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Income Taxes | 9 Months Ended
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Jul. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Effective Tax Rate We estimate our annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account our estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and possible outcomes of audits. The following table presented the provision for income taxes and the effective tax rates:
| Three Months Ended July 31, |  | Nine Months Ended July 31,
| 2023 |  | 2022 |  | 2023 |  | 2022
| (in thousands)
Income before income taxes | $ | 321,282 |  |  | $ | 236,354 |  |  | $ | 892,091 |  |  | $ | 903,385 |
Provision (benefit) for income taxes | $ | (11,773) |  |  | $ | 16,708 |  |  | $ | 20,461 |  |  | $ | 76,506 |
Effective tax rate | (3.7) | % |  | 7.1 | % |  | 2.3 | % |  | 8.5 | %
Our effective tax rate for the nine months ended July 31, 2023 is lower than the statutory federal corporate tax rate of 21% primarily due to U.S. federal research tax credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, U.S. foreign tax credits, and the tax benefit recorded as a result of concluding the Hungary tax litigation, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings. On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which significantly changed prior U.S. tax law and includes numerous provisions that affect our business. Effective our fiscal 2023, the Tax Act requires that research and development expenditures are capitalized and amortized instead of being deducted when incurred. Domestic research is capitalized over five years and foreign research is capitalized over fifteen years. For fiscal 2023, this will result in a significant increase to our cash tax liabilities and will also decrease our effective tax rate due to increasing the foreign derived intangible income deduction. The impact to our cash tax liabilities will decrease over time as the research and development expenditures are amortized. Our effective tax rate decreased in the three months ended July 31, 2023 as compared to the same period in fiscal 2022, primarily due to higher foreign derived intangible income deduction, as a result of the Tax Act, higher excess tax benefits from stock-based compensation, and the tax benefit recorded as a result of concluding the Hungary tax litigation. Our effective tax rate decreased for the nine months ended July 31, 2023 as compared to the same period in fiscal 2022, primarily due to higher foreign derived intangible income deduction and the tax benefit recorded as a result of concluding the Hungary tax litigation, offset by lower excess tax benefits from stock-based compensation. The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that in the coming 12 months, it is reasonably possible that either certain audits and ongoing tax litigation will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $10 million. Non-U.S. Examinations Hungarian Tax Authority In 2017, the Hungarian Tax Authority (the HTA) assessed withholding taxes of approximately $25.0 million and interest and penalties of $11.0 million against our Hungary subsidiary (Synopsys Hungary). Synopsys Hungary contested the assessment with the Hungarian Administrative Court (Administrative Court). In fiscal 2018, as required under Hungarian law, Synopsys Hungary paid the assessment and in fiscal 2019, recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits. The Administrative Court found against Synopsys Hungary, and we appealed to the Hungarian Supreme Court. During 2021, the Hungarian Supreme Court heard our appeal and remanded the case to the Administrative Court for further proceedings. The Administrative Court once again ruled against Synopsys Hungary, and we filed another appeal with the Hungarian Supreme Court. The Hungarian Supreme Court heard our appeal on January 27, 2022, vacated the lower court's decision and remanded the case back to the Administrative Court for further proceedings. Hearings with the Administrative Court were held on June 30, 2022, September 22, 2022 and April 25, 2023. The Administrative Court issued its written decision in favor of Synopsys Hungary on May 17, 2023, and the HTA subsequently refunded Synopsys Hungary the tax, penalty and interest paid in fiscal 2018, as well as additional interest totaling $39.1 million (including foreign currency effects). The HTA had until July 14, 2023, to file an appeal with the Hungarian Supreme Court and the HTA did not appeal. This concludes the litigation. During the third quarter of fiscal 2023, Synopsys released its unrecognized tax benefit and offsetting U.S. foreign tax credits, resulting in a net benefit of $23.8 million. We are also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations. Legislative Developments On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. The IR Act includes a 15% minimum tax based primarily on global consolidated U.S. GAAP profits with a $1 billion minimum threshold. The tax takes effect in fiscal 2024, with the $1 billion threshold measured as an average over three years commencing in the current fiscal year. Computation of the tax includes adjustments which, among others, provide for an offset of income taxes paid or accrued in non-U.S. jurisdictions. The details of the computation will be subject to regulations to be issued by the U.S. Department of the Treasury. Synopsys will monitor regulatory developments and will continue to evaluate the impact, if any, of the minimum tax. The IR Act includes provisions intended to mitigate climate change by, among others, providing tax credit incentives for reductions in greenhouse gas emissions. The details of the implementation of these incentives are subject to regulations to be released by the U.S. Department of the Treasury. Synopsys is monitoring these developments and will continue to evaluate opportunities to utilize these incentives in the future. The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. We do not expect a material impact on our overall capital allocation strategy or our consolidated financial statements. On August 9, 2022, the CHIPS and Science Act of 2022 (the CHIPS Act) was enacted in the United States. The CHIPS Act provides financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States. We are evaluating potential opportunities related to the CHIPS Act.

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