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INCOME TAXES | 12 Months Ended
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Jun. 30, 2021
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 increased to a provision of 52.2% for the year ended June 30, 2021, compared to a provision of 32.1% for the year ended June 30, 2020. Tax expense increased by $229.1 million from $110.8 million during the year ended June 30, 2020 to $339.9 million during the year ended June 30, 2021. This was primarily due to (i) an increase of $300.5 million relating to the IRS Settlement, (ii) an increase of $76.4 million relating to higher net income including the impact of foreign rates and (iii) an increase of $7.0 million related to the one-time benefit from the US CARES Act in Fiscal 2020 that did not recur in Fiscal 2021. These were partially offset by (i) a decrease of $66.9 million for changes in unrecognized tax benefits, (ii) a decrease of $34.1 million related to tax benefits of internal reorganizations that occurred in Fiscal 2021 (iii) a decrease of $33.2 million related to the US Base Erosion Anti-Abuse Tax (US BEAT), (iv) a decrease of $5.7 million for net changes in valuation allowance, (v) a decrease of $3.1 million related to permanent differences and (vi) a decrease of $3.1 million related to differences in tax filings being higher than estimates. 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,
| 2021 |  | 2020 |  | 2019
Expected statutory rate | 26.50 | % |  | 26.50 | % |  | 26.50 | %
Expected provision for income taxes | $ | 172,454 |  |  | $ | 91,479 |  |  | $ | 116,752 |
Effect of foreign tax rate differences | (4,309) |  |  | 218 |  |  | (1,344) |
Change in valuation allowance | (5,900) |  |  | (222) |  |  | (5,045) |
Effect of permanent differences | (1,885) |  |  | 1,215 |  |  | (577) |
Effect of changes in unrecognized tax benefits | (86,170) |  |  | (19,284) |  |  | 31,992 |
Effect of withholding taxes | 8,500 |  |  | 8,036 |  |  | 2,097 |
Difference in tax filings from provision | (2,162) |  |  | 933 |  |  | (250) |
Effect of tax credits for research and development | (16,086) |  |  | (14,947) |  |  | (13,550) |
Effect of accrual for undistributed earnings | 3,209 |  |  | 4,233 |  |  | (13,112) |
Effect of US BEAT | 7,967 |  |  | 41,207 |  |  | 16,030 |
Effect of CARES Act | — |  |  | (7,009) |  |  | — |
Effect of IRS Settlement | 300,460 |  |  | — |  |  | — |
Impact of internal reorganization of subsidiaries | (33,676) |  |  | 451 |  |  | 16,471 |
Other Items | (2,496) |  |  | 4,527 |  |  | 5,473 |
| $ | 339,906 |  |  | $ | 110,837 |  |  | $ | 154,937 |
The following is a geographical breakdown of income before the provision for income taxes:
| Year Ended June 30,
| 2021 |  | 2020 |  | 2019
Domestic income (loss) | $ | 462,315 |  |  | $ | 241,862 |  |  | $ | 269,331 |
Foreign income | 188,455 |  |  | 103,343 |  |  | 171,243 |
Income before income taxes | $ | 650,770 |  |  | $ | 345,205 |  |  | $ | 440,574 |
The provision for (recovery of) income taxes consisted of the following:
| Year Ended June 30,
| 2021 |  | 2020 |  | 2019
Current income taxes (recoveries): |  |  |  |  |
Domestic | $ | 310,615 |  |  | $ | 12,547 |  |  | $ | 7,862 |
Foreign | (43,748) |  |  | 46,902 |  |  | 99,650 |
| 266,867 |  |  | 59,449 |  |  | 107,512 |
Deferred income taxes (recoveries): |  |  |  |  |
Domestic | 111,232 |  |  | 68,580 |  |  | 52,889 |
Foreign | (38,193) |  |  | (17,192) |  |  | (5,464) |
| 73,039 |  |  | 51,388 |  |  | 47,425 |
Provision for (recovery of) income taxes | $ | 339,906 |  |  | $ | 110,837 |  |  | $ | 154,937 |
As of June 30, 2021, we have $305.7 million of domestic non-capital loss carryforwards. In addition, we have $413.0 million of foreign non-capital loss carryforwards of which $73.1 million have no expiry date. The remainder of the domestic and foreign losses expire between 2022 and 2039. In addition, investment tax credits of $59.3 million will expire between 2022 and 2041. The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
