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Income Taxes
 12 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

8. Income Taxes

Our income (loss) before income taxes consisted of the following:

 

(in thousands)

 

Year ended September 30,

 

 

 

2021

 

 

2020

 

 

2019

 

Domestic

 

$

41,199

 

 

$

(73,865

)

 

$

(112,077

)

Foreign

 

 

350,556

 

 

 

208,571

 

 

 

132,377

 

Total income before income taxes

 

$

391,755

 

 

$

134,706

 

 

$

20,300

 

 

Our provision (benefit) for income taxes consisted of the following:

 

(in thousands)

 

Year ended September 30,

 

 

 

2021

 

 

2020

 

 

2019

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

4,774

 

 

$

2,187

 

 

$

13,130

 

State

 

 

1,609

 

 

 

1,266

 

 

 

(945

)

Foreign

 

 

66,554

 

 

 

25,199

 

 

 

33,867

 

 

 

 

72,937

 

 

 

28,652

 

 

 

46,052

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(152,311

)

 

 

(26,811

)

 

 

22,911

 

State

 

 

(27,228

)

 

 

(4,063

)

 

 

1,759

 

Foreign

 

 

21,434

 

 

 

6,233

 

 

 

(22,962

)

 

 

 

(158,105

)

 

 

(24,641

)

 

 

1,708

 

Total provision (benefit) for income taxes

 

$

(85,168

)

 

$

4,011

 

 

$

47,760

 

 

Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit) for income taxes as follows:

 

(in thousands)

 

Year ended September 30,

 

 

 

2021

 

 

2020

 

 

2019

 

Statutory federal income tax rate

 

$

82,268

 

 

 

21

%

 

$

28,288

 

 

 

21

%

 

$

4,263

 

 

 

21

%

Change in valuation allowance

 

 

(134,695

)

 

 

(34

)%

 

 

(16,489

)

 

 

(12

)%

 

 

66,417

 

 

 

327

%

State income taxes, net of federal tax benefit

 

 

(28,768

)

 

 

(8

)%

 

 

(2,998

)

 

 

(2

)%

 

 

607

 

 

 

3

%

Federal research and development credits

 

 

(5,764

)

 

 

(2

)%

 

 

(5,483

)

 

 

(4

)%

 

 

(3,731

)

 

 

(18

)%

Uncertain tax positions

 

 

3,398

 

 

 

1

%

 

 

3,072

 

 

 

2

%

 

 

2,611

 

 

 

13

%

Foreign tax credit

 

 

(35,368

)

 

 

(9

)%

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Foreign rate differences

 

 

(34,584

)

 

 

(9

)%

 

$

(22,074

)

 

 

(16

)%

 

$

(26,952

)

 

 

(133

)%

Foreign tax on U.S. provision

 

 

5,931

 

 

 

2

%

 

 

4,523

 

 

 

3

%

 

 

6,547

 

 

 

32

%

Excess tax benefits from restricted stock

 

 

(6,141

)

 

 

(2

)%

 

 

(1,743

)

 

 

(1

)%

 

 

(5,940

)

 

 

(29

)%

Audits and settlements

 

 

33,370

 

 

 

9

%

 

 

—

 

 

 

—

 

 

 

51

 

 

 

—

 

U.S. permanent items

 

 

18,389

 

 

 

5

%

 

 

6,590

 

 

 

5

%

 

 

2,483

 

 

 

12

%

BEAT

 

 

2,936

 

 

 

1

%

 

 

(1,759

)

 

 

(1

)%

 

 

1,759

 

 

 

9

%

GILTI, net of foreign tax credits

 

 

18,217

 

 

 

4

%

 

 

14,899

 

 

 

11

%

 

 

6,170

 

 

 

31

%

Foreign-Derived Intangible Income (FDII)

 

 

(4,428

)

 

 

(1

)%

 

 

(2,461

)

 

 

(2

)%

 

 

(6,409

)

 

 

(32

)%

Other, net

 

 

71

 

 

 

—

 

 

 

(354

)

 

 

(1

)%

 

 

(116

)

 

 

(1

)%

Provision (benefit) for income taxes

 

$

(85,168

)

 

 

(22

)%

 

$

4,011

 

 

 

3

%

 

$

47,760

 

 

 

235

%

 

In 2021, 2020, and 2019, our tax rate differed from the U.S. statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2021, 2020, and 2019, the foreign rate differential predominantly relates to these earnings.

In 2021, in addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax rate due to the release of the valuation allowance on the majority of our U.S. net deferred tax assets, the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation.  

