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.

The following is a geographical breakdown of income before the provision for income taxes:



	Year Ended June 30,
	2013			2012			2011
Domestic income	$	(20,525	)	$	(13,064	)	$	9,039
Foreign income	198,735			150,409			127,095
Income before income taxes	$	178,210		$	137,345		$	136,134

The provision for income taxes consisted of the following:



	Year Ended June 30,
	2013			2012			2011
Current income taxes:
Domestic	$	747		$	6,147		$	5,693
Foreign	34,739			84,816			25,017
	35,486			90,963			30,710
Deferred income taxes (recoveries):
Domestic	3,126			6,470			1,351
Foreign	(8,922		)	(85,262		)	(19,130		)
	(5,796		)	(78,792		)	(17,779		)
Provision for income taxes	$	29,690		$	12,171		$	12,931

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,
	2013			2012			2011
Expected statutory rate	26.5		%	27.25		%	29.25		%
Expected provision for income taxes	$	47,226		$	37,427		$	39,819
Effect of foreign tax rate differences	(27,026		)	(21,496		)	(10,258		)
Change in valuation allowance	2,082			15,536			(4,840		)
Amortization of deferred charges	10,922			11,112			8,535
Effect of permanent differences	6,008			6,902			1,577
Effect of Canadian to US dollar functional currency election	—			(5,887		)	—
Withholding taxes and other items	(2,093		)	1,473			(5,177		)
Impact of internal reorganization of subsidiaries and integration of acquisitions	(7,429		)	(32,896		)	(16,725		)
	$	29,690		$	12,171		$	12,931

Substantially all the tax rate differential for international jurisdictions was driven by earnings in Luxembourg. An additional impact on the difference in our consolidated tax rate from the statutory Canadian tax rate was from tax benefits relating to the internal reorganization of certain recently acquired international subsidiaries wherein a change in the tax status of those subsidiaries resulted in both a significant reduction of deferred tax liabilities related to acquired intangibles and a corresponding reduction in income tax expense.

The effective tax rate (which is the provision for taxes expressed as a percentage of net income before taxes) increased to 16.6% for Fiscal 2013 from 8.9% for Fiscal 2012 primarily due to greater tax benefits realized in Fiscal 2012 relating to the internal reorganization of the acquired international subsidiaries and a Canadian election to file tax returns in U.S. dollar functional currency. The Fiscal 2013 tax expense also includes an increase in tax expense related to the impact of adjustments in the United States and Australia upon filing of tax returns, which is offset by tax benefits achieved on account of tax years becoming statute barred for purposes of uncertain tax positions, as well as a decrease in the impact of valuation allowances. The remainder of the differences are due to normal course movements and non material items.

We have approximately $22.1 million of domestic non-capital loss carryforwards. In addition, we have $160.0 million of foreign non-capital loss carryforwards of which $109.6 million have no expiry date. The remainder of the domestic and foreign losses expires between 2014 and 2033. In addition, investment tax credits of $36.3 million will expire between 2018 and 2033.

The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:



	June 30,
	2013			2012
Deferred tax assets
Non-capital loss carryforwards	$	55,946		$	47,516
Capital loss carryforwards	3,010			3,002
Undeducted scientific research and development expenses	72,555			60,415
Depreciation and amortization	16,331			12,049
Restructuring costs and other reserves	20,325			11,274
Deferred revenue	58,471			55,267
Other	11,066			3,544
Total deferred tax asset	$	237,704		$	193,067
Valuation allowance	$	(80,778	)	$	(63,431	)
Deferred tax liabilities
Scientific research and development tax credits	$	(7,484	)	$	(8,695	)
Deferred credits	—			(906		)
Acquired intangibles	(55,128		)	(11,040		)
Other	(18,336		)	(18,181		)
Deferred tax liabilities	$	(80,948	)	$	(38,822	)
Net deferred tax asset (liability)	$	75,978		$	90,814
Comprised of:
Current assets	$	11,082		$	4,003
Long-term assets	135,695			115,128
Current liabilities	(1,127		)	(1,612		)
Long-term liabilities	(69,672		)	(26,705		)
	$	75,978		$	90,814

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, 2011	$	132,892
Increases on account of current year positions	5,279
Increases on account of prior year positions*	65,994
Decreases due to settlements with tax authorities	(4,935		)
Decreases due to lapses of statutes of limitations	(42,949		)
Unrecognized tax benefits as of July 1, 2012	$	156,281
Increases on account of current year positions	5,736
Increases on account of prior year positions**	22,017
Decreases due to settlements with tax authorities	(5,138		)
Decreases due to lapses of statutes of limitations	(29,993		)
Unrecognized tax benefits as of June 30, 2013	$	148,903


*	Included in these balances as of June 30, 2012 are acquired balances of $0.4 million relating to the acquisition of Global 360.


**	Included in these balances as of June 30, 2013 are acquired balances of $8.8 million relating to the acquisition of EasyLink.

Included in the above tabular reconciliation are unrecognized tax benefits of $8.8 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 $140.1 million as of June 30, 2013 ($149.5 million as of June 30, 2012).

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

For the year ended June 30, 2013, we recognized the following amounts as income tax-related interest expense and penalties:



	Year Ended June 30,
	2013			2012			2011
Interest expense	$	(736	)	$	9,383		$	3,387
Penalties expense (recovery)	65			(10,764		)	75
Total	$	(671	)	$	(1,381	)	$	3,462

As of June 30, 2013 and June 30, 2012, the following amounts have been accrued on account of income tax-related interest expense and penalties:



	As of June 30, 2013		As of June 30, 2012
Interest expense accrued *	$	18,210	$	19,316
Penalties accrued *	$	6,045	$	4,040



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

Included in the accrual balances as of June 30, 2013 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 June 30, 2013, could decrease tax expense in the next 12 months by $3.8 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, Germany, 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 June 30, 2013, 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 $0.4 million (June 30, 2012—nil).