18.    Income Taxes

Income taxes have been provided in accordance with ASC 740, Income Taxes.   The effective tax rate for the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates.  Our effective tax rate may fluctuate as a result of changes in the forecasted annual income level and geographical mix of our operating earnings as well as a result of acquisitions, changes in liabilities recorded for unrecognized tax benefits, changes in the valuation allowances for deferred tax assets, tax settlements with U.S. and foreign tax authorities, and the impact from changes in enacted tax laws.

Our income (loss) before income taxes related to the following jurisdictions:

 



The income tax provision (benefit) attributable to earnings from operations consisted of the following:



 



Our income tax provision (benefit) differed from the amount computed by applying the federal statutory rate to our income (loss) before provision for income taxes as follows:

 



 

A summary of the components of our deferred tax assets and liabilities was as follows:

 







The net deferred tax asset (liability) was classified on our Consolidated Balance Sheets as follows:

 





The following summarizes the rollforward of our deferred tax asset valuation allowance:

 



As of April 30, 2017, we have U.S. Federal net operating loss deferred tax assets amounting to $165.7 million. These losses expire in various years between 2018 and 2034, the majority of which will expire between 2019 and 2028. We also have U.S. foreign tax credits of $0.9 million, U.S. research and development credits of $7.7 million, and alternative minimum credit carryovers of $14.0 million.  In addition, we have state and local net operating losses and credits of $22.9 million and $7.8 million, respectively. Our state and local net operating losses expire in various years between 2018 and 2034. We currently have a deferred tax asset of $289.6 million relating to interest limitations under IRC Section 163(j), which has an indefinite carryforward. Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carryforwards and certain built-in losses or deductions.  As a result of the Starmount Acquisition, the Predictix Acquisition and the GT Nexus Acquisition, Starmount, Predictix and GT Nexus experienced ownership changes that resulted in the application of Section 382 limitations. These limitations are, however, not expected to materially limit our ability to utilize Starmount, Predictix and GT Nexus’ net operating loss carryforwards. In addition, we experienced an ownership change as a result of the global restructuring that occurred April 5, 2012, that resulted in the application of a Section 382 limitation. This limitation is, however, not expected to materially limit our ability to utilize any net operating loss carryforwards. Some of our U.S. loss and credit carryforwards are also subject to various limitations resulting from changes of ownership prior to April 5, 2012, and the possibility of future changes of ownership may further limit our ability to utilize certain loss and credit carryforwards.

As of April 30, 2017, we have foreign net operating loss deferred tax assets amounting to $128.0 million. The majority of these losses relate to our subsidiary operations in the United Kingdom, Brazil, France, Austria, Norway, Japan, Sweden, Hong Kong and Singapore. We also have certain foreign capital loss carryforward deferred tax assets of $32.2 million, the majority of which relate to our subsidiary operations in the United Kingdom and are not subject to expiry but do require us to generate certain qualified income in order to utilize. The foreign loss and credit carryforwards are subject to various limitations resulting from prior changes of ownership and the possibility of future changes of ownership may further limit our ability to utilize certain foreign loss and credit carryforwards.  



ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. We recorded a net increase to our valuation allowance (including the impact of ASC 740-10) in fiscal 2017 of $43.0 million, a net decrease to our valuation allowance in fiscal 2016 of $13.2 million, and a net increase to our valuation allowance of $0.5 million in fiscal 2015.  In fiscal 2017 we recorded a valuation allowance on our deferred tax assets in the U.S. based on the change in position of our U.S. operations from a net deferred tax liability position to a net deferred tax assets position, which resulted from various tax deductible charges incurred during the fourth quarter related to the closure of the KED Purchase.  In addition, during the fourth quarter we released a $17.5 million valuation allowance previously established for a net operating loss in Sweden as a result of the completion of a tax planning strategy.  We also established a valuation allowance of $18.9 million in the fourth quarter in the United Kingdom as a result of the establishment of negative evidence from the most recent three years of operating results.  In fiscal 2016, we released the valuation allowance on our deferred tax assets in the Netherlands based on the removal of negative evidence related to the entities' most recent three years of operating results, as well as the execution of a tax planning strategy.  The valuation allowance and the change therein as of April 30, 2017 and 2016, primarily relate to disallowed carried forward interest expense as well as certain U.S. and foreign net operating losses, tax credits, and capital losses associated with our U.S. and foreign subsidiaries. No other valuation allowances were deemed necessary due to future possible sources of taxable income, including the anticipation of future taxable income and future reversals of existing taxable temporary differences. 

