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Income Taxes | 12 Months Ended
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Jun. 30, 2019
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,
| 2019 |  | 2018 |  | 2017
Domestic income (loss) | $ | 269,331 |  |  | $ | 238,405 |  |  | $ | 110,562 |
Foreign income | 171,243 |  |  | 147,721 |  |  | 138,989 |
Income before income taxes | $ | 440,574 |  |  | $ | 386,126 |  |  | $ | 249,551 |
The provision for (recovery of) income taxes consisted of the following:
| Year Ended June 30,
| 2019 |  | 2018 |  | 2017
Current income taxes (recoveries): |  |  |  |  |
Domestic | $ | 7,862 |  |  | $ | 5,313 |  |  | $ | 12,238 |
Foreign | 99,650 |  |  | 48,777 |  |  | 82,593 |
| 107,512 |  |  | 54,090 |  |  | 94,831 |
Deferred income taxes (recoveries): |  |  |  |  |  |  |  |
Domestic | 52,889 |  |  | 61,678 |  |  | (851,683 | )
Foreign | (5,464 | ) |  | 28,058 |  |  | (19,512 | )
| 47,425 |  |  | 89,736 |  |  | (871,195 | )
Provision for (recovery of) income taxes | $ | 154,937 |  |  | $ | 143,826 |  |  | $ | (776,364 | )
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,
| 2019 |  | 2018 |  | 2017
Expected statutory rate | 26.5 | % |  | 26.5 | % |  | 26.5 | %
Expected provision for income taxes | $ | 116,752 |  |  | $ | 102,323 |  |  | $ | 66,131 |
Effect of foreign tax rate differences | (1,344 | ) |  | 2,352 |  |  | 8,647 |
Change in valuation allowance | (5,045 | ) |  | 1,779 |  |  | 520 |
Amortization of deferred charges | — |  |  | 4,242 |  |  | 6,298 |
Effect of permanent differences | (577 | ) |  | 4,332 |  |  | 3,673 |
Effect of changes in unrecognized tax benefits | 31,992 |  |  | 5,543 |  |  | 14,427 |
Effect of withholding taxes | 2,097 |  |  | 7,927 |  |  | 3,845 |
Difference in tax filings from provision | (250 | ) |  | 1,321 |  |  | (7,836 | )
Effect of U.S. tax reform | — |  |  | 19,037 |  |  | — |
Effect of tax credits for research and development | (13,550 | ) |  | (3,875 | ) |  | (2,643 | )
Effect of accrual for undistributed earnings | (13,112 | ) |  | (1,154 | ) |  | 5,613 |
Effect of Base Erosion and Anti-Abuse Tax (BEAT) | 16,030 |  |  | — |  |  | — |
Other Items | 5,473 |  |  | (1 | ) |  | 1,075 |
Impact of internal reorganization of subsidiaries | 16,471 |  |  | — |  |  | (876,114 | )
| $ | 154,937 |  |  | $ | 143,826 |  |  | $ | (776,364 | )
In Fiscal 2019, 2018 and 2017, respectively, substantially all the tax rate differential for international jurisdictions was driven by earnings in the United States. The effective tax rate decreased to a provision of 35.2% for the year ended June 30, 2019, compared to 37.2% for the year ended June 30, 2018. The increase in tax expense of $11.1 million was primarily due to the increase in net income taxed at foreign rates of $10.7 million, an increase of $26.4 million in reserves for unrecognized tax benefits, an increase of $16.1 million arising on the introduction of BEAT in Fiscal 2019, and an increase of $16.3 million relating to the tax impact of internal reorganizations of subsidiaries, partially offset by a the reversal of accruals for undistributed United States earnings of $14.8 million, the Fiscal 2018 impact of United States tax reform of $19.0 million which did not recur in Fiscal 2019, an increase in tax credits for research and development of $9.7 million, an increase of $6.8 million in the release of valuation allowance, a decrease of $5.8 million in the impact of withholding taxes in Fiscal 2019. 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, 2019, we have approximately $242.3 million of domestic non-capital loss carryforwards. In addition, we have $387.6 million of foreign non-capital loss carryforwards of which $53.8 million have no expiry date. The remainder of the domestic and foreign losses expires between 2020 and 2039. In addition, investment tax credits of $58.6 million will expire between 2020 and 2039. The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
| June 30,
| 2019 |  | 2018
Deferred tax assets |  |  |
