Entity information:
INCOME TAXES
 
On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The 2017 Tax Act significantly revises the Internal Revenue Code of 1986, as amended, and it includes fundamental changes to taxation of U.S. multinational corporations.

The key provisions impacting our January 31, 2018 year include a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% and the Transition Tax, which is a one-time tax on previously untaxed earnings of foreign subsidiaries at reduced rates regardless of whether the earnings are actually repatriated. As a result of the reduction of the corporate tax rate we recorded a benefit of $5.4 million related to the estimated revaluation of U.S. deferred tax items. The Transition Tax results in an estimated increase to taxable income of $230.5 million, but no impact to the tax provision. We expect to utilize a portion of our net operating loss carryforward and release the valuation allowance on the deferred tax asset for that net operating loss carryforward for a net impact of $0. Foreign earnings subject to the Transition Tax will not be subject to further U.S. taxation upon repatriation. Therefore, we may repatriate certain foreign cash, a portion of which will be subject to a withholding tax estimated to be $15 million.
   
Additional provisions effective beginning after January 31, 2018 which may significantly impact our effective tax rate include new limitations on the tax deductions for interest expense and executive compensation, elimination of the alternative minimum tax (“AMT”) and the ability to refund unused AMT credits over a four year periods, and new rules related to uses and limitations of net operating loss carryforwards. New international provisions add a new category of deemed income from our foreign operations, eliminates U.S. tax on foreign dividends (subject to certain restrictions), and adds a minimum tax on certain payments made to foreign related parties. We are still assessing the impact of these changes.

On December 22, 2017, the staff of the Securities and Exchange Commission issued SAB No. 118, which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB No. 118 allows registrants to record provisional amounts for a period of up to one year from the date of enactment of the 2017 Tax Act when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Compliance with the 2017 Tax Act will require significant complex computations not previously required by U.S. tax law. In addition, it is uncertain if and to what extent various states will enact legislation to conform to the 2017 Tax Act. Because the 2017 Tax Act was passed late in the fourth quarter of our year ended January 31, 2018, and because legislative guidance and accounting interpretations are expected in the future, we consider the accounting of the Transition Tax, deferred tax remeasurement, deferred taxes on earnings of foreign subsidiaries that may be repatriated in the future, unrecognized tax benefits related to the 2017 Tax Act, and additional provisions under the 2017 Tax Act that are effective beginning after January 31, 2018 to be incomplete and therefore only consider amounts related to these items to be reasonably estimated as of January 31, 2018. We expect to refine and complete the accounting for the 2017 Tax Act during the year ending January 31, 2019 as we obtain, prepare, and analyze additional information and as additional legislative, regulatory, and accounting guidance and interpretations become available.

The components of income (loss) before provision for income taxes for the years ended January 31, 2018, 2017, and 2016 were as follows:
 
 
Year Ended January 31,
(in thousands)
 
2018
 
2017
 
2016
Domestic
 
$
(44,502
)
 
$
(60,722
)
 
$
(43,471
)
Foreign
 
63,402

 
37,248

 
66,651

Total income (loss) before provision for income taxes
 
$
18,900

 
$
(23,474
)
 
$
23,180



The provision for income taxes for the years ended January 31, 2018, 2017, and 2016 consisted of the following:

 
 
Year Ended January 31,
(in thousands)
 
2018
 
2017
 
2016
Current provision (benefit) for income taxes:
 
 
 
 
 
 
Federal
 
$
4,364

 
$
604

 
$
(2,997
)
State
 
1,215

 
989

 
1,300

Foreign
 
24,308

 
18,120

 
8,289

Total current provision for income taxes
 
29,887

 
19,713

 
6,592

Deferred provision (benefit) for income taxes:
 
 
 
 
 
 
Federal
 
4,734

 
(8,179
)
 
2,244

State
 
(58
)
 
(842
)
 
12

Foreign
 
(12,209
)
 
(7,920
)
 
(7,896
)
 Total deferred benefit for income taxes
 
(7,533
)
 
(16,941
)
 
(5,640
)
Total provision for income taxes
 
$
22,354

 
$
2,772

 
$
952



The reconciliation of the U.S. federal statutory rate to our effective tax rate on income (loss) before provision for income taxes for the years ended January 31, 2018, 2017, and 2016 was as follows:
 
 
Year Ended January 31,
(in thousands)
 
2018
 
2017
 
2016
U.S. federal statutory income tax rate
 
33.8
%
 
35.0
 %
 
35.0
%
 
 
 
 
 
 
 
Income tax provision (benefit) at the U.S. federal statutory rate
 
$
6,394

 
$
(8,215
)
 
