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Income Taxes | 12 Months Ended
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Jun. 30, 2018
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. The following is a geographical breakdown of income before the provision for income taxes:
| Year Ended June 30,
| 2018 |  | 2017 |  | 2016
Domestic income (loss) | $ | 238,405 |  |  | $ | 110,562 |  |  | $ | (80,066 | )
Foreign income | 147,721 |  |  | 138,989 |  |  | 370,843 |
Income before income taxes | $ | 386,126 |  |  | $ | 249,551 |  |  | $ | 290,777 |
The provision for (recovery of) income taxes consisted of the following:
| Year Ended June 30,
| 2018 |  | 2017 |  | 2016
Current income taxes (recoveries): |  |  |  |  |
Domestic | $ | 5,313 |  |  | $ | 12,238 |  |  | $ | (3,119 | )
Foreign | 48,777 |  |  | 82,593 |  |  | 63,862 |
| 54,090 |  |  | 94,831 |  |  | 60,743 |
Deferred income taxes (recoveries): |  |  |  |  |  |  |  |
Domestic | 61,678 |  |  | (851,683 | ) |  | (44,569 | )
Foreign | 28,058 |  |  | (19,512 | ) |  | (9,892 | )
| 89,736 |  |  | (871,195 | ) |  | (54,461 | )
Provision for (recovery of) income taxes | $ | 143,826 |  |  | $ | (776,364 | ) |  | $ | 6,282 |
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,
| 2018 |  | 2017 |  | 2016
Expected statutory rate | 26.5 | % |  | 26.5 | % |  | 26.5 | %
Expected provision for income taxes | $ | 102,323 |  |  | $ | 66,131 |  |  | $ | 77,056 |
Effect of foreign tax rate differences | 2,352 |  |  | 8,647 |  |  | (71,478 | )
Change in valuation allowance | 1,779 |  |  | 520 |  |  | (34,999 | )
Amortization of deferred charges | 4,242 |  |  | 6,298 |  |  | 11,316 |
Effect of permanent differences | 4,332 |  |  | 3,673 |  |  | 10,711 |
Effect of changes in unrecognized tax benefits | 5,543 |  |  | 14,427 |  |  | (264 | )
Effect of withholding taxes | 7,927 |  |  | 3,845 |  |  | 3,457 |
Difference in tax filings from provision | 1,321 |  |  | (7,836 | ) |  | 8,959 |
Effect of U.S. tax reform | 19,037 |  |  | — |  |  | — |
Other Items | (5,030 | ) |  | 4,045 |  |  | 1,524 |
Impact of internal reorganization of subsidiaries | — |  |  | (876,114 | ) |  | — |
| $ | 143,826 |  |  | $ | (776,364 | ) |  | $ | 6,282 |
In Fiscal 2018 and 2017, respectively, substantially all the tax rate differential for international jurisdictions was driven by earnings in the United States. In Fiscal 2016, this differential was driven by earnings in Luxembourg. The effective tax rate increased to a provision of 37.2% for the year ended June 30, 2018, compared to a recovery of 311.1% for the year ended June 30, 2017. The increase in tax expense of $920.2 million was primarily due to (i) a significant tax benefit of $876.1 million resulting from the Fiscal 2017 internal reorganization as described below which did not reoccur in Fiscal 2018, (ii) the impact of changes in US tax legislation in Fiscal 2018 resulting in a provisional charge of $19.0 million (see below), (iii) an increase of $29.9 million on account of the Company having higher income before taxes, including the impact of foreign tax rates and (iv) an increase of $9.2 million relating to differences in tax filings from provisions, offset by (i) a decrease of $8.9 million resulting from the net impact of reversals and accruals of reserves, and (ii) a decrease of $2.1 million relating to a decrease in amortization of deferred charges. The remainder of the difference was due to normal course movements and non-material items. 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. 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 recognized in the first quarter of Fiscal 2017. For more information relating to this, please refer to our Annual Report on Form 10-K for the year ended June 30, 2017. As of June 30, 2018, we have approximately $60.8 million of domestic non-capital loss carryforwards. In addition, we have $471.5 million of foreign non-capital loss carryforwards of which $65.3 million have no expiry date. The remainder of the domestic and foreign losses expires between 2019 and 2037. In addition, investment tax credits of $55.2 million will expire between 2019 and 2038. The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
| June 30,
| 2018 |  | 2017
Deferred tax assets |  |  |
Non-capital loss carryforwards | $ | 129,436 |  |  | $ | 109,060 |
Capital loss carryforwards | 417 |  |  | 246 |
Undeducted scientific research and development expenses | 123,114 |  |  | 101,998 |
Depreciation and amortization | 829,369 |  |  | 887,735 |
Restructuring costs and other reserves | 17,202 |  |  | 22,956 |
Deferred revenue | 62,726 |  |  | 75,248 |
Other | 57,461 |  |  | 74,668 |
Total deferred tax asset | $ | 1,219,725 |  |  | $ | 1,271,911 |