Non-capital loss carryforwards | $ | 161,119 |  |  | $ | 129,436 |
Capital loss carryforwards | 155 |  |  | 417 |
Undeducted scientific research and development expenses | 137,253 |  |  | 123,114 |
Depreciation and amortization | 683,777 |  |  | 829,369 |
Restructuring costs and other reserves | 17,845 |  |  | 17,202 |
Deferred revenue | 53,254 |  |  | 62,726 |
Other | 59,584 |  |  | 57,461 |
Total deferred tax asset | $ | 1,112,987 |  |  | $ | 1,219,725 |
Valuation Allowance | $ | (77,328 | ) |  | $ | (80,924 | )
Deferred tax liabilities |  |  |
Scientific research and development tax credits | $ | (14,482 | ) |  | $ | (13,342 | )
Other | (72,599 | ) |  | (82,668 | )
Deferred tax liabilities | $ | (87,081 | ) |  | $ | (96,010 | )
Net deferred tax asset | $ | 948,578 |  |  | $ | 1,042,791 |
Comprised of: |  |  |
Long-term assets | 1,004,450 |  |  | 1,122,729 |
Long-term liabilities | (55,872 | ) |  | (79,938 | )
| $ | 948,578 |  |  | $ | 1,042,791 |
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, 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 |
Increases on account of current year positions | 25,642 |
Increases on account of prior year positions | 15,024 |
Decreases due to settlements with tax authorities | — |
Decreases due to lapses of statutes of limitations | (9,236 | )
Unrecognized tax benefits as of June 30, 2019 | $ | 209,242 |
Included in the above tabular reconciliation are unrecognized tax benefits of $11.2 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 $198.1 million as of June 30, 2019 (June 30, 2018—$167.2 million). We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2019, 2018 and 2017, we recognized the following amounts as income tax-related interest expense and penalties:
| Year Ended June 30,
| 2019 |  | 2018 |  | 2017
Interest expense | $ | 10,512 |  |  | $ | 6,233 |  |  | $ | 13,028 |
Penalties expense (recoveries) | 945 |  |  | (191 | ) |  | 438 |
Total | $ | 11,457 |  |  | $ | 6,042 |  |  | $ | 13,466 |
The following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of June 30, 2019 |  | As of June 30, 2018
Interest expense accrued * | $ | 64,530 |  |  | $ | 54,058 |
Penalties accrued * | $ | 2,525 |  |  | $ | 2,438 |
* 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, 2019, could decrease tax expense in the next 12 months by $17.5 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, the United Kingdom and Belgium. 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, 2019, we have recognized a provision of $17.4 million (June 30, 2018—$28.5 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 German subsidiaries, that will be subject to withholding taxes upon distribution. During the year ended June 30, 2019, we reversed previous accruals related to the undistributed earnings of our United States subsidiaries in the amount of $14.8 million. These earnings are now considered to be permanently reinvested in the United States, as there is no expectation of future distributions of earnings in the foreseeable future. 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 one-time tax expense of $19.0 million in 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. During the year ended June 30, 2019, there was a reduction of $0.9 million to this amount, mainly attributable to evaluating the portion of our existing Alternative Minimum Tax (AMT) credit carryforwards expected to be refundable as a result of the repeal of corporate AMT. The portion of the tax expense attributable to the transition tax is payable over a period of up to eight years. In accordance with Staff Accounting Bulletin 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118), the Company completed its analysis of the impact of the Tax Cuts and Jobs Act by December 22, 2018. The Company's final determination of the total one-time tax expense as a result of the enactment of the Tax Cuts and Jobs Act is $18.1 million.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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