$
8,115

State income tax provision (benefit)
 
1,792

 
(312
)
 
(79
)
Foreign tax rate differential
 
(9,434
)
 
(5,794
)
 
(3,068
)
Tax incentives
 
(3,891
)
 
(3,507
)
 
(12,293
)
Valuation allowances
 
14,539

 
(3,640
)
 
(7,767
)
Stock-based and other compensation
 
(8,656
)
 
2,522

 
3,562

Non-deductible expenses
 
(2,091
)
 
5,315

 
6,061

Tax credits
 
(307
)
 
(112
)
 
(482
)
Tax contingencies
 
5,017

 
5,566

 
(6,281
)
Tax effects of reorganizations and liquidations
 
—

 
975

 
6,136

U.S. tax effects of foreign operations
 
8,591

 
9,542

 
7,574

Impact of the 2017 Tax Act
 
9,641

 
—

 
—

Other, net
 
759

 
432

 
(526
)
Total provision for income taxes
 
$
22,354

 
$
2,772

 
$
952

Effective income tax rate
 
118.3
%
 
(11.8
)%
 
4.1
%


The table above reflects a January 31, 2018 U.S. federal statutory income tax rate of 33.8% due to the 2017 Tax Act. The 2017 Tax Act includes a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending January 31, 2018 will have a blended corporate tax rate of 33.8% which is based on the applicable tax rates before and after the 2017 Tax Act and the number of days in the year.

Our operations in Israel have been granted “Approved Enterprise” (“AE”) status by the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the program, income attributable to an approved enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five to eight years (generally 10% - 25%, depending on the percentage of foreign investment in the company). In addition, certain operations in Cyprus qualify for favorable tax treatment under the Cypriot Intellectual Property Regime (“IP Regime”). This legislation exempts 80% of income and gains derived from patents, copyrights, and trademarks from taxation. These tax incentives decreased our effective tax rate by 17.8%, 12.4%, and 51.0% for the years ended January 31, 2018, 2017, and 2016, respectively. The current and prior year benefits are lower than the January 2016 benefit as a result of the Company’s taxable loss position in our Cyprus entity in the last two years. At the lower IP Regime tax rate, the deferred tax benefit of the net operating losses generated by those companies is less than it would be under the higher statutory tax rate.

Deferred tax assets and liabilities consisted of the following at January 31, 2018 and 2017:
 
 
January 31,
(in thousands)
 
2018
 
2017
Deferred tax assets:
 
 
 
 
Accrued expenses
 
$
7,637

 
$
10,627

Deferred revenue
 
2,421

 
3,953

Loss carryforwards
 
47,009

 
125,986

Tax credits
 
11,935

 
7,972

Stock-based and other compensation
 
17,568

 
20,187

Capitalized research and development expenses
 
10,316

 
4,146

Other, net
 
3,749

 
2,672

Total deferred tax assets
 
100,635

 
175,543

Deferred tax liabilities:
 
 
 
 
Goodwill and other intangible assets
 
(36,977
)
 
(50,679
)
Unremitted earnings of foreign subsidiaries
 
(12,257
)
 
(18,215
)
Other, net
 
(712
)
 
(2,344
)
Total deferred tax liabilities
 
(49,946
)
 
(71,238
)
Valuation allowance
 
(55,116
)
 
(108,609
)
Net deferred tax liabilities
 
$
(4,427
)
 
$
(4,304
)
 
 
 
 
 
Recorded as:
 
 
 
 
Deferred tax assets
 
$
30,878

 
$
21,510

Deferred tax liabilities
 
(35,305
)
 
(25,814
)
Net deferred tax liabilities
 
$
(4,427
)
 
$
(4,304
)


As of January 31, 2018 we remeasured our U.S. federal deferred tax assets and liabilities, and related valuation allowances, using a rate of 21% in accordance with the 2017 Tax Act. The January 31, 2018 deferred tax asset for loss carryforward reflects the use of U.S. federal NOL carryforwards to offset the Transition Tax imposed under the 2017 Tax Act. The reduction of the corporate rate caused an estimated reduction in net deferred tax assets of $65.4 million and a reduction to valuation allowance of $70.8 million. As of January 31, 2018 we continue to record U.S. federal alternative minimum tax credit carryforwards as deferred tax assets