| As of June 30,
| 2021 |  | 2020
Deferred tax assets |  |  |
Non-capital loss carryforwards | $ | 174,486 |  |  | $ | 208,248 |
Capital loss carryforwards | 5,570 |  |  | 152 |
Undeducted scientific research and development expenses | 197,791 |  |  | 160,354 |
Depreciation and amortization | 391,974 |  |  | 415,516 |
Restructuring costs and other reserves | 24,919 |  |  | 21,999 |
Deferred revenue | 11,388 |  |  | 60,026 |
Other | 73,236 |  |  | 76,031 |
Total deferred tax asset | $ | 879,364 |  |  | $ | 942,326 |
Valuation allowance | $ | (72,888) |  |  | $ | (81,810) |
Deferred tax liabilities |  |  |
Scientific research and development tax credits | $ | (15,080) |  |  | $ | (14,361) |
Other | (102,882) |  |  | (83,328) |
Deferred tax liabilities | $ | (117,962) |  |  | $ | (97,689) |
Net deferred tax asset | $ | 688,514 |  |  | $ | 762,827 |
Comprised of: |  |  |
Long-term assets | 796,738 |  |  | 911,565 |
Long-term liabilities | (108,224) |  |  | (148,738) |
| $ | 688,514 |  |  | $ | 762,827 |
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 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 |
Increases on account of current year positions | 1,279 |
Increases on account of prior year positions | 773 |
Decreases due to settlements with tax authorities | (158,070) |
Decreases due to lapses of statutes of limitations | (2,314) |
Unrecognized tax benefits as of June 30, 2021 | $ | 36,749 |
Included in the above tabular reconciliation are unrecognized tax benefits of $6.7 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 $29.9 million as of June 30, 2021 (June 30, 2020—$180.0 million). We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2021, 2020 and 2019, respectively, we recognized the following amounts as income tax-related interest expense and penalties:
| Year Ended June 30,
| 2021 |  | 2020 |  | 2019
Interest expense (recoveries) | $ | 44,657 |  |  | $ | 5,764 |  |  | $ | 10,512 |
Penalties expense (recoveries) | 1,125 |  |  | 327 |  |  | 945 |
Total | $ | 45,782 |  |  | $ | 6,091 |  |  | $ | 11,457 |
The following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of June 30, 2021 |  | As of June 30, 2020
Interest expense accrued (1) | $ | 5,166 |  |  | $ | 70,364 |
Penalties accrued (1) | $ | 2,605 |  |  | $ | 2,620 |
(1) 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, 2021, could decrease tax expense in the next 12 months by $3.8 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, 2015 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, Austria, Italy, France, 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". On December 21, 2020, we entered into a closing agreement with the IRS resolving all of the proposed adjustments to our taxable income for Fiscal 2010 and Fiscal 2012. As a result, we recorded charges of $300.5 million during the year ended June 30, 2021 to "Provision for (recovery of) income taxes". The IRS Settlement also eliminates approximately $90 million in future withholding taxes that we had expected to incur over the next 10 years. We believe the IRS Settlement to be in the best interest of all stakeholders, as it closes all past, present and future items related to this matter. The IRS Settlement provides finality to this longstanding matter. During the year ended June 30, 2021, we made payments of $299.6 million associated with the IRS Settlement. As of June 30, 2021, the outstanding settlement amount of approximately $0.9 million is recorded within "Income taxes payable" in our Consolidated Balance Sheets. Please refer to note 14 "Guarantees and Contingencies" for additional details. As of June 30, 2021, we have recognized a provision of $27.5 million (June 30, 2020—$24.8 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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