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Income Taxes | 12 Months Ended
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Jun. 30, 2011
Income Taxes |
Income Taxes | NOTE 13—INCOME TAXES We operate in several tax jurisdictions. Our income is subject to varying rates of tax, and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. The effective tax rate represents the net effect of the mix of income earned in various tax jurisdictions which are subject to a wide range of income tax rates. The following is a geographical breakdown of income before the provision for income taxes:
|  | Year Ended June 30, |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Domestic income |  | $ | 6,686 |  |  | $ | 45,954 |  |  | $ | 28,493 |
Foreign income |  |  | 125,986 |  |  |  | 44,569 |  |  |  | 52,284 |
Income before income taxes |  | $ | 132,672 |  |  | $ | 90,523 |  |  | $ | 80,777 |
The provision for income taxes consisted of the following:
|  | Year Ended June 30, |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Current income taxes: |  |  |  |  |  |  |  |  |  |  |  |
Domestic |  | $ | 3,340 |  |  | $ | 2,649 |  |  | $ | 5,450 |
Foreign |  |  | 23,908 |  |  |  | 22,881 |  |  |  | 28,252 |
|  |  | 27,248 |  |  |  | 25,530 |  |  |  | 33,702 |
Deferred income taxes (recoveries): |  |  |  |  |  |  |  |  |  |  |  |
Domestic |  |  | 1,351 |  |  |  | 16,001 |  |  |  | (60 | )
Foreign |  |  | (19,130 | ) |  |  | (40,220 | ) |  |  | (9,854 | )
|  |  | (17,779 | ) |  |  | (24,219 | ) |  |  | (9,914 | )
Provision for income taxes |  | $ | 9,469 |  |  | $ | 1,311 |  |  | $ | 23,788 |
A reconciliation of the combined Canadian federal and provincial income tax rate with our effective income tax rate is as follows:
|  | Year Ended June 30, |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Expected statutory rate |  |  | 29.25 | % |  |  | 32.50 | % |  |  | 33.25 | %
Expected provision for income taxes |  | $ | 38,807 |  |  | $ | 29,420 |  |  | $ | 26,858 |
Effect of permanent differences |  |  | 2,590 |  |  |  | (2,669 | ) |  |  | (4,850 | )
Effect of foreign tax rate differences |  |  | (10,258 | ) |  |  | (8,275 | ) |  |  | (7,296 | )
Effect of change in tax rates |  |  | 2,001 |  |  |  | (6,768 | ) |  |  | (1,540 | )
Change in valuation allowance |  |  | (4,840 | ) |  |  | 814 |  |  |  | 6,823 |
Difference in tax filings from provision |  |  | (3,344 | ) |  |  | 1,590 |  |  |  | 177 |
Amortization of deferred charges |  |  | 8,535 |  |  |  | — |  |  |  | — |
Withholding taxes and other items |  |  | (7,297 | ) |  |  | 8,401 |  |  |  | 3,616 |
Impact of internal reorganization of subsidiaries and integration of acquisitions |  |  | (16,725 | ) |  |  | (21,202 | ) |  |  | — |
|  | $ | 9,469 |  |  | $ | 1,311 |  |  | $ | 23,788 |
As a result of an internal reorganization of our international subsidiaries and current year acquisitions, we recorded a tax recovery of $16.7 million during Fiscal 2011. This initiative was undertaken to consolidate our intellectual property within certain jurisdictions and to effect an operational reduction of our global subsidiaries with a view to, eventually, having a single operating legal entity in each jurisdiction. We have approximately $44.4 million of domestic non-capital loss carryforwards. In addition, we have $177.9 million of foreign non-capital loss carryforwards of which $137.6 million have no expiry date. The remainder of the foreign losses expires between 2012 and 2030. In addition, investment tax credits of $32.2 million will expire between 2012 and 2030. The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
|  | June 30, |
|  | 2011 |  |  | 2010 |
Deferred tax assets |  |  |  |  |  |  |  |
Non-capital loss carryforwards |  | $ | 68,870 |  |  | $ | 63,589 |
Capital loss carryforwards |  |  | 2,832 |  |  |  | — |
Undeducted scientific research and development expenses |  |  | 8,615 |  |  |  | 7,859 |
Depreciation and amortization |  |  | 11,895 |  |  |  | 15,510 |
Restructuring costs and other reserves |  |  | 8,112 |  |  |  | 10,690 |
Other |  |  | 22,373 |  |  |  | 22,923 |
Total deferred tax asset |  |  | 122,697 |  |  |  | 120,571 |
Valuation allowance |  |  | (40,955 | ) |  |  | (56,448 | )
Deferred tax liabilities |  |  |  |  |  |  |  |
Scientific research and development tax credits |  |  | (6,304 | ) |  |  | (8,252 | )
Deferred credits |  |  | (906 | ) |  |  | (861 | )
Acquired intangibles |  |  | (33,029 | ) |  |  | (11,028 | )
