the successor periods ended January 29, 2016, January 30, 2015, and January 31, 2014, the income tax benefits attributable to the tax status of these subsidiaries were estimated to be approximately $205 million ($0.51 per share), $218 million ($0.54 per share), and $65 million ($0.16 per share), respectively. For the predecessor period ended October 28, 2013, these benefits were estimated to be approximately $87 million ($0.05 per share). A significant portion of these income tax benefits is related to a tax holiday that will expire on January 31, 2017. The Company is currently seeking new terms for the affected subsidiary and it is uncertain whether any terms will be agreed upon. The Company’s other tax holidays will expire in whole or in part during Fiscal 2019 through Fiscal 2023. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met.

A reconciliation of the Company’s income tax provision to the statutory U.S. federal tax rate is as follows:

		Successor												Predecessor
		Fiscal Year Ended January 29, 2016				Fiscal Year Ended January 30, 2015				October 29, 2013 through  January 31, 2014				February 2, 2013 through October 28, 2013
U.S. federal statutory rate			35.0	%			35.0	%			35.0	%			35.0	%
State income taxes, net of federal tax benefit			1.9				2.4				2.1				6.6
Tax impact of foreign operations			(37.1	)			(25.3	)			(15.8	)			4.1
Change in valuation allowance impacting tax rate and non-deductible operating losses			4.6				(7.1	)			(0.1	)			78.1
Non-deductible transaction costs			(0.7	)			—				(1.1	)			8.8
Vendor and other settlements			2.7				2.8				—				—
Other			(0.4	)			1.5				(0.6	)			(3.5	)
Total			6.0	%			9.3	%			19.5	%			129.1	%

- F-48 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the Predecessor and Successor entities is as follows:

		Total
		(in millions)
Predecessor
Balance at February 1, 2013		$	2,446
Increases related to tax positions of the current year			121
Increases related to tax position of prior years			6
Reductions for tax positions of prior years			(42	)
Lapse of statute of limitations			(16	)
Audit settlements			2
Balance at October 28, 2013			2,517
Successor
Balance at October 29, 2013			—
Fair value recognized through purchase accounting			2,517
Increases related to tax positions of the current year			29
Increases related to tax position of prior years			22
Reductions for tax positions of prior years			(11	)
Lapse of statute of limitations			(26	)
Audit settlements			(68	)
Balance at January 31, 2014			2,463
Increases related to tax positions of the current year			142
Increases related to tax position of prior years			14
Reductions for tax positions of prior years			(80	)
Lapse of statute of limitations			(34	)
Audit settlements			(50	)
Balance at January 30, 2015			2,455
Increases related to tax positions of the current year			70
Increases related to tax position of prior years			52
Reductions for tax positions of prior years			(61	)
Lapse of statute of limitations			(24	)
Audit settlements			(13	)
Balance at January 29, 2016		$	2,479

The Company recorded net unrecognized tax benefits of $3.1 billion and $3.0 billion as of January 29, 2016 and January 30, 2015, respectively. The unrecognized tax benefits in the table above do not include accrued interest and penalties. As of January 29, 2016 and January 30, 2015, accrued interest and penalties were $950 million and $858 million, respectively. These interest and penalties are offset by tax benefits from transfer pricing, interest deductions, and state income tax, which are also not included in the table above. As of January 29, 2016 and January 30, 2015, these benefits were $372 million and $336 million, respectively.

Interest and penalties related to income tax liabilities are included in income tax expense. The Company recorded interest and penalties of $63 million, $35 million, and $5 million for the successor periods ended January 29, 2016, January 30, 2015, and January 31, 2014, respectively, and $32 million for the predecessor period ended October 28, 2013.

- F-49 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

During Fiscal 2014, the Internal Revenue Service (“IRS”) issued a revised Revenue Agent’s Report for fiscal years 2004 through 2006, proposing certain assessments primarily related to transfer pricing matters. The Company disagrees with certain of the proposed assessments and has contested them through the IRS administrative appeals procedures. In addition, the Company’s U.S. federal income tax returns for fiscal years 2007 through 2009 are currently under examination by the IRS.

The Company is currently under income tax audits in various state and foreign jurisdictions. The Company is undergoing negotiations, and in some cases contested proceedings, relating to tax matters with the taxing authorities in these jurisdictions. The Company believes that it has provided adequate reserves related to all matters contained in tax periods open to examination. Although the Company believes it has made adequate provisions for the uncertainties surrounding these audits, should the Company experience unfavorable outcomes, such outcomes could have a material impact on its results of operations, financial position, and cash flows. Although timing of resolution or closure of audits is not certain, the Company believes it is reasonably possible that tax audit resolutions could reduce its unrecognized tax benefits by an amount between $300 million to $750 million in the next twelve months. Such a reduction would not have a material effect on the Company’s effective tax rate. Net unrecognized tax benefits, if recognized, would favorably affect the Company’s effective tax rate. With respect to major U.S. state and foreign taxing jurisdictions, the Company is generally not subject to tax examinations for years prior to fiscal year 2000.

The Company takes certain non-income tax positions in the jurisdictions in which it operates and has received certain non-income tax assessments from various jurisdictions. The Company believes that a material loss in these matters is not probable and that it is not reasonably possible that a material loss exceeding amounts already accrued has been incurred. The Company believes its positions in these non-income tax litigation matters are supportable and that it ultimately will prevail. In the normal course of business, the Company’s positions and conclusions related to its non-income taxes could be challenged and assessments may be made. To the extent new information is obtained and the Company’s views on its positions, probable outcomes of assessments, or litigation change, changes in estimates to the Company’s accrued liabilities would be recorded in the period in which such a determination is made. In the resolution process for income tax and non-income tax audits, the Company may be required to provide collateral guarantees or indemnification to regulators and tax authorities until the matter is resolved.