Income Taxes

6 Months Ended

Dec. 31, 2018

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, 2018 and 2017, we recognized the following amounts as income tax-related interest expense and penalties:



	Three Months Ended December 31,					Six Months Ended December 31,
	2018		2017			2018		2017
Interest expense	$	1,570	$	1,811		$	4,607	$	3,897
Penalties expense (recoveries)	67		(624		)	559		(543		)
Total	$	1,637	$	1,187		$	5,166	$	3,354

The following amounts have been accrued on account of income tax-related interest expense and penalties:



	As of December 31, 2018		As of June 30, 2018
Interest expense accrued *	$	58,603	$	54,058
Penalties accrued *	$	2,707	$	2,438

* 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, 2018, could decrease tax expense in the next 12 months by $3.3 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 December 31, 2018, we have provided $16.6 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. In the quarter ended December 31, 2018, 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.

The effective tax rate decreased to a provision of 25.8% for the three months ended December 31, 2018, compared to 38.5% for the three months ended December 31, 2017. The decrease in tax expense of $16.9 million was primarily due to the reversal of accruals for undistributed United States earnings of $14.8 million, and the Fiscal 2018 impact of United States tax reform of $15.3 million which did not recur in Fiscal 2019, partially offset by an increase of $10.2 million arising on the introduction of the United States Base Erosion Avoidance Tax (“BEAT”) in Fiscal 2019, and an increase of $4.6 million relating to the tax impact of internal reorganizations of subsidiaries. The remainder of the difference was due to normal course movements and non-material items.

The effective tax rate decreased to a provision of 31.9% for the six months ended December 31, 2018, compared to 39.8% for the six months ended December 31, 2017. The decrease in tax expense of $14.4 million was primarily due the reversal of accruals for undistributed United States earnings of $14.8 million, and the Fiscal 2018 impact of United States tax reform of $15.3 million which did not recur in Fiscal 2019, offset by an increase of $11.7 million arising on the introduction of BEAT in Fiscal 2019, and an increase of $8.3 million relating to the tax impact of internal reorganizations of subsidiaries. The remainder of the difference was due to normal course movements and non-material items.

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. There was a reduction of $0.9 million to this amount for the six months ended December 31, 2018, 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'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.