INCOME TAXES

Our effective tax rate represents the net effect of the mix of income earned in various tax jurisdictions that are subject to a wide range of income tax rates.

We recognize interest expense and penalties related to income tax matters in income tax expense.

For the three and six months ended December 31, 2012 and 2011, we recognized the following amounts as income tax-related interest expense and penalties:



	Three Months Ended December 31,				Six Months Ended December 31,
	2012		2011		2012		2011
Interest expense (recovery)	(2,041	)	4,897		(187	)	6,459
Penalties expense (recovery)	(3	)	(7,279	)	36		(7,241	)
Total	(2,044	)	(2,382	)	(151	)	(782	)

As of December 31, 2012 and June 30, 2012, the following amounts have been accrued on account of income tax-related interest expense and penalties:



	As of December 31, 2012		As of June 30, 2012
Interest expense accrued *	$	20,002	$	19,316
Penalties accrued *	$	6,000	$	4,040



*	These balances have been included within "Long-term income taxes payable" within the Condensed Consolidated Balance Sheets.

Included in the accrual balances as of December 31, 2012 are accrued interest expense and penalties of $0.4 million and $1.9 million, respectively, relating to the acquisition of EasyLink.

We believe that it is reasonably possible that the gross unrecognized tax benefits, as of December 31, 2012, could decrease tax expense in the next 12 months by $11.9 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 four most significant tax jurisdictions are Canada, the United States, Luxembourg 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, Spain, and India. 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.

As at December 31, 2012, we have not provided for additional foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of our non-Canadian subsidiaries other than certain United States subsidiaries, since such earnings are considered permanently invested in those subsidiaries, or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future. We do plan to make periodic repatriations that will be subject to withholding taxes from certain United States subsidiaries and have accrued additional tax cost attributable to these distributions in the amount of $0.3 million.

The decrease in the provision for income taxes from $6.8 million for the three months ended December 31, 2011 to $3.2 million for the three months ended December 31, 2012 is primarily due to the impact of valuation allowances set up during the three months ended December 31, 2011.

The net increase in tax expense from $5.5 million for the six months ended December 31, 2011 to $19.4 million for the six months ended December 31, 2012 was primarily due to tax benefits realized in Fiscal 2012 relating to the internal reorganization of the acquired international subsidiaries of Metastorm Inc., in the amount of $4.1 million, and a Canadian election to file tax returns in U.S. dollar functional currency, in the amount of $5.9 million. The Fiscal 2013 tax expense includes an increase of $4.6 million relating to the impact of adjustments in the United States and Australia upon filing of tax returns. The remainder of the differences are due to normal course movements and non-material items.