ELECTRONIC ARTS INC. - 10-K filing on 2015-05-21

Income Taxes

12 Months Ended

Mar. 31, 2015

(11) INCOME TAXES

The components of our income before provision for (benefit from) income taxes for the fiscal years ended March 31, 2015, 2014 and 2013 are as follows (in millions):



	Year Ended March 31,
	2015		2014			2013
Domestic	$	232	$	(146	)	$	(15	)
Foreign	693		153			154
Income before provision for (benefit from) income taxes	$	925	$	7		$	139

Provision for (benefit from) income taxes for the fiscal years ended March 31, 2015, 2014 and 2013 consisted of (in millions):



	Current			Deferred			Total
Year Ended March 31, 2015
Federal	$	10		$	17		$	27
State	—			—			—
Foreign	21			2			23
	$	31		$	19		$	50
Year Ended March 31, 2014
Federal	$	(2	)	$	(9	)	$	(11	)
State	1			(2		)	(1		)
Foreign	8			3			11
	$	7		$	(8	)	$	(1	)
Year Ended March 31, 2013
Federal	$	—		$	5		$	5
State	—			1			1
Foreign	39			(4		)	35
	$	39		$	2		$	41

Excess tax benefits from stock-based compensation deductions are allocated to contributed capital before historical net operating losses are utilized to reduce tax expense. Deferred income tax provision includes tax benefits allocated directly to contributed capital of $21 million and $12 million for fiscal years 2015 and 2014, respectively, and none for fiscal year 2013.

The differences between the statutory tax expense rate and our effective tax expense (benefit) rate, expressed as a percentage of income before provision for (benefit from) income taxes, for the fiscal years ended March 31, 2015, 2014 and 2013 were as follows:



	Year Ended March 31,
	2015		2014		2013
Statutory federal tax expense rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.1	%	(242.9	)%	(5.0	)%
Differences between statutory rate and foreign effective tax rate	(22.3	)%	(142.9	)%	(15.2	)%
Valuation allowance	(9.2	)%	936.5	%	35.0	%
Research and development credits	(1.1	)%	(128.6	)%	(8.6	)%
Differences between book and tax on sale of strategic investments	—		—		(15.2	)%
Resolution of tax matters with authorities	(0.5	)%	(657.1	)%	—
Non-deductible stock-based compensation	3.5	%	385.7	%	21.5	%
Acquisition-related contingent consideration	(0.2	)%	(185.7	)%	(16.5	)%
Other	0.1	%	(14.3	)%	(1.5	)%
Effective tax expense (benefit) rate	5.4	%	(14.3	)%	29.5	%

During the fiscal year 2014, we made a one-time repatriation of $700 million from certain of our wholly-owned subsidiaries. This repatriation did not have a material impact on our effective tax rate for fiscal year 2014 due to the deferred tax valuation allowance.

Undistributed earnings of our foreign subsidiaries amounted to approximately $752 million as of March 31, 2015. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.

The components of net deferred tax assets, as of March 31, 2015 and 2014 consisted of (in millions):



	As of March 31,
	2015			2014
Deferred tax assets:
Accruals, reserves and other expenses	$	193		$	163
Tax credit carryforwards	358			462
Stock-based compensation	35			43
Net operating loss & capital loss carryforwards	53			199
Total	639			867
Valuation allowance	(555		)	(675		)
Deferred tax assets, net of valuation allowance	84			192
Deferred tax liabilities:
Depreciation	(9		)	(12		)
State effect on federal taxes	(62		)	(63		)
Amortization	(23		)	(28		)
Prepaids and other liabilities	(8		)	(9		)
Total	(102		)	(112		)
Deferred tax assets, net of valuation allowance and deferred tax liabilities	$	(18	)	$	80

On April 1, 2014, we adopted ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under the new accounting standard, an unrecognized tax benefit is required to be presented as a reduction to a deferred tax asset if the disallowance of the uncertain tax position would reduce an available tax loss or tax credit carryforward instead of resulting in a cash tax liability. The ASU applies prospectively to all unrecognized tax benefits that exist as of the adoption date. Prior to adoption, the deferred tax assets were presented without reduction for uncertain tax positions.

The valuation allowance decreased by $120 million in fiscal year 2015, primarily due to the current fiscal year utilization of U.S. deferred tax assets. We have not yet been able to establish a sustained level of profitability in the U.S. or other sufficient significant positive evidence to conclude that our U.S. deferred tax assets are more likely than not to be realized. Therefore, we continue to maintain a valuation allowance against most of our U.S. deferred tax assets. It is possible that a significant portion of the valuation allowance recorded against our U.S. deferred tax assets at March 31, 2015 could be reversed by the end of fiscal year 2016.

As of March 31, 2015, we have state net operating loss carry forwards of approximately $785 million of which approximately $114 million is attributable to various acquired companies. These carry forwards, if not fully realized, will begin to expire in 2016. We also have U.S. federal, California and Canada tax credit carry forwards of $320 million, $131 million and $7 million, respectively. The U.S. federal tax credit carry forwards will begin to expire in 2024. The California and Canada tax credit carry forwards can be carried forward indefinitely.

The total unrecognized tax benefits as of March 31, 2015 and 2014 were $254 million and $232 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):



Balance as of March 31, 2013	$	297
Increases in unrecognized tax benefits related to prior year tax positions	10
Decreases in unrecognized tax benefits related to prior year tax positions	(79		)
Increases in unrecognized tax benefits related to current year tax positions	44
Decreases in unrecognized tax benefits related to settlements with taxing authorities	(29		)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(9		)
Changes in unrecognized tax benefits due to foreign currency translation	(2		)
Balance as of March 31, 2014	232
Increases in unrecognized tax benefits related to prior year tax positions	9
Decreases in unrecognized tax benefits related to prior year tax positions	(14		)
Increases in unrecognized tax benefits related to current year tax positions	50
Decreases in unrecognized tax benefits related to settlements with taxing authorities	(6		)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(7		)
Changes in unrecognized tax benefits due to foreign currency translation	(10		)
Balance as of March 31, 2015	$	254

A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of March 31, 2015, approximately $58 million of the unrecognized tax benefits would affect our effective tax rate and approximately $195 million would result in adjustments to deferred tax valuation allowance. As of March 31, 2014, approximately $84 million of the unrecognized tax benefits would affect our effective tax rate and approximately $148 million would result in corresponding adjustments to the deferred tax valuation allowance.

Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized in income tax expense in our Consolidated Statements of Operations. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current other liabilities was approximately $16 million as of March 31, 2015 and 2014. There is no material change in accrued interest and penalties during fiscal year 2015.

We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions, including Canada, France, Germany, Switzerland and the United Kingdom. The IRS is currently examining our returns for fiscal years 2009 through 2011, and we remain subject to income tax examination by the IRS for fiscal years after 2011.

We are also currently under income tax examination in the United Kingdom for fiscal years 2010 through 2013, and in Germany for fiscal years 2008 through 2012. We remain subject to income tax examination for several other jurisdictions including in France for fiscal years after 2011, in Germany for fiscal years after 2012, in the United Kingdom for fiscal years after 2013, and in Canada and Switzerland for fiscal years after 2007.

The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $11 million of unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.