At January 31, 2018, we had U.S. federal NOL carryforwards of approximately $428.0 million. This amount reflects a reduction for the utilization of U.S. federal NOL carryforwards of $230.5 million to offset the Transition Tax imposed under the 2017 Tax Act. These loss carryforwards expire in various years ending from January 31, 2028 to January 31, 2037. We had state NOL carryforwards of approximately $242.5 million, expiring in years ending from January 31, 2019 to January 31, 2036. We had foreign NOL carryforwards of approximately $68.0 million. At January 31, 2018, all but $11.0 million of these foreign loss carryforwards had indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. As a result of the adoption of ASU No. 2016-09, which amends the accounting for stock-based compensation, as of January 31, 2018 there is an increase of the recorded NOL of $49.7 million. We had U.S. federal, state, and foreign tax credit carryforwards of approximately $16.2 million at January 31, 2018, the utilization of which is subject to limitation. At January 31, 2018, approximately $8.0 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $8.2 million expires in various years ending from January 31, 2019 to January 31, 2034.

We currently intend to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent of the U.S. tax provided under the 2017 Tax Act and withholding taxes of $15.0 million accrued on certain identified cash that may be repatriated to the U.S., we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries.  Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes guidance requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We have recorded valuation allowances in the amounts of $55.1 million and $108.6 million at January 31, 2018 and 2017, respectively.

Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2018 and 2017:
 
 
Year Ended January 31,
(in thousands)
 
2018
 
2017
Valuation allowance, beginning of year
 
$
(108,609
)
 
$
(115,756
)
(Benefit from) provision for income taxes
 
2,868

 
3,640

Adoption of ASU No. 2016-09
 
(17,407
)
 
—

Impact of 2017 Tax Act
 
70,832

 
—

Additional paid-in capital
 
—

 
3,204

Business combinations
 
(2,061
)
 
—

Currency translation adjustment
 
(739
)
 
303

Valuation allowance, end of year
 
$
(55,116
)
 
$
(108,609
)


In accordance with the authoritative guidance on accounting for uncertainty in income taxes, differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, determined by applying the prescribed methodologies of accounting for uncertainty in income taxes, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.

For the years ended January 31, 2018, 2017, and 2016, the aggregate changes in the balance of gross unrecognized tax benefits were as follows:
 
 
Year Ended January 31,
(in thousands)
 
2018
 
2017
 
2016
Gross unrecognized tax benefits, beginning of year
 
$
148,639

 
$
142,271

 
$
159,648

Increases related to tax positions taken during the current year
 
12,260

 
11,034

 
9,465

Increases as a result of business combinations
 
43

 
—

 
985

Increases related to tax positions taken during prior years
 
9,226

 
585

 
2,514

Increases (decreases) related to foreign currency exchange rates
 
2,449

 
648

 
(741
)
Reductions for tax positions of prior years
 
(8,266
)
 
(5,094
)
 
(13,613
)
Reductions for settlements with tax authorities
 
(140
)
 
(145
)
 
(13,811
)
Reduction for rate change due to the 2017 Tax Act
 
(48,004
)
 
—

 
—

Lapses of statutes of limitations
 
(498
)
 
(660
)
 
(2,176
)
Gross unrecognized tax benefits, end of year
 
$
115,709

 
$
148,639

 
$
142,271



As of January 31, 2018, we had $115.7 million of unrecognized tax benefits, of which $105.4 million represents the amount that, if recognized, would impact the effective income tax rate in future periods. We recorded $1.5 million of tax expense, $0.5 million of tax expense, and $4.4 million of tax benefit for interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2018, 2017, and 2016, respectively. Accrued liabilities for interest and penalties were $5.6 million and $3.9 million at January 31, 2018 and 2017, respectively. Interest and penalties (expense and/or benefit) are recorded as a component of the provision (benefit) for income taxes in the consolidated financial statements.

Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In Israel, we are no longer subject to income tax examination for years prior to January 31, 2014.  In the United Kingdom, with the exception of years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31, 2016. In the U.S., our federal returns are no longer subject to income tax examination for years prior to January 31, 2015.  However, to the extent we generated NOLs or tax credits in closed tax years, future use of the NOL or tax credit carry forward balance would be subject to examination within the relevant statute of limitations for the year in which utilized.

As of January 31, 2018, income tax returns are under examination in the following significant tax jurisdictions:
Jurisdiction
 
Tax Years
Canada
 
January 31, 2011 - January 31, 2012
United Kingdom
 
December 31, 2006; January 31, 2008
India
 
March 31, 2007 - March 31, 2008; March 31, 2010 - March 31, 2013
Israel
 
January 31, 2014 - January 31, 2016


We regularly assess the adequacy of our provisions for income tax contingencies. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of expiration. We believe that it is reasonably possible that the total amount of unrecognized tax benefits at January 31, 2018 could decrease by approximately $6.9 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the need for additional valuation allowances and the recognition of tax benefits.