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Income Taxes
 9 Months Ended
Sep. 30, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Company recorded a provision for income taxes of $4.0 million and $2.5 million for the three months ended September 30, 2023 and 2022, respectively, and a provision for (benefit from) income taxes of $(151.1) million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively. The provision for income taxes for the three months ended September 30, 2023 was primarily driven by foreign withholding taxes and adjustments to the valuation allowance release on U.S. deferred tax assets due to a change in forecasted taxable income and expense, offset by tax benefits from excess stock-based compensation deductions. The benefit from income taxes for the nine months ended September 30, 2023 was primarily driven by the valuation allowance release on U.S. deferred tax assets, as well as tax benefits from excess stock-based compensation deductions, offset by foreign withholding taxes. The provision for income taxes for the three and nine months ended September 30, 2022 was driven by a combination of the valuation allowance recorded on U.S. deferred tax assets, foreign withholding taxes, the statutory tax expense for the foreign jurisdictions for 2022 and indefinite-lived intangible tax amortization expense.
During the three months ended September 30, 2023 and 2022, the Company paid withholding taxes of $5.4 million and $5.5 million, respectively. During both the nine months ended September 30, 2023 and 2022, the Company paid withholding taxes of $15.8 million.
The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realizability of the Company’s net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. During the second quarter of 2023, based on all available positive and negative evidence, the Company determined that it was appropriate to release the valuation allowance on the majority of the Company’s U.S. federal and other state deferred tax assets. The Company recognized a $149.4 million discrete tax benefit during the three and six months ended June 30, 2023 as a result of the valuation allowance release.
During the second quarter of 2023, the Company reached a cumulative income position over the previous three years. The cumulative three-year income is considered positive evidence, which is considered objective and verifiable, and thus received significant weighting. Additional positive evidence considered by the Company in its assessment included recent utilization of tax attribute carryforwards and future forecasts of continued profitability in the United States. Negative evidence the Company
considered included economic uncertainties, including volatility of the industry, and the possibility of a recession or a decline in the market.
Upon considering the relative impact of all evidence during the second quarter of 2023, both negative and positive, and the weight accorded to each, the Company concluded that it was more likely than not that the majority of its deferred tax assets would be realizable, with the exception of primarily its California research and development credits and certain expiring federal tax credits that have not met the “more likely than not” realization threshold criteria. As a result, the Company released the related valuation allowance against the majority of its federal and state deferred tax assets. The effect of the valuation allowance release is included as a component of the benefit from income taxes in the accompanying Unaudited Condensed Consolidated Statement of Operations.
When a change in valuation allowance is recognized during an interim period, the change in valuation allowance resulting from current year income is included in the annual effective tax rate and the release of valuation allowance supported by projections of future taxable income is recorded as a discrete provision for (benefit from) income taxes in the interim period. During the three months ended September 30, 2023, the Company further adjusted its valuation allowance release as a result of a change in forecasted income and tax expense, primarily due to the sale of intangible assets as part of the PHY IP group divestiture. The Company recognized discrete tax expense of $4.4 million during the three months ended September 30, 2023, and it recognized a $145.1 million discrete tax benefit during the nine months ended September 30, 2023, as a result of the valuation allowance release.
The Company has U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset U.S. federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. It is possible that some or all of these attributes could ultimately expire unused.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of December 31, 2022, the Company had $164.5 million of unrecognized tax benefits including $19.6 million recorded as a reduction of long-term deferred tax assets, $143.6 million recorded as a reduction of other assets associated with refundable withholding taxes previously withheld from licensees in South Korea, and $1.3 million recorded to long-term income taxes payable. As of September 30, 2023, the Company had approximately $179.5 million of unrecognized tax benefits, including $27.4 million recorded as a reduction of long-term deferred tax assets, $75.1 million recorded as a reduction of other assets associated with refundable withholding taxes previously withheld from licensees in South Korea and $77.0 million recorded in long-term income taxes payable. The decrease in the unrecognized tax benefits recorded as a reduction of other assets from December 31, 2022 to September 30, 2023, is due to the Company’s determination in the three months ended September 30, 2023, that it is more likely than not to succeed in its decision to request refund of Korean withholding tax for which refund claims were submitted in October 2023. The increase in unrecognized tax benefits recorded to long-term income taxes payable from December 31, 2022 to September 30, 2023 is primarily due to the Company’s decision to request refund of Korean withholding tax for which the Company claimed foreign tax credits in the United States. As a result of an analysis of court rulings and other settlement activities to date in South Korea, the Company has determined that it may be entitled to refund claims for foreign taxes previously withheld by licensees in South Korea. If the Company is successful in recovering the $152.6 million of refundable withholding taxes from South Korea, the refund will result in an offsetting reduction in U.S. foreign tax credits. The Company recognizes there are numerous risks and uncertainties associated with the ultimate collection of this refund. The Company previously maintained an offsetting reserve for the entire amount of refundable withholding taxes previously withheld in South Korea. During the three months ended September 30, 2023, the Company concluded it is more likely than not it will recover withholding taxes withheld during the past five years and accordingly filed a claim in October 2023 for refund of certain refundable withholding taxes, and recorded an income taxes receivable of $82.7 million with an offsetting long-term income taxes payable of $75.6 million and a reduction in long-term deferred tax assets of $7.1 million. The Company has not recorded a receivable for the portion of potentially available refunds for which a claim for refund has not been submitted or the Company does not intend to pursue at this time, as the Company does not at this time believe recovery of those taxes would be more likely than not if a refund claim were submitted. The Company continues to evaluate the potential for recovery of these taxes.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
Additionally, the Company’s future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.