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INCOME TAXES | 12 Months Ended
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Jun. 30, 2024
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 36.2% for the year ended June 30, 2024, compared to a provision of 32.0% for the year ended June 30, 2023. Tax expense increased from $70.8 million during the year ended June 30, 2023 to $264.0 million during the year ended June 30, 2024. The increase in the effective tax rate was driven by an increase in valuation allowance, the impact of internal reorganizations and the AMC Divestiture, and U.S. Base Erosion and Anti-Abuse Tax (BEAT), partially offset by tax credits and change in undistributed earnings. The tax rate for the year ended June 30, 2023 varied from the statutory rate due to withholding taxes, changes in valuation allowance, permanent differences related to foreign source income inclusions, and the impact of internal reorganizations, partially offset by tax credits and permanent differences related to preferential tax treatment of the mark-to-market gains on derivatives. 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,
| 2024 |  | 2023 |  | 2022
Expected statutory rate | 26.50 | % |  | 26.50 | % |  | 26.50 | %
Expected provision for income taxes | $ | 193,263 |  |  | $ | 58,653 |  |  | $ | 136,743 |
Effect of foreign tax rate differences | (18,338) |  |  | (17,502) |  |  | (4,578) |
Change in valuation allowance | 71,328 |  |  | 16,218 |  |  | (2,444) |
Effect of permanent differences | 11,864 |  |  | 17,281 |  |  | (12,710) |
Effect of changes in unrecognized tax benefits | (4,570) |  |  | 857 |  |  | 8,130 |
Effect of withholding taxes | 18,680 |  |  | 12,464 |  |  | 6,617 |
Effect of tax credits | (84,244) |  |  | (45,596) |  |  | (12,330) |
Effect of accrual for undistributed earnings | (12,421) |  |  | 5,804 |  |  | (6,343) |
Effect of U.S. BEAT | 17,927 |  |  | 6,854 |  |  | — |
Impact of internal reorganizations | 59,761 |  |  | 8,822 |  |  | 13,077 |
Other items | 10,762 |  |  | 6,912 |  |  | (7,410) |
Provision for income taxes | $ | 264,012 |  |  | $ | 70,767 |  |  | $ | 118,752 |
The following is a geographical breakdown of income before the provision for income taxes:
| Year Ended June 30,
| 2024 |  | 2023 |  | 2022
Domestic income (loss) | 359,865 |  |  | 300,437 |  |  | 435,355 |
Foreign income (loss) | 369,431 |  |  | (79,104) |  |  | 80,656 |
Income before income taxes | $ | 729,296 |  |  | $ | 221,333 |  |  | $ | 516,011 |
The provision for (recovery of) income taxes consisted of the following:
| Year Ended June 30,
| 2024 |  | 2023 |  | 2022
Current income taxes (recoveries): |  |  |  |  |
Domestic | 76,571 |  |  | 15,619 |  |  | 17,428 |
Foreign | 329,712 |  |  | 204,708 |  |  | 137,412 |
Total current income taxes (recoveries) | 406,283 |  |  | 220,327 |  |  | 154,840 |
Deferred income taxes (recoveries): |  |  |  |  |
Domestic | 17,205 |  |  | 17,461 |  |  | 54,867 |
Foreign | (159,476) |  |  | (167,021) |  |  | (90,955) |
Total deferred income taxes (recoveries) | (142,271) |  |  | (149,560) |  |  | (36,088) |
Provision for income taxes | $ | 264,012 |  |  | $ | 70,767 |  |  | $ | 118,752 |
The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:
| As of June 30,
| 2024 |  | 2023
Deferred tax assets |  |  |
Non-capital loss carryforwards | $ | 750,895 |  |  | $ | 754,852 |
Capital loss carryforwards | 13,221 |  |  | 13,512 |
Interest expense carryforwards | 217,071 |  |  | 156,832 |
Capitalized scientific research and development expenses | 416,126 |  |  | 343,308 |
Restructuring costs and other reserves | 21,347 |  |  | 34,357 |
Capitalized inventory and intangible expenses | — |  |  | 52,345 |
Tax credits | 172,409 |  |  | 171,536 |
Lease liabilities | 36,343 |  |  | 48,378 |
Deferred revenue | 23,362 |  |  | 90,312 |
Share-based compensation | 40,188 |  |  | 37,692 |
Derivatives | 41,978 |  |  | 42,716 |
Other | 88,901 |  |  | 50,272 |
Total deferred tax asset | $ | 1,821,841 |  |  | $ | 1,796,112 |
Valuation allowance | (662,694) |  |  | (605,926) |
Deferred tax liabilities |  |  |
Depreciation and amortization | (233,219) |  |  | (546,024) |
Right of use assets | (21,173) |  |  | (31,933) |
Other | (120,730) |  |  | (109,465) |
Deferred tax liabilities | $ | (375,122) |  |  | $ | (687,422) |
Net deferred tax asset | $ | 784,025 |  |  | $ | 502,764 |
Comprised of: |  |  |
Long-term assets | 932,657 |  |  | 926,719 |
