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INCOME TAXES
 12 Months Ended
Jun. 30, 2023
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 32.0% for the year ended June 30, 2023, compared to a provision of 23.0% for the year ended June 30, 2022. Tax expense decreased from $118.8 million during the year ended June 30, 2022 to $70.8 million during the year ended June 30, 2023. The increase in the effective tax rate was driven by increases in withholding taxes, changes in valuation allowance, permanent differences related to foreign source income inclusions, and the impact of internal reorganizations, partially offset by lower pretax income, tax credits and permanent adjustments related to the preferential tax treatment of the mark-to-market gains on derivatives. The tax rate for the year ended June 30, 2022 varied from the statutory rate due favorable permanent adjustments related to excess share-based compensation deductions, tax credits, and the reduction in the accrual on unremitted foreign earnings, partially offset by the impact of internal reorganizations and an increase in unrecognized tax benefits.
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,
202320222021
Expected statutory rate26.50 %26.50 %26.50 %
Expected provision for income taxes$58,653 $136,743 $172,454 
Effect of foreign tax rate differences(17,502)(4,578)(4,309)
Change in valuation allowance16,218 (2,444)(5,900)
Effect of permanent differences17,281 (12,710)(1,885)
Effect of changes in unrecognized tax benefits857 8,130 (86,170)
Effect of withholding taxes12,464 6,617 8,500 
Effect of tax credits(45,596)(12,330)(16,086)
Effect of accrual for undistributed earnings5,804 (6,343)3,209 
Effect of US BEAT6,854 — 7,967 
Effect of IRS Settlement— — 300,460 
Impact of internal reorganizations8,822 13,077 (33,676)
Other items6,912 (7,410)(4,658)
Provision for income taxes$70,767 $118,752 $339,906 
The following is a geographical breakdown of income before the provision for income taxes:
Year Ended June 30,
202320222021
Domestic income (loss)300,437 435,355 462,315 
Foreign income (loss)(79,104)80,656 188,455 
Income before income taxes$221,333 $516,011 $650,770 
The provision for (recovery of) income taxes consisted of the following:
Year Ended June 30,
202320222021
Current income taxes (recoveries):
Domestic15,619 17,428 310,615 
Foreign204,708 137,412 (43,748)
Total current income taxes (recoveries)220,327 154,840 266,867 
Deferred income taxes (recoveries):
Domestic17,461 54,867 111,232 
Foreign(167,021)(90,955)(38,193)
Total deferred income taxes (recoveries)(149,560)(36,088)73,039 
Provision for income taxes$70,767 $118,752 $339,906 

The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
As of June 30,
20232022
Deferred tax assets
Non-capital loss carryforwards$754,852 $207,631 
Capital loss carryforwards13,512 — 
Interest expense carryforwards156,832 — 
Capitalized scientific research and development expenses343,308 121,771 
Depreciation and amortization— 314,168 
Restructuring costs and other reserves34,357 19,561 
Capitalized inventory and intangible expenses52,345 43,129 
Tax credits171,536 126,920 
Lease liabilities48,378 40,486 
Deferred revenue90,312 9,288 
Share-based compensation37,692 29,239 
Derivatives42,716 — 
Other50,272 30,540 
Total deferred tax asset$1,796,112 $942,733 
Valuation allowance(605,926)(73,965)
Deferred tax liabilities
Depreciation and amortization(546,024)— 
Right of use assets(31,933)(31,452)
Other(109,465)(93,049)
Deferred tax liabilities$(687,422)$(124,501)
Net deferred tax asset$502,764 $744,267 
Comprised of:
Long-term assets926,719 810,154 
Long-term liabilities(423,955)(65,887)
Net deferred tax asset$502,764 $744,267 
As of June 30, 2023, we have $364.2 million of domestic non-capital loss carryforwards. In addition, we have $3.0 billion of foreign non-capital loss carryforwards, which includes $372.1 million of U.S. state loss carryforwards. $476.3 million of the foreign non-capital loss carryforwards have no expiry date, which includes $12.8 million of U.S. state loss carryforwards. The remainder of the domestic and foreign losses expire between 2024 and 2043. In addition, investment tax credits of $74.1 million will expire between 2028 and 2043.