In 2020, in addition to the foreign rate differential, our tax rate differed from the statutory federal income tax rate due to U.S. tax reform, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, we recorded benefits for the reduction of the U.S. valuation allowance as a result of the Onshape acquisition. A further reduction to the valuation allowance was also recorded to reflect the impact from the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets.

In 2019, our effective tax rate was higher than the statutory federal income tax rate due in large part to the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets requiring an increase to the U.S. valuation allowance, U.S. tax reform and foreign withholding taxes, an obligation of the U.S. parent. This is offset by foreign rate differences, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606.

At September 30, 2021 and 2020, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $15.7 million ($5.0 million in accrued income taxes, $0.8 million in other current liabilities and $9.9 million in other liabilities) and $15.4 million ($7.0 million in accrued income taxes, $1.0 million in other current liabilities and $7.4 million in other liabilities), respectively. At September 30, 2021and 2020, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $15.4 million and $17.3 million, respectively. We made net income tax payments of $56.0 million, $52.6 million and $38.9 million in 2021, 2020 and 2019, respectively.

The significant temporary differences that created deferred tax assets and liabilities are shown below:

 

(in thousands)

 

September 30,

 

 

 

2021

 

 

2020

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

65,383

 

 

$

61,495

 

Foreign tax credits

 

 

36,287

 

 

 

8,074

 

Capitalized research and development

 

 

27,546

 

 

 

30,109

 

Pension benefits

 

 

14,097

 

 

 

14,370

 

Prepaid expenses

 

 

12,540

 

 

 

13,579

 

Deferred revenue

 

 

2,274

 

 

 

6,021

 

Stock-based compensation

 

 

15,822

 

 

 

13,630

 

Other reserves not currently deductible

 

 

16,796

 

 

 

15,130

 

Amortization of intangible assets

 

 

147,385

 

 

 

162,426

 

Research and development and other tax credits

 

 

74,846

 

 

 

70,695

 

Lease liabilities

 

 

51,471

 

 

 

52,224

 

Fixed assets

 

 

53,025

 

 

 

47,457

 

Capital loss carryforward

 

 

35,156

 

 

 

35,851

 

Other

 

 

2,269

 

 

 

1,849

 

Gross deferred tax assets

 

 

554,897

 

 

 

532,910

 

Valuation allowance

 

 

(52,085

)

 

 

(205,423

)

Total deferred tax assets

 

 

502,812

 

 

 

327,487

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Acquired intangible assets not deductible

 

 

(108,746

)

 

 

(65,894

)

Lease assets

 

 

(37,273

)

 

 

(35,885

)

Pension prepayments

 

 

(2,834

)

 

 

(1,155

)

Deferred revenue

 

 

(2,662

)

 

 

(594

)

Depreciation

 

 

(7,121

)

 

 

(7,481

)

Unbilled accounts receivable

 

 

(6,391

)

 

 

(12,699

)

Deferred income

 

 

(21,744

)

 

 

(5,821

)

Prepaid commissions

 

 

(16,990

)

 

 

(17,124

)

Other

 

 

(5,427

)

 

 

(2,302

)

Total deferred tax liabilities

 

 

(209,188

)

 

 

(148,955

)

Net deferred tax assets

 

$

293,624

 

 

$

178,532

 

We reassess our valuation allowance requirements each financial reporting period.  We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use its existing deferred tax assets. In the assessment for the period ended September 30, 2021, we have concluded it is more likely than not that our deferred tax assets related to United States federal and state income will be realizable, and therefore, the United States federal and the majority of the state valuation allowances were released, which resulted in non-cash federal and state tax benefits of $109.4 million and $24.8 million, respectively, to earnings in this period. That determination was based, in part, on the Company’s cumulative profits before tax and permanent differences from the past three years, which became profitable during 2021, and projections of profits before tax and permanent differences in future years.

For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2021, we had U.S. federal NOL carryforwards from acquisitions of $190.3 million, of which $32.5 million expire in 2023 to 2036. The remaining carryforwards of $157.8 million do not expire. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382.

As of September 30, 2021, we had Federal R&D credit carryforwards of $54.1 million, which expire beginning in 2027 and ending in 2041, and Massachusetts R&D credit carryforwards of $24.2 million, which expire beginning in 2022 and ending in 2036. We also had foreign tax credits of $36.3 million, which expire beginning in 2025 and ending in 2031.

We also have NOL carryforwards in non-U.S. jurisdictions totaling $49.8 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $4.7 million that expire beginning in 2030 and ending in 2040. Additionally, we have amortization carryforwards of $1,084.6 million in a foreign

jurisdiction. There are limitations imposed on the utilization of such attributes that could restrict the recognition of any tax benefits.