Deferred taxes have not been recognized with the exception of certain previously taxed earnings resulting from Subpart F as well as certain IRC Section 987 losses from U.S. branch operations for the excess of the amount for financial reporting over the tax basis of the investment in each of our foreign subsidiaries because the undistributed earnings of each of our foreign subsidiaries are considered permanently reinvested. Therefore, these basis differences are not expected to reverse in the foreseeable future. It is not practicable to calculate the amount of the unrecognized deferred tax liability which would result if these basis differences reversed due to the complexities of the tax laws in various jurisdictions, the number of jurisdictions in which we operate, the complexity of our legal entity structure, and the hypothetical nature of the calculations.  For purposes of the previously taxed earnings resulting from Subpart F as well as certain IRC Section 987 losses incurred from U.S. branch operations, the Company has recorded a gross deferred tax asset of $21.5 million to reflect the foreign exchange losses associated with these pools of unremitted earnings.  In addition, the Company has established a valuation allowance of $21.5 million for this deferred tax asset as a result of the valuation allowance position of the Company’s U.S. operations.

Our income tax returns are routinely audited by taxing authorities and provisions are routinely made in our financial statements in anticipation of the results of these audits. The amount of these tax liabilities may be revised in future periods if estimates of our ultimate liability are revised. 

The following summarizes the rollforward of our unrecognized tax benefits:

 



The reversal of the unrecognized tax benefits above would have impacted our effective tax rate (through the recognition of an income tax benefit) at April 30, 2017, 2016, and 2015 by $71.9 million, $100.0 million and $70.6 million, respectively. During our upcoming fiscal year ending April 30, 2018, we expect that approximately $54.1 million of the unrecognized tax benefits above will reverse, primarily due to the expiration of statutes of limitation in various jurisdictions.

We classify interest on uncertain tax positions as provision (benefit) for income taxes in our Consolidated Statements of Operations. The amount of accrued interest on uncertain tax positions at April 30, 2017 and 2016, was $18.4 million and $19.0 million, respectively, and is primarily reflected in other long-term liabilities on our Consolidated Balance Sheets. The amount of interest expense recorded for uncertain tax positions for fiscal 2017, 2016 and 2015, net of income tax benefits was $1.3 million, $1.4 million and $13.4 million, respectively. 

We classify penalties on uncertain tax positions as provision (benefit) for income taxes in our Consolidated Statements of Operations. The amount of accrued penalties on uncertain tax positions at April 30, 2017 and 2016, was $4.7 million and $5.3 million, respectively, and is primarily reflected in other long-term liabilities on our Consolidated Balance Sheets. The amount of penalty expense recorded for uncertain tax positions for fiscal 2017, 2016 and 2015 was a benefit of $0.4 million, a benefit of $0.0 million and a benefit of $0.1 million, respectively. The fiscal 2017, 2016 and 2015 benefits were due to the expiration of the statute of limitations in various jurisdictions.



The Company is in the process of completing a voluntary disclosure agreement with a foreign taxing jurisdiction in connection with potential withholding tax exposure on certain intercompany transactions.  Within the next twelve months, it is reasonably possible that the Company will complete negotiations with the taxing jurisdiction and enter into a settlement resulting in tax, interest and penalties ranging from zero to $19.6 million.

Domestically, we file a federal income tax return and generally file state income tax returns in each jurisdiction in which we do business. The statutes of limitations for these returns, with some exceptions, run through 2021. We are generally no longer subject to tax examinations domestically for years prior to fiscal 2013.  We are also currently under examination in a number of state jurisdictions. Management believes that we have adequately provided for any uncertain tax positions that may be addressed in these examinations.

Internationally, we generally file income tax returns in each jurisdiction in which we do business. The statutes of limitations for these returns, with some exceptions, run through 2021. We are generally no longer subject to tax examination internationally for years prior to fiscal 2011. We are currently under examination in a number of international jurisdictions. Management believes that we have adequately provided for any uncertain tax positions that may be addressed in these examinations.

While management believes we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently includes subjectivity. Accordingly, additional provisions on tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.