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. As of June 30, 2023 and 2022, the Company had a valuation allowance on its domestic and foreign deferred tax assets of $605.9 million and $74.0 million, respectively. The balance at June 30, 2023 consisted of $8.7 million and $597.2 million against the Company’s domestic and foreign deferred tax assets, respectively, which, the Company believes, are more likely than not to be utilized in future years. The valuation allowance increased in Fiscal 2023 by $532.0 million primarily related to the Micro Focus Acquisition, which has significant losses that cannot be benefited.

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, 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 
Increases on account of current year positions8,118 
Increases on account of prior year positions (1)
138,062 
Decreases on account of prior year positions(2,086)
Decreases due to settlements with tax authorities(4,485)
Decreases due to lapses of statutes of limitations(15,007)
Unrecognized tax benefits as of June 30, 2023
$178,728 
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(1)The increase in unrecognized tax benefits is primarily driven by the assumption of unrecognized tax benefits related to the Micro Focus Acquisition.
Included in the above tabular reconciliation are unrecognized tax benefits of $66.1 million as of June 30, 2023 (June 30, 2022—$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 $112.6 million as of June 30, 2023 (June 30, 2022—$30.7 million).
We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2023, 2022 and 2021, respectively, we recognized the following amounts as income tax-related interest expense and penalties:
Year Ended June 30,
202320222021
Interest expense (income)$(1,922)$419 $44,657 
Penalties expense(21)1,739 1,125 
Total$(1,943)$2,158 $45,782 
The following amounts have been accrued on account of income tax-related interest expense and penalties:
As of June 30, 2023As of June 30, 2022
Interest expense accrued (1)
$10,187 $4,821 
Penalties accrued (1)
$3,332 $3,569 
__________________________________
(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, 2023, could decrease tax expense in the next 12 months by $9.9 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.
We are subject to income tax audits in all major taxing jurisdictions in which we operate. Our four most significant tax jurisdictions are Canada, the United States, United Kingdom 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. We currently have income tax audits open in Canada, the United States, the United Kingdom, Germany and other immaterial jurisdictions. The earliest fiscal years open for examination are 2012 for Canada, 2018 for the United States, 2015 for the United Kingdom and 2016 for Germany. 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, 2023, we have recognized a provision of $28.3 million (June 30, 2022—$15.1 million) in respect of 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 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.
State Aid Matter
In April 2019, the European Commission published its final decision on its State Aid investigation into the UK’s “Financing Company Partial Exemption” legislation and concluded that part of the legislation was in breach of EU State Aid rules. The UK government and certain UK-based international companies, supported by Micro Focus, appealed to the General Court of the Court of Justice of the European Union (General Court of the CJEU) against the decision.
In February 2021, Micro Focus received and settled GBP denominated State Aid charging notices issued by HM Revenue and Customs, following the requirement for the UK government to start collection proceedings. As a result, Micro Focus recorded a long-term income tax receivable of $43.2 million. This reflects the payment that was made following the final decision published by the European Commission on its State Aid investigation into the UK’s ‘Financing Company Partial Exemption’ legislation. Based on management’s assessment of the value of the underlying tax benefit under dispute, and as supported by external professional advice, Micro Focus believed they had no liability in respect of these matters and therefore no tax charge was recorded.
On June 8, 2022, the General Court of the CJEU found in favor of the European Commission’s decision that the UK’s ‘Financing Company Partial Exemption’ legislation is in breach of EU State Aid rules. The UK Government and UK-based international companies, supported by Micro Focus, lodged an appeal against the judgement with the CJEU. Micro Focus previously received and settled State Aid charging notices from HM Revenue and Customs (including historic interest) and given that an appeal would be expected to take more than a year, a long-term income tax recoverable continues to be recognized as part of non-current tangible assets as of June 30, 2023, in the preliminary purchase price allocation relating to the Micro Focus Acquisition, as described in Note 19 “Acquisitions.”