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INCOME TAXES
 12 Months Ended
Jan. 31, 2024
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The components of income before provision for income taxes for the years ended January 31, 2024, 2023, and 2022 were as follows:
Year Ended January 31,
(in thousands)202420232022
Domestic$(13,507)$(6,676)$(12,492)
Foreign74,779 61,438 51,996 
Total income before provision for income taxes$61,272 $54,762 $39,504 

The provision for income taxes for the years ended January 31, 2024, 2023, and 2022 consisted of the following:
Year Ended January 31,
(in thousands)202420232022
Current provision for income taxes:
Federal$20,128 $30,637 $3,215 
State2,784 2,733 1,121 
Foreign16,365 15,277 30,840 
Total current provision for income taxes39,277 48,647 35,176 
Deferred (benefit from) provision for income taxes:
Federal(17,086)(8,010)6,714 
State(133)(699)255 
Foreign(420)(835)(18,292)
 Total deferred benefit from income taxes(17,639)(9,544)(11,323)
Total provision for income taxes$21,638 $39,103 $23,853 

The reconciliation of the U.S. federal statutory rate to our effective tax rate on income before provision for income taxes for the years ended January 31, 2024, 2023, and 2022 was as follows:
Year Ended January 31,
(in thousands)202420232022
U.S. federal statutory income tax rate21.0 %21.0 %21.0 %
Income tax provision at the U.S. federal statutory rate$12,867 $11,499$8,296
State income tax (benefit) provision(695)2,617(1,238)
Foreign tax rate differential6,556 3,2446,262
Tax incentives(5,403)(3,779)(6,378)
Valuation allowances8,464 (292)2,616
Stock-based and other compensation5,612 3,347897
Litigation and other non-deductible expenses(475)1,770(238)
Tax credits(17,012)321117
Tax contingencies(1,597)2,3332,108
Change in fair value of future tranche right— —(3,320)
Tax effects of business divestiture(1,372)——
Changes in tax laws89 91,552
U.S. tax effects of foreign operations14,903 18,64213,480
Other, net(299)(608)(301)
Total provision for income taxes$21,638 $39,103$23,853
Effective income tax rate35.3 %71.4 %60.4 %

The January 31, 2024 tax credits benefit of $17.0 million includes a benefit of $14.3 million related to the generation of research tax credits.

Our operations in Israel qualify for an alternative tax incentive program known as a Preferred Technological Enterprise (“PTE”). Pursuant to Amendment 73 to the Investment Law adopted in 2017, a company located in the Center of Israel that meets the conditions for PTE is subject to a 12% tax rate on eligible income. Income not eligible for PTE benefits is taxed at the regular corporate rate of 23%, excluding income derived from manufacturing activity which is entitled to tax benefits according to the “Preferred Enterprise” regime. Income eligible for tax benefits under the Preferred Enterprise regime is taxed at 16%.

In total, tax incentives decreased our effective tax rate by 8.8%, 6.9%, and 16.1% for the years ended January 31, 2024, 2023, and 2022, respectively.

Deferred tax assets and liabilities consisted of the following at January 31, 2024 and 2023:
January 31,
(in thousands)20242023
Deferred tax assets:
Accrued expenses$2,843 $4,506 
Operating lease liabilities6,054 7,974 
Loss carryforwards23,171 20,483 
Tax credits14,241 5,408 
Stock-based and other compensation5,593 3,963 
Capitalized research and development expenses31,530 18,669 
Other, net1,193 995 
Total deferred tax assets84,625 61,998 
Deferred tax liabilities:
Prepaid expenses(2,497)(2,600)
Depreciation of property and equipment(1,931)(2,732)
Deferred cost of revenue(8,810)(9,707)
Goodwill and other intangible assets(19,252)(20,607)
Unremitted earnings of foreign subsidiaries(3,137)(1,784)
Operating lease right-of-use assets(3,965)(5,241)
Total deferred tax liabilities(39,592)(42,671)
Valuation allowance(28,891)(20,357)
Net deferred tax assets (liabilities)$16,142 $(1,030)
Recorded as:
Deferred tax assets$25,697 $10,719 
Deferred tax liabilities(9,555)(11,749)
Net deferred tax assets (liabilities)$16,142 $(1,030)

As required by the 2017 Tax Cuts and Jobs Act, effective February 1, 2022 certain research and development expenditures were capitalized and amortized for U.S. income tax purposes. These expenditures are the primary component of the capitalized research and development deferred tax asset.

At January 31, 2024, we had U.S. federal NOL carryforwards of approximately $55.4 million. Except for $11.1 million of NOLs that can be carried forward indefinitely, these loss carryforwards expire in various years ending from January 31, 2025 to January 31, 2037. We had state NOL carryforwards of approximately $164.0 million. Except for $5.0 million of NOLs that can be carried forward indefinitely, those loss carryforwards expire in various years ending from January 31, 2025 to January 31, 2042. We had foreign NOL carryforwards of approximately $20.9 million. At January 31, 2024, all but $0.5 million of these foreign loss carryforwards had indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. We had U.S. federal, state, and foreign tax credit carryforwards of approximately $18.0 million at January 31, 2024, the utilization of which is subject to limitation. At January 31, 2024, approximately $5.1 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $12.9 million expires in various years ending from January 31, 2028 to January 31, 2043.

We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent that earnings of our foreign subsidiaries have been subject to U.S. taxation as of January 31, 2024, and withholding taxes of $3.1 million accrued as of January 31, 2024 with respect to certain identified cash that may be repatriated to the United States, we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes guidance requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the
valuation allowances against certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in certain state and foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal. We have recorded valuation allowances in the amounts of $28.9 million and $20.4 million at January 31, 2024 and 2023, respectively.

Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2024 and 2023:
Year Ended January 31,
(in thousands)20242023
Valuation allowance, beginning of year$(20,357)$(20,711)
Income tax (provision) benefit(8,464)292 
Currency translation adjustment and other(70)62 
Valuation allowance, end of year$(28,891)$(20,357)

In accordance with the authoritative guidance on accounting for uncertainty in income taxes, differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, determined by applying the prescribed methodologies of accounting for uncertainty in income taxes, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.

For the years ended January 31, 2024, 2023, and 2022, the aggregate changes in the balance of gross unrecognized tax benefits were as follows:
Year Ended January 31,
(in thousands)202420232022
Gross unrecognized tax benefits, beginning of year$87,928 $84,229 $84,847 
Increases related to tax positions taken during the current year853 645 672 
Increases related to tax positions taken during prior years1,598 4,260 430 
(Decreases) increases related to foreign currency exchange rates(174)(404)45 
Reductions for tax positions of prior years(843)(84)(152)
Lapses of statutes of limitations(6,098)(718)(1,613)
Gross unrecognized tax benefits, end of year$83,264 $87,928 $84,229 

During the fourth quarter of the year ended January 31, 2023, we identified and recorded a $4.7 million out-of-period adjustment related to uncertain tax positions associated with Cognyte in fiscal years prior to the Spin-Off. We recorded a corresponding indemnification asset, within other assets in our consolidated balance sheet, as we are indemnified by Cognyte