Income Taxes

9 Months Ended

Mar. 31, 2020

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 25.5% for the three months ended March 31, 2020, compared to a provision of 30.9% for the three months ended March 31, 2019. The decrease in tax expense of $23.7 million was primarily due to (i) a decrease of $20.0 million relating to lower net income including the impact of foreign rates, (ii) a decrease of $9.0 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 (iii)

a decrease of $7.9 million related to tax costs of internal reorganizations that did not recur in Fiscal 2020. These were partially offset by (i) an increase of $4.8 million related to the US Base Erosion Anti-avoidance Tax (US BEAT), (ii) an increase in tax filings in excess of estimates of $3.0 million, (iii) a decrease in tax credits for research and development of $2.9 million resulting from filings in excess of estimates in Fiscal 2019 that did not recur in Fiscal 2020 and (iv) an increase in accruals for repatriations from foreign subsidiaries of $1.7 million. The remainder of the difference was due to normal course movements and non-material items.

The effective tax rate decreased to a provision of 27.5% for the nine months ended March 31, 2020, compared to a provision of 31.6% for the nine months ended March 31, 2019. Tax expense decreased by $19.8 million primarily due to (i) a decrease of $21.5 million in reserves for unrecognized tax benefits resulting from clarifications provided by tax regulations and taxation years becoming statute barred, (ii) a decrease of $15.8 million relating to the tax impact of internal reorganizations of subsidiaries that did not recur in Fiscal 2020, (iii) a decrease of $9.0 million from tax rate differential in tax years applicable to United States loss carryforwards that became eligible for carryback under the CARES Act enacted in the third quarter of Fiscal 2020, (iv) a decrease in net income taxed at foreign rates of $8.3 million, and (v) an increase in tax credits for research and development of $2.9 million. These were partially offset by (i) an increase of $16.6 million relating to a one-time reversal of accruals for repatriations from subsidiaries in the United States in Fiscal 2019 that did not recur in Fiscal 2020, (ii) an increase in tax filings in excess of estimates of $10.4 million, and (iii) the impact of US BEAT of $9.9 million. The remainder of the difference was due to normal course movements and non-material items.

We recognize interest expense and penalties related to income tax matters in income tax expense. For the three and nine months ended March 31, 2020 and 2019, we recognized the following amounts as income tax-related interest expense and penalties:



	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Interest expense (recoveries)	$	2,814	$	2,823	$	4,048	$	7,430
Penalties expense (recoveries)	100		9		175		568
Total	$	2,914	$	2,832	$	4,223	$	7,998

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



	As of March 31, 2020		As of June 30, 2019
Interest expense accrued *	$	68,707	$	64,530
Penalties accrued *	$	2,580	$	2,525

* These balances are primarily 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 March 31, 2020, could decrease tax expense in the next 12 months by $9.3 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, the United Kingdom, Italy and Japan. 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 March 31, 2020, we have recognized a provision of $21.7 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.