Income Taxes
Loss before income tax expense consists of the following for the periods shown below (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended January 31, |
| 2018 | | 2017 | | 2016 |
United States | $ | (276,492 | ) | | $ | (362,505 | ) | | $ | (294,624 | ) |
International | 18,746 |
| | 12,823 |
| | 7,980 |
|
Total | $ | (257,746 | ) | | $ | (349,682 | ) | | $ | (286,644 | ) |
Income tax expense (benefit) consists of the following for the periods shown below (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended January 31, |
| 2018 | | 2017 | | 2016 |
Current tax provision: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 301 |
| | 274 |
| | 223 |
|
Foreign | 5,878 |
| | 5,559 |
| | 3,045 |
|
Total current tax provision | 6,179 |
| | 5,833 |
| | 3,268 |
|
Deferred tax provision: | | | | | |
Federal | (2,825 | ) | | 165 |
| | (10,437 | ) |
State | (362 | ) | | 15 |
| | (487 | ) |
Foreign | (1,635 | ) | | (506 | ) | | (216 | ) |
Total deferred tax provision | (4,822 | ) | | (326 | ) | | (11,140 | ) |
Total tax provision (benefit) | $ | 1,357 |
| | $ | 5,507 |
| | $ | (7,872 | ) |
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted into law making significant changes to how the U.S. imposes income tax on multinational corporations. Changes include, but not limited to, a decrease in the corporate tax rate from 35% to 21%, effective for tax years after 2017 and a transition of the U.S. international taxation from a worldwide tax system to a territorial tax system by imposing a one-time mandatory repatriation of undistributed foreign earnings. We are required to recognize the effect of the Act in the period of enactment. Subsequent to the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend more than one year beyond the enactment date.
In accordance with SAB 118, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of January 31, 2018. Accordingly, we have remeasured our deferred taxes as of January 31, 2018 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The provisional amount related to the remeasurement of deferred taxes was $230.1 million and is offset by our valuation allowance. In addition, based on our initial assessment no transition tax is expected to be due upon the newly enacted legislation. As we complete our analysis with additional guidance and accounting interpretation to be issued over the next 12 months, we may make adjustments to these provisional amounts. We expect to complete our analysis in fiscal 2019.
The FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provision of the Act in January 2018. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and have not yet made a provisional estimate as we have not yet completed our assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as a period expense in the period the tax is incurred.
Tax Provision
For the fiscal year ended January 31, 2018, our tax provision consisted principally of foreign taxes from legal entities established in foreign jurisdictions and withholding taxes paid offset by a partial release of valuation allowance on our U.S. deferred tax assets from acquisitions. For the fiscal year ended January 31, 2017, our tax provision consisted principally of federal and state taxes in the U.S. and foreign taxes from legal entities established in foreign jurisdictions and withholding taxes paid. For the fiscal year ended January 31, 2016, our tax provision consisted principally of state taxes in the U.S. and foreign taxes from legal entities established in foreign jurisdictions and withholding taxes paid offset by a partial release of valuation allowance on our U.S. deferred tax assets as a result of an acquisition during the 2016 fiscal year.
The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended January 31, |
| 2018 | | 2017 | | 2016 |
Expected provision at U.S. federal statutory rate | $ | (54,126 | ) | | $ | (118,892 | ) | | $ | (97,459 | ) |
State income taxes - net of federal benefit | (8,918 | ) | | (10,711 | ) | | (8,730 | ) |
Stock-based compensation | 8,450 |
| | 21,772 |
| | 10,734 |
|
Research and development tax credits | (18,463 | ) | | (13,496 | ) | | (11,965 | ) |
Tax reserve for uncertain tax positions | 375 |
| | 18 |
| | 26 |
|
Change in valuation allowance | (154,299 | ) | | 124,220 |
| | 108,300 |
|
Non-deductible expenses | 2,145 |
| | 2,694 |
| | 2,632 |
|
Release of valuation allowance due to acquisitions | (3,187 | ) | | — |
| | (10,924 | ) |
Impact of the Act - U.S. tax rate differential | 230,133 |
| | — |
| | — |
|
Non-U.S. tax rate differential | (753 | ) | | (98 | ) | | (486 | ) |
Total tax provision (benefit) | $ | 1,357 |
| | $ | 5,507 |
| | $ | (7,872 | ) |
Deferred tax assets and liabilities consist of the following (in thousands):
|
| | | | | | | |
| Fiscal Year Ended January 31, |
| 2018 | | 2017 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 401,339 |
| | $ | 220,818 |
|
Accrued liabilities | 16,546 |
| | 14,848 |
|
Tax credit carryforwards | 71,373 |
| | 49,280 |
|
Stock-based compensation | 22,411 |
| | 36,074 |
|
Deferred revenue | 47,393 |
| | 40,046 |
|