As of September 30, 2021, we have a valuation allowance of $17.7 million against net deferred tax assets in the U.S. and a valuation allowance of $34.4 million against net deferred tax assets in certain foreign jurisdictions. The $17.7 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits.

The changes to the valuation allowance were primarily due to the following:

 

(in thousands)

 

Year ended September 30,

 

 

 

2021

 

 

2020

 

 

2019

 

Valuation allowance, beginning of year

 

$

205,423

 

 

$

177,663

 

 

$

141,950

 

Net release of valuation allowance(1)

 

 

(134,235

)

 

 

—

 

 

 

(1,772

)

Net increase (decrease) in deferred tax assets with a full valuation allowance(2)

 

 

(19,103

)

 

 

27,760

 

 

 

37,485

 

Valuation allowance, end of year

 

$

52,085

 

 

$

205,423

 

 

$

177,663

 

 

(1)

In 2021, this is attributable to the release in the U.S and in 2019, this is attributable to the release in foreign jurisdictions.

(2)

In 2021, this change includes the loss of state attributes a upon merger of two wholly-owned subsidiaries. In 2020, this change is largely attributed to the Onshape acquisition, the adoption of ASC 842 and the impact to the change in scheduling of the reversal of existing temporary differences. In 2019, this is due in large part to a change in method of accounting for federal income tax purposes resulting in deferred tax liabilities that cannot be offset against available tax attributes in the scheduling of the reversal of existing temporary differences, and by the adoption of ASC 606.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2021, 2020 and 2019 we recorded interest expense of $2.2 million, $0.3 million and $0.1 million, respectively. In 2021, we had penalty expenses of $2.0 million. In 2020 and 2019 we had no tax penalty expense in our income tax provision. As of September 30, 2021 and 2020, we had accrued $0.7 million and $0.6 million of net estimated interest expense related to income tax accruals, respectively. We had no accrued tax penalties as of September 30, 2021, 2020 or 2019.

 

 

 

Year ended September 30,

 

Unrecognized tax benefits (in thousands)

 

2021

 

 

2020

 

 

2019

 

Unrecognized tax benefit, beginning of year

 

$

16,107

 

 

$

11,484

 

 

$

9,812

 

Tax positions related to current year:

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

4,844

 

 

 

2,173

 

 

 

1,466

 

Tax positions related to prior years:

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

30,130

 

 

 

2,452

 

 

 

1,375

 

Reductions

 

 

(478

)

 

 

(2

)

 

 

(9

)

Settlements

 

 

(29,437

)

 

 

—

 

 

 

(1,160

)

Unrecognized tax benefit, end of year

 

$

21,166

 

 

$

16,107

 

 

$

11,484

 

 

If all of our unrecognized tax benefits as of September 30, 2021 were to become recognizable in the future, we would record a benefit to the income tax provision of $21.2 million (which would be partially offset by an increase in the U.S. valuation allowance of $4.5 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $1 million as audits close and statutes of limitations expire.

Our results for the year ended September 30, 2021 include a charge of $37.3 million related to the effects of a tax matter in the Republic of Korea (South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of $2.9 million. The charge relates to an assessment with respect to various tax issues, primarily foreign withholding taxes, that was under appeal in South Korea. We received an assessment of approximately $12 million from the tax authorities in South Korea in the fourth quarter of 2016 for the years 2011 to 2015 and paid the assessment in the first quarter of 2017. We appealed that assessment to an intermediate appellate court. In December 2020, our appeal to that court - the Seoul High Court - was rejected. We appealed this decision to the Supreme Court of the Republic of Korea. In May 2021, the Supreme Court denied our request for a review of the case. Therefore, the decision of the Seoul High Court was deemed final. We made additional payments of approximately $20 million to the tax authorities in South Korea in FY’21 for the years 2016 to 2021 in settlement of the amounts previously accrued.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2021, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

 

Major Tax Jurisdiction

 

Open Years

United States

 

2017 through 2021

Germany

 

2015 through 2021

France

 

2018 through 2021

Japan

 

2016 through 2021

Ireland

 

2017 through 2021

 

Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are utilized in later periods.

We incurred expenses related to stock-based compensation in 2021, 2020 and 2019 of $177.3 million, $115.1 million and $86.4 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $39.9 million, $13.4 million and $16.6 million in 2021, 2020 and 2019, respectively. Upon the settlement of the stock-based awards (i.e., vesting), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2021, 2020 and 2019, windfall tax benefits of $9.9 million, $1.3 million and $6.7 million were recorded to the tax provision. Prior to the adoption of ASU 2016-09, windfall tax benefits were recorded to APIC when they resulted in a reduction in taxes payable.

Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the U.S. unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.