Intercompany debt reserve |  |  | — |  |  |  | (22,418 | )
Other |  |  | (15,058 | ) |  |  | (12,745 | )
Deferred tax liabilities |  |  | (55,297 | ) |  |  | (55,304 | )
Net deferred tax asset (liability) |  | $ | 26,445 |  |  | $ | 8,819 |
Comprised of: |  |  |  |  |  |  |  |
Current assets |  | $ | 27,861 |  |  | $ | 20,242 |
Long-term assets |  |  | 42,737 |  |  |  | 30,420 |
Current liabilities |  |  | (624 | ) |  |  | (28,384 | )
Long-term liabilities |  |  | (43,529 | ) |  |  | (13,459 | )
|  | $ | 26,445 |  |  | $ | 8,819 |
We believe that sufficient uncertainty exists regarding the realization of certain deferred tax assets that a valuation allowance is required. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction, including but not limited to factors such as estimated taxable income, any historical experience of losses for tax purposes and the future growth of OpenText. The aggregate changes in the balance of our gross unrecognized tax benefits (including interest and penalties) were as follows:
Unrecognized tax benefits as of July 1, 2009 |  |  | 91,353 |
Increases on account of current year positions |  |  | 540 |
Increases on account of prior year positions* |  |  | 22,429 |
Decreases due to settlements with tax authorities |  |  | (671 | )
Decreases due to lapses of statutes of limitations |  |  | (6,153 | )
Unrecognized tax benefits as of July 1, 2010 |  |  | 107,498 |
Increases on account of current year positions |  |  | 11,601 |
Increases on account of prior year positions* |  |  | 21,661 |
Decreases due to settlements with tax authorities |  |  | (2,500 | )
Decreases due to lapses of statutes of limitations |  |  | (5,368 | )
Unrecognized tax benefits as of June 30, 2011 |  | $ | 132,892 |
* | Included in these balances as of June 30, 2011, are acquired balances of $12.3 million, relating to the acquisition of StreamServe and $4.5 million relating to the acquisition of Metastorm.
Included in the above tabular reconciliation are unrecognized tax benefits of $20.9 million relating to deferred tax assets in jurisdictions in which these deferred tax assets are offset with valuation allowances. The net unrecognized tax benefit excluding these deferred tax assets is $112.0 million as of June 30, 2011 ($65.4 million as of June 30, 2010). Upon adoption of ASC Topic 740-10 "Income Taxes" (ASC Topic 740-10), we elected to follow an accounting policy to classify interest related to liabilities for income tax expense under the "Interest income (expense), net" line and penalties related to liabilities for income tax expense under the "Other income (expense)" line of our Consolidated Statements of Income. For the year ended June 30, 2011, we recognized interest in the amount of $3.0 million (June 30, 2010 – $1.4 million, June 30, 2009 – $1.0 million) and penalties reversed in the amount of $0.4 million (June 30, 2010 penalties recognized- $1.1 million, June 30, 2009 penalties recognized – $0.2 million). The amount of interest and penalties accrued as of June 30, 2011 was $10.3 million ($6.8 million as of June 30, 2010) and $15.8 million ($12.0 million as of June 30, 2010), respectively. Included in these balances as of June 30, 2011, are accrued interest and penalties of $nil and $3.5 million, respectively, relating to the acquisition of StreamServe (see note 17). We believe that it is reasonably possible that the gross unrecognized tax benefits, as of June 30, 2011 could increase tax expense in the next 12 months by $0.2 million (June 30, 2010, increased by $4.0 million), relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions. Our three most significant tax jurisdictions are Canada, the United States and Germany. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. Tax years that remain open to examinations by local taxing authorities vary by jurisdiction up to ten years. We are subject to tax examinations in all major taxing jurisdictions in which we operate and currently have examinations open in Canada, the United States, France, and Spain. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax examinations and that any settlement will not have a material adverse effect on our consolidated financial position or results of operations. However, we cannot predict with any level of certainty the exact nature of any future possible settlements.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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