Long-term liabilities | (148,632) |  |  | (423,955) |
Net deferred tax asset | $ | 784,025 |  |  | $ | 502,764 |
As of June 30, 2024, we have $414.2 million of domestic non-capital loss carryforwards. In addition, we have $3.1 billion of foreign non-capital loss carryforwards, which includes $490.6 million of U.S. state loss carryforwards. $565.1 million of the foreign non-capital loss carryforwards have no expiry date, which includes $61.2 million of U.S. state loss carryforwards. The remainder of the domestic and foreign losses expire between 2025 and 2044. In addition, investment tax credits of $81.5 million will expire between 2028 and 2044. 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, 2024 and 2023, the Company had a valuation allowance on its domestic and foreign deferred tax assets of $662.7 million and $605.9 million, respectively. The balance at June 30, 2024 consisted of $8.8 million and $653.9 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 2024 by $56.8 million primarily related to interest carryovers and 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, 2022 | $ | 54,126 |
Increases on account of current year positions | 8,118 |
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 |
Increases on account of current year positions | 4,074 |
Increases on account of prior year positions | 16,558 |
Decreases on account of prior year positions | (3,338) |
Decreases due to settlements with tax authorities | (11,497) |
Decreases due to lapses of statutes of limitations | (4,160) |
Unrecognized tax benefits as of June 30, 2024 | $ | 180,365 |
______________________ (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 $63.0 million as of June 30, 2024 (June 30, 2023—$66.1 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 $117.4 million as of June 30, 2024 (June 30, 2023—$112.6 million). We recognize interest expense and penalties related to income tax matters in income tax expense. For the year ended June 30, 2024, 2023 and 2022, respectively, we recognized the following amounts as income tax-related interest expense and penalties:
| Year Ended June 30,
| 2024 |  | 2023 |  | 2022
Interest expense (income) | $ | 7,778 |  |  | $ | (1,922) |  |  | $ | 419 |
Penalties expense | 964 |  |  | (21) |  |  | 1,739 |
Total | $ | 8,742 |  |  | $ | (1,943) |  |  | $ | 2,158 |
The following amounts have been accrued on account of income tax-related interest expense and penalties:
| As of June 30, 2024 |  | As of June 30, 2023
Interest expense accrued (1) | $ | 19,976 |  |  | $ | 10,187 |
Penalties accrued (1) | $ | 4,295 |  |  | $ | 3,332 |
______________________ (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, 2024, could decrease tax expense in the next 12 months by $44.0 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, the 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 for our major jurisdictions are 2012 for Canada, 2020 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, refer to Note 14 “Guarantees and Contingencies.” As of June 30, 2024, we have recognized a provision of $15.9 million (June 30, 2023—$28.3 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. 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 $44.1 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. On April 11, 2024, the CJEU Advocate General (AG) issued an Opinion proposing that the CJEU should (i) set aside the General Court decision of June 8, 2022, (ii) annul the Commission Decision of April 2, 2019, and (iii) order the European Commission to pay the costs of the appeals. While this decision is not binding on the Court, and it is possible that the Court forms a different view to the AG, Court decisions do in most cases follow AG opinions. The AG decision is therefore considered as positively impacting the collectability of this income tax recoverable. Furthermore, the Court has now confirmed that its decision will be handed down on September 19, 2024. Micro Focus previously received and settled State Aid charging notices from HM Revenue and Customs (including historic interest). Although the Court decision is due within the period ending June 30, 2025, the timing of the refund is uncertain and therefore the income tax recoverable has continued to be treated as long term and recognized as part of non-current tangible assets as of June 30, 2024.

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