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,
	2014			2013			2012
Domestic income	$	(11,623	)	$	(20,525	)	$	(13,064	)
Foreign income	288,158			198,735			150,409
Income before income taxes	$	276,535		$	178,210		$	137,345

The provision for income taxes consisted of the following:



	Year Ended June 30,
	2014			2013			2012
Current income taxes:
Domestic	$	1,424		$	747		$	6,147
Foreign	88,053			34,739			84,816
	89,477			35,486			90,963
Deferred income taxes (recoveries):
Domestic	5,901			3,126			6,470
Foreign	(36,917		)	(8,922		)	(85,262		)
	(31,016		)	(5,796		)	(78,792		)
Provision for income taxes	$	58,461		$	29,690		$	12,171

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,
	2014			2013			2012
Expected statutory rate	26.5		%	26.5		%	27.25		%
Expected provision for income taxes	$	73,282		$	47,226		$	37,427
Effect of foreign tax rate differences	(52,577		)	(27,026		)	(21,496		)
Change in valuation allowance	3,281			2,082			15,536
Amortization of deferred charges	11,307			10,922			11,112
Effect of permanent differences	7,643			6,008			6,902
Effect of Canadian to US dollar functional currency election	—			—			(5,887		)
Effect of changes in unrecognized tax benefits	13,214			(13,076		)	(7,005		)
Effect of withholding taxes	2,234			2,847			5,154
Other items	68			8,136			3,324
Impact of internal reorganization of subsidiaries and integration of acquisitions	9			(7,429		)	(32,896		)
	$	58,461		$	29,690		$	12,171

Substantially all the tax rate differential for international jurisdictions was driven by earnings in Luxembourg. In prior years, 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 GAAP tax rate (which is the provision for taxes expressed as a percentage of net income before taxes) increased to 21.1% for Fiscal 2014, from 16.6% for Fiscal 2013, primarily due to an increase in the net expense of unrecognized tax benefits with related interest and penalties in the amount of $26.3 million, and a decrease of $7.4 million in the benefit of the impact of internal reorganizations, offset by a decrease of $6.2 million related to the impact of adjustments in the United States, Germany and Australia upon filing of tax returns in Fiscal 2014 compared to Fiscal 2013. The remainder of the differences are due to normal course movements and non-material items.

We have approximately $29.1 million of domestic non-capital loss carryforwards. In addition, we have $608.6 million of foreign non-capital loss carryforwards of which $103.9 million have no expiry date. The remainder of the domestic and foreign losses expires between 2015 and 2032. In addition, investment tax credits of $39.8 million will expire between 2018 and 2034.

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



	June 30,
	2014			2013
Deferred tax assets
Non-capital loss carryforwards	$	205,576		$	55,946
Capital loss carryforwards	3,452			3,010
Undeducted scientific research and development expenses	76,743			72,555
Depreciation and amortization	16,441			16,331
Restructuring costs and other reserves	20,889			20,325
Deferred revenue	75,515			58,471
Other	29,458			11,066
Total deferred tax asset	$	428,074		$	237,704
Valuation allowance	$	(108,734	)	$	(80,778	)
Deferred tax liabilities
Scientific research and development tax credits	$	(6,848	)	$	(7,484	)
Acquired intangibles	(165,858		)	(55,128		)
Other	(23,391		)	(18,336		)
Deferred tax liabilities	$	(196,097	)	$	(80,948	)
Net deferred tax asset (liability)	$	123,243		$	75,978
Comprised of:
Current assets	$	28,215		$	11,082
Long-term assets	156,712			135,695
Current liabilities	(1,053		)	(1,127		)
Long-term liabilities	(60,631		)	(69,672		)
	$	123,243		$	75,978

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, 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 July 1, 2013	$	148,903
Increases on account of current year positions	5,037
Increases on account of prior year positions**	45,266
Decreases due to settlements with tax authorities	(2,321		)
Decreases due to lapses of statutes of limitations	(6,666		)
Unrecognized tax benefits as of June 30, 2014	$	190,219


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

**Included in these balances as of June 30, 2014 are acquired balances of $17.4 million relating to the acquisition of GXS.

Included in the above tabular reconciliation are unrecognized tax benefits of $27.6 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 $162.6 million as of June 30, 2014 ($140.1 million as of June 30, 2013).

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

For the years ended June 30, 2014, 2013 and 2012, we recognized the following amounts as income tax-related interest expense and penalties:



	Year Ended June 30,
	2014		2013			2012
Interest expense	$	6,969	$	(736	)	$	9,383
Penalties expense (recovery)	287		65			(10,764		)
Total	$	7,256	$	(671	)	$	(1,381	)

As of June 30, 2014 and June 30, 2013, the following amounts have been accrued on account of income tax-related interest expense and penalties:



	As of June 30, 2014		As of June 30, 2013
Interest expense accrued *	$	26,235	$	18,210
Penalties accrued *	$	7,858	$	6,045


*	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, 2014 are accrued interest expense and penalties of $1.8 million and $1.5 million, respectively, relating to the acquisition of GXS.

We believe that it is reasonably possible that the gross unrecognized tax benefits, as of June 30, 2014, could decrease tax expense in the next 12 months by $18.9 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 audits 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 tax audits by local taxing authorities vary by jurisdiction up to ten years.

We are subject to tax audits in all major taxing jurisdictions in which we operate and currently have tax audits open in Canada, the United States, France, Spain, Germany, India, the Netherlands, Italy and Switzerland. 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. Statements regarding the United States audits are included in note 13.

The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.

As at June 30, 2014, we have provided $7.6 million (June 30, 2013—$0.4 million) in respect of both additional foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries, and planned periodic repatriations from certain United States and Luxembourg subsidiaries,that will be subject to withholding taxes upon distribution. Prior to its acquisition by the Company, the GXS group had recorded $4.5 million of this amount as a deferred tax liability related to undistributed earnings of non-United States subsidiaries. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian 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.