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INCOME TAXES | 12 Months Ended
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Jun. 30, 2020
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 effective tax rate decreased to a provision of 32.1% for the year ended June 30, 2020, compared to a provision of 35.2% for the year ended June 30, 2019. The decrease in tax expense of $44.1 million was primarily due to (i) a decrease of $23.7 million relating to lower net income including the impact of foreign rates, (ii) a decrease of $51.3 million for changes in unrecognized tax benefits, (iii) a decrease of $7.0 million from tax rate differential in tax years applicable to United States loss carryforwards that became eligible for carryback under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in the third quarter of Fiscal 2020, and (iv) a decrease of $16.0 million related to tax costs of internal reorganizations that did not recur in Fiscal 2020. These were partially offset by (i) an increase of $25.2 million related to the US Base Erosion Anti-avoidance Tax (US BEAT), (ii) an increase in accruals for repatriations from foreign subsidiaries of $17.3 million, (iii) an increase in the effect of withholding taxes of $5.9 million, and (iv) an increase in the change in the valuation allowance of $4.8 million. The remainder of the difference was due to normal course movements and non-material items. 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,
| 2020 |  | 2019 |  | 2018
Expected statutory rate | 26.5 | % |  | 26.5 | % |  | 26.5 | %
Expected provision for income taxes | $ | 91,479 |  |  | $ | 116,752 |  |  | $ | 102,323 |
Effect of foreign tax rate differences | 218 |  |  | (1,344 | ) |  | 2,352 |
Change in valuation allowance | (222 | ) |  | (5,045 | ) |  | 1,779 |
Amortization of deferred charges | — |  |  | — |  |  | 4,242 |
Effect of permanent differences | 1,215 |  |  | (577 | ) |  | 4,332 |
Effect of changes in unrecognized tax benefits | (19,284 | ) |  | 31,992 |  |  | 5,543 |
Effect of withholding taxes | 8,036 |  |  | 2,097 |  |  | 7,927 |
Difference in tax filings from provision | 933 |  |  | (250 | ) |  | 1,321 |
Effect of U.S. tax reform | — |  |  | — |  |  | 19,037 |
Effect of tax credits for research and development | (14,947 | ) |  | (13,550 | ) |  | (3,875 | )
Effect of accrual for undistributed earnings | 4,233 |  |  | (13,112 | ) |  | (1,154 | )
Effect of US BEAT | 41,207 |  |  | 16,030 |  |  | — |
Effect of CARES Act | (7,009 | ) |  | — |  |  | — |
Other Items | 4,527 |  |  | 5,473 |  |  | (1 | )
Impact of internal reorganization of subsidiaries | 451 |  |  | 16,471 |  |  | — |
| $ | 110,837 |  |  | $ | 154,937 |  |  | $ | 143,826 |
The following is a geographical breakdown of income before the provision for income taxes:
| Year Ended June 30,
| 2020 |  | 2019 |  | 2018
Domestic income (loss) | $ | 241,862 |  |  | $ | 269,331 |  |  | $ | 238,405 |
Foreign income | 103,343 |  |  | 171,243 |  |  | 147,721 |
Income before income taxes | $ | 345,205 |  |  | $ | 440,574 |  |  | $ | 386,126 |
The provision for (recovery of) income taxes consisted of the following:
| Year Ended June 30,
| 2020 |  | 2019 |  | 2018
Current income taxes (recoveries): |  |  |  |  |
Domestic | $ | 12,547 |  |  | $ | 7,862 |  |  | $ | 5,313 |
Foreign | 46,902 |  |  | 99,650 |  |  | 48,777 |
| 59,449 |  |  | 107,512 |  |  | 54,090 |
Deferred income taxes (recoveries): |  |  |  |  |  |  |  |
Domestic | 68,580 |  |  | 52,889 |  |  | 61,678 |
Foreign | (17,192 | ) |  | (5,464 | ) |  | 28,058 |
| 51,388 |  |  | 47,425 |  |  | 89,736 |
Provision for (recovery of) income taxes | $ | 110,837 |  |  | $ | 154,937 |  |  | $ | 143,826 |
As of June 30, 2020, we have $347.0 million of domestic non-capital loss carryforwards. In addition, we have $478.6 million of foreign non-capital loss carryforwards of which $87.7 million have no expiry date. The remainder of the domestic and foreign losses expires between 2021 and 2040. In addition, investment tax credits of $55.0 million will expire between 2021 and 2040. The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
| June 30,
| 2020 |  | 2019
Deferred tax assets |  |  |
Non-capital loss carryforwards | $ | 208,248 |  |  | $ | 161,119 |
Capital loss carryforwards | 152 |  |  | 155 |
Undeducted scientific research and development expenses | 160,354 |  |  | 137,253 |
Depreciation and amortization | 415,516 |  |  | 683,777 |
Restructuring costs and other reserves | 21,999 |  |  | 17,845 |
Deferred revenue | 60,026 |  |  | 53,254 |
Other | 76,031 |  |  | 59,584 |
Total deferred tax asset | $ | 942,326 |  |  | $ | 1,112,987 |
Valuation Allowance | $ | (81,810 | ) |  | $ | (77,328 | )
Deferred tax liabilities |  |  |
Scientific research and development tax credits | $ | (14,361 | ) |  | $ | (14,482 | )
Other | (83,328 | ) |  | (72,599 | )
Deferred tax liabilities | $ | (97,689 | ) |  | $ | (87,081 | )
Net deferred tax asset | $ | 762,827 |  |  | $ | 948,578 |
Comprised of: |  |  |
Long-term assets | 911,565 |  |  | 1,004,450 |
Long-term liabilities | (148,738 | ) |  | (55,872 | )
| $ | 762,827 |  |  | $ | 948,578 |
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, 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 |
Increases on account of current year positions | 7,296 |
Increases on account of prior year positions | 17,853 |
Decreases due to settlements with tax authorities | (20,457 | )
Decreases due to lapses of statutes of limitations | (18,853 | )
Unrecognized tax benefits as of June 30, 2020 | $ | 195,081 |
Included in the above tabular reconciliation are unrecognized tax benefits of $15.0 million relating to deferred tax assets, of which $6.0 million would not impact the effective tax rate if reversed. The net unrecognized tax benefit excluding these deferred tax assets is $180.0 million as of June 30, 2020 (June 30, 2019—$198.1 million). We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2020, 2019 and 2018, we recognized the following amounts as income tax-related interest expense and penalties:
| Year Ended June 30,
| 2020 |  | 2019 |  | 2018
Interest expense (recoveries) | $ | 5,764 |  |  | $ | 10,512 |  |  | $ | 6,233 |
Penalties expense (recoveries) | 327 |  |  | 945 |  |  | (191 | )
Total | $ | 6,091 |  |  | $ | 11,457 |  |  | $ | 6,042 |
The following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of June 30, 2020 |  | As of June 30, 2019
Interest expense accrued * | $ | 70,364 |  |  | $ | 64,530 |
Penalties accrued * | $ | 2,620 |  |  | $ | 2,525 |
* These balances are primarily 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, 2020, could decrease tax expense in the next 12 months by $7.3 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, Germany, India, Italy and the Philippines. 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 14 "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 14 "Guarantees and Contingencies". As at June 30, 2020, we have recognized a provision of $24.8 million (June 30, 2019—$17.4 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. 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.

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