Valuation allowance | (551,419 | ) | | (356,782 | ) |
Total deferred tax assets | 7,643 |
| | 4,284 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (4,539 | ) | | (3,459 | ) |
Total deferred tax liabilities | (4,539 | ) | | (3,459 | ) |
Net deferred taxes | 3,104 |
| | 825 |
|
Recorded as: | | | |
Non-current deferred tax assets | 554,523 |
| | 357,607 |
|
Non-current valuation allowance | (551,419 | ) | | (356,782 | ) |
Net deferred tax assets | $ | 3,104 |
| | $ | 825 |
|
Net operating loss and tax credit carryforwards as of January 31, 2018 are as follows (in thousands):
|
| | | | | |
| Amount | | Expiration years |
Net operating loss, federal (generated in taxable years ending after 12/31/17) | $ | 193,434 |
| | No expiration |
Net operating loss, federal (generated in taxable years prior to 12/31/17) | 1,406,923 |
| | 2025 - 2038 |
Net operating loss, state | 1,073,049 |
| | 2019 - 2038 |
Tax credit, federal | 52,275 |
| | 2026 - 2038 |
Tax credit, state | 50,392 |
| | N/A |
ASC Topic 740, Income Taxes, requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that we assess that realization is more likely than not. Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Due to our history of U.S. operating losses, we believe the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, have provided a full valuation allowance against net U.S. deferred tax assets. The valuation allowance totaled $551.4 million, $356.8 million and $236.2 million for fiscal 2018, 2017, and 2016, respectively.
The gross increase in the valuation allowance was $194.6 million between fiscal 2018 and 2017. At January 31, 2018, we had federal and state net operating loss carryforwards of $1.6 billion and $1.1 billion, respectively. The net operating losses for federal and state purposes begin to expire starting in 2025 and 2019, respectively. The Act allows federal net operating losses generated for years ending after December 31, 2017 to be carried forward indefinitely. As a result of the Act, $193.4 million of the net operating losses from the 2018 fiscal year will not expire. Additionally, we had federal and state research and development tax credit carryforwards of $100.4 million and $76.7 million as of January 31, 2018 and 2017, respectively. Our federal tax credits will start to expire in 2026 if not utilized. At January 31, 2018, we also had $2.3 million of California Enterprise Zone credits. The California Enterprise Zone credits will expire in 2024 if not utilized.
If certain factors change, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance, our consolidated financial statements in the period of reversal would likely reflect an increase in assets on our balance sheet and a corresponding tax benefit to our consolidated statements of operations in the amount of the reversal.
Because of certain prior period ownership changes, the utilization of a portion of our U.S. federal and state NOL and tax credit carryforwards may be limited.
We have not provided U.S. income taxes for the unremitted earnings of foreign subsidiaries because such earnings are intended to be reinvested in the foreign jurisdictions. As a result of the Act, we have accumulated deficits such that no transition tax is expected to be due upon newly enacted IRC 965.
Due to the adoption of ASU 2016-09, the excess tax benefits associated with stock-based compensation are recognized as income tax expense in our consolidated statements of operations.
As of January 31, 2018, our unrecognized tax benefits were $31.8 million, of which $0.7 million would, if recognized, impact our effective tax rate. The remainder will not, if recognized, affect the effective income tax rate due to the valuation allowance that currently offsets deferred tax assets.
Unrecognized tax benefit balances are presented below (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended January 31, |
| 2018 | | 2017 | | 2016 |
Balance at beginning of year | $ | 16,755 |
| | $ | 12,493 |
| | $ | 8,462 |
|
Increase related to prior year tax positions | 6,355 |
| | — |
| | — |
|
Decrease related to prior year tax positions | — |
| | — |
| | — |
|
Increase related to current year tax positions | 8,692 |
| | 4,262 |
| | 4,031 |
|
Balance at end of year | $ | 31,802 |
| | $ | 16,755 |
| | $ | 12,493 |
|
We are required to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments were reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities.
We are subject to income taxes in United States federal and various state and local jurisdictions. Generally, we are no longer subject to United States federal, state and local tax examinations for tax years ended before January 31, 2014. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward.
The amount of unrecognized tax benefits could be reduced upon filing of an Application for Change In Accounting Method with the Internal Revenue Service. We estimate that our potential reduction in unrecognized tax benefits during the next 12 months to be $6.0 million.
We accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 31, 2018 and 2017, there was accrued interest and penalties of $0.1 million.