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INCOME TAXES
 12 Months Ended
Jun. 30, 2022
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 23.0% for the year ended June 30, 2022, compared to a provision of 52.2% for the year ended June 30, 2021. Tax expense decreased from $339.9 million during the year ended June 30, 2021 to $118.8 million during the year ended June 30, 2022. This was primarily due to (i) a decrease of $300.6 million related to IRS settlements in Fiscal 2021, (ii) a decrease of $37.5 million related to lower net income before taxes, (iii) a decrease of $10.8 million related to passive income from foreign subsidiaries, (iv) a decrease of $9.6 million related to tax accruals on unremitted earnings and (v) a decrease of $8.0 million for BEAT. These were partially offset by (i) an increase of $94.3 million for changes in unrecognized tax benefits, (ii) a net increase of $46.8 million related to internal reorganizations and (iii) an increase of $3.5 million for change in valuation allowance. 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,
202220212020
Expected statutory rate26.50 %26.50 %26.50 %
Expected provision for income taxes$136,743 $172,454 $91,479 
Effect of foreign tax rate differences(4,578)(4,309)218 
Change in valuation allowance(2,444)(5,900)(222)
Effect of permanent differences(12,710)(1,885)1,215 
Effect of changes in unrecognized tax benefits8,130 (86,170)(19,284)
Effect of withholding taxes6,617 8,500 8,036 
Effect of tax credits for research and development(12,330)(16,086)(14,947)
Effect of accrual for undistributed earnings(6,343)3,209 4,233 
Effect of US BEAT— 7,967 41,207 
Effect of CARES Act— — (7,009)
Effect of IRS Settlement— 300,460 — 
Impact of internal reorganization of subsidiaries13,077 (33,676)451 
Other Items(7,410)(4,658)5,460 
$118,752 $339,906 $110,837 
The following is a geographical breakdown of income before the provision for income taxes:
Year Ended June 30,
202220212020
Domestic income (loss)435,355 462,315 241,862 
Foreign income80,656 188,455 103,343 
Income before income taxes$516,011 $650,770 $345,205 
The provision for (recovery of) income taxes consisted of the following:
Year Ended June 30,
202220212020
Current income taxes (recoveries):
Domestic17,428 310,615 12,547 
Foreign137,412 (43,748)46,902 
154,840 266,867 59,449 
Deferred income taxes (recoveries):
Domestic54,867 111,232 68,580 
Foreign(90,955)(38,193)(17,192)
(36,088)73,039 51,388 
Provision for (recovery of) income taxes$118,752 $339,906 $110,837 
As of June 30, 2022, we have $325.1 million of domestic non-capital loss carryforwards. In addition, we have $746.0 million of foreign non-capital loss carryforwards, which includes $230.4 million of U.S. state loss carryforwards. $104.4 million of the foreign non-capital loss carryforwards have no expiry date, which includes $14.3 million of U.S. state loss carryforwards. The remainder of the domestic and foreign losses expire between 2023 and 2042. In addition, investment tax credits of $66 million will expire between 2028 and 2042.
The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
As of June 30,
20222021
Deferred tax assets
Non-capital loss carryforwards207,631 174,486 
Capital loss carryforwards— 5,570 
Capitalized scientific research and development expenses121,771 85,553 
Depreciation and amortization314,168 391,974 
Restructuring costs and other reserves19,561 24,919 
Capitalized inventory and intangible expenses43,129 — 
Research and development and investment tax credits104,183 97,157 
Lease liabilities40,486 40,598 
Deferred revenue9,288 11,388 
Other82,516 67,677 
Total deferred tax asset$942,733 $899,322 
Valuation allowance(73,965)(72,888)
Deferred tax liabilities
Right of use asset(31,452)(35,038)
Other(93,049)(102,882)
Deferred tax liabilities$(124,501)$(137,920)
Net deferred tax asset$744,267 $688,514 
Comprised of:
Long-term assets810,154 796,738 
Long-term liabilities(65,887)(108,224)
$744,267 $688,514 
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, 2020
195,081 
Increases on account of current year positions1,279 
Increases on account of prior year positions773 
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 
Increases on account of current year positions206 
Increases on account of prior year positions27,398 
Decreases on account of prior year positions(694)
Decreases due to settlements with tax authorities(3,830)
Decreases due to lapses of statutes of limitations(5,703)
Unrecognized tax benefits as of June 30, 2022
$54,126 
Included in the above tabular reconciliation are unrecognized tax benefits of $23.4 million relating to tax attributes in which the unrecognized tax benefit has been recorded as a reduction to the deferred tax asset. The net unrecognized tax benefit excluding these deferred tax assets is $30.7 million as of June 30, 2022 (June 30, 2021—$29.9 million).
We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2022, 2021 and 2020, respectively, we recognized the following amounts as income tax-related interest expense and penalties:
Year Ended June 30,
202220212020
Interest expense$419 $44,657 $5,764 
Penalties expense1,739 1,125 327 
Total$2,158 $45,782 $6,091 
The following amounts have been accrued on account of income tax-related interest expense and penalties:
As of June 30, 2022As of June 30, 2021
Interest expense accrued (1)
$4,821 $5,166 
Penalties accrued (1)
$3,569 $2,605 
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(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, 2022, could decrease tax expense in the next 12 months by $4.8 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 Canada, 2016 for the United States and 2012 for Germany. As of December 31, 2021, the Fiscal 2015 and Fiscal 2016 tax years for Luxembourg became statute barred.
We are subject to income tax audits in all major taxing jurisdictions in which we operate and currently have income tax audits open in Canada, the United States, Germany, India France, South Africa, Switzerland, 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 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 income tax audits, please refer to Note 14 “Guarantees and Contingencies.”
As of June 30, 2022, we have recognized a provision of $19.9 million (June 30, 2021—$27.5 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. 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 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.” 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.