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Income Taxes
 12 Months Ended
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.