Valuation Allowance | $ | (80,924 | ) |  | $ | (58,925 | )
Deferred tax liabilities |  |  |
Scientific research and development tax credits | $ | (13,342 | ) |  | $ | (12,070 | )
Acquired intangibles | — |  |  | — |
Other | (82,668 | ) |  | (79,928 | )
Deferred tax liabilities | $ | (96,010 | ) |  | $ | (91,998 | )
Net deferred tax asset | $ | 1,042,791 |  |  | $ | 1,120,988 |
Comprised of: |  |  |
Long-term assets | 1,122,729 |  |  | 1,215,712 |
Long-term liabilities | (79,938 | ) |  | (94,724 | )
| $ | 1,042,791 |  |  | $ | 1,120,988 |
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, 2016 | $ | 174,485 |
Increases on account of current year positions | 5,675 |
Increases on account of prior year positions | 18,938 |
Decreases due to settlements with tax authorities | (16,332 | )
Decreases due to lapses of statutes of limitations | (8,236 | )
Unrecognized tax benefits as of June 30, 2017 | $ | 174,530 |
Increases on account of current year positions | 6,483 |
Increases on account of prior year positions | 17,794 |
Decreases due to settlements with tax authorities | — |
Decreases due to lapses of statutes of limitations | (20,995 | )
Unrecognized tax benefits as of June 30, 2018 | $ | 177,812 |
Included in the above tabular reconciliation are unrecognized tax benefits of $10.5 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 approximately $167.2 million as of June 30, 2018 (June 30, 2017—$163.0 million). Increases on account of prior year positions includes nothing that is subject to recovery as an indemnified asset (June 30, 2017—$9.4 million). We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2018, 2017 and 2016, we recognized the following amounts as income tax-related interest expense and penalties:
| Year Ended June 30,
| 2018 |  | 2017 |  | 2016
Interest expense | $ | 6,233 |  |  | $ | 13,028 |  |  | $ | 6,534 |
Penalties expense (recoveries) | (191 | ) |  | 438 |  |  | (2,761 | )
Total | $ | 6,042 |  |  | $ | 13,466 |  |  | $ | 3,773 |
The following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of June 30, 2018 |  | As of June 30, 2017
Interest expense accrued * | $ | 54,058 |  |  | $ | 47,402 |
Penalties accrued * | $ | 2,438 |  |  | $ | 2,160 |
* These balances have been included within "Long-term income taxes payable" within the Consolidated Balance Sheets. We believe that it is reasonably possible that the gross unrecognized tax benefits, as of June 30, 2018, could decrease tax expense in the next 12 months by $9.1 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 2012 for Germany, 2010 for the United States, 2012 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, Malaysia, and the United Kingdom. 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 and Canada 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 June 30, 2018, we have provided $28.5 million (June 30, 2017—$22.1 million) in respect of both additional foreign 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. On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changed the existing US tax laws, including a reduction in the federal corporate tax rate from 35% to 21%, and the transition of US international taxation from a worldwide tax system to a partially territorial tax system. As a result of the enactment of the legislation, the Company incurred a provisional one-time tax expense of $19.0 million for the year ended June 30, 2018, primarily related to the transition tax on accumulated foreign earnings and the re-measurement of certain deferred tax assets and liabilities. The portion of this anticipated increase to tax expense attributable to the transition tax is payable over a period of up to eight years. The impact of the $19.0 million adjustment resulting from the US legislation on the effective tax rate is an increase of 4.9% for the year ended June 30, 2018. The $19.0 million is a provisional amount in respect of Alternative Minimum Tax (AMT), and transition tax on accumulated foreign earnings in accordance with Staff Accounting Bulletin 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118). The finalization of the provisional one-time amount is pending finalization of considerations related to undistributed foreign earnings and evaluating whether any portion of our existing AMT credit carryforwards are not expected to be refundable as a result of the repeal of corporate AMT, which may result in changes to the provisional amount during the SAB 118 measurement period. The Company continues to assess the impact of the new law on its consolidated financial statements and anticipates finalizing the determination on or before December 22, 2018 in accordance with SAB 118.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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