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Income Taxes | 6 Months Ended
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Dec. 31, 2016
Income Tax Disclosure [Abstract] |
INCOME TAXES | 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, 2016 and 2015, we recognized the following amounts as income tax-related interest expense and penalties:
| Three Months Ended December 31, |  | Six Months Ended December 31,
| 2016 |  | 2015 |  | 2016 |  | 2015
Interest expense | $ | 1,501 |  |  | $ | 1,195 |  |  | $ | 2,783 |  |  | $ | 2,972 |
Penalties expense (recoveries) | (218 | ) |  | (2,596 | ) |  | (324 | ) |  | (2,726 | )
Total | $ | 1,283 |  |  | $ | (1,401 | ) |  | $ | 2,459 |  |  | $ | 246 |
As of December 31, 2016 and June 30, 2016, the following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of December 31, 2016 |  | As of June 30, 2016
Interest expense accrued * | $ | 36,957 |  |  | $ | 34,476 |
Penalties accrued * | $ | 1,234 |  |  | $ | 1,615 |
* | These balances have been included within "Long-term income taxes payable" within the Condensed Consolidated Balance Sheets.
We believe that it is reasonably possible that the gross unrecognized tax benefits, as of December 31, 2016, could decrease tax expense in the next 12 months by $2.0 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 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. The earliest fiscal years open for examination are 2009 for Germany, 2010 for the United States, 2011 for Luxembourg, and 2012 for Canada. 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, Germany, India, the Netherlands, Italy and Malaysia. 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 "Guarantees and Contingencies". 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. For more information relating to certain tax audits, please refer to note 13 "Guarantees and Contingencies". As at December 31, 2016, we have provided $17.7 million (June 30, 2016—$15.9 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 German subsidiaries, that will be subject to withholding taxes upon distribution. 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. In July 2016, we implemented a reorganization of our subsidiaries worldwide with the view to continuing to enhance operational and administrative efficiencies through further consolidated ownership, management, and development of our intellectual property (IP) in Canada, continuing to reduce the number of entities in our group and working towards our objective of having a single operating legal entity in each jurisdiction. We believe our reorganization also reduces our exposure to global political and tax uncertainties, particularly in Europe. We believe that further consolidating our IP in Canada will continue to ensure appropriate legal protections for our consolidated IP, simplify legal, accounting and tax compliance, and improve our global cash management. A significant tax benefit of $876.1 million, associated primarily with the recognition of a net deferred tax asset arising from the entry of the IP into Canada, was realized in the first quarter of Fiscal 2017. We believe it is more likely than not that the deferred tax asset will be realized and therefore no valuation allowance was 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 effective tax rate increased to a provision of 40.6% for the three months ended December 31, 2016, compared to a provision of 4.4% for the three months ended December 31, 2015. The increase in tax expense of $26.7 million was primarily due to an increase of $25.1 million resulting from the impact of foreign rates. Starting in Fiscal 2017 the Company is recognizing a significant portion of its global income in Canada for tax purposes which gives rise to a non-cash deferred tax expense resulting from the use of the tax assets discussed above at the Canadian statutory rate. Also contributing to the increase in tax expense is an increase in changes in unrecognized tax benefits in the amount of $10.5 million relating mainly to reversals of reserves in the three months ended December 31, 2015 that did not reoccur in the three months ended December 31, 2016. These increases were partially offset by a decrease of $4.2 million relating to the tax impact of the Company having lower income before taxes, a decrease in the change in valuation allowance of $1.6 million and a decrease in the amortization of deferred charges of $1.2 million. The remainder of the difference was due to normal course movements and non-material items. The effective tax rate decreased to a recovery of 640.6% for the six months ended December 31, 2016, compared to a provision of 10.6% for the six months ended December 31, 2015. The decrease in tax expense of $843.9 million was primarily due to a significant tax benefit of $876.1 million resulting from an internal reorganization that is further described above. Additionally, we saw an increase of $36.0 million resulting from the impact of foreign rates. Starting in Fiscal 2017 the Company is recognizing a significant portion of its global income in Canada for tax purposes which gives rise to a non-cash deferred tax expense resulting from the use of the tax assets discussed above at the Canadian statutory rate. Also contributing to the increase in tax expense is an increase in changes in unrecognized tax benefits in the amount of $8.3 million relating mainly to reversals of reserves in the six months ended December 31, 2015 that did not reoccur in the six months ended December 31, 2016. These increases were partially offset by a decrease of $4.0 million relating to the tax impact of the Company having lower income before taxes, a decrease in the change in valuation allowance of $2.7 million and a decrease in the amortization of deferred charges of $1.7 million. The remainder of the difference was due to normal course movements and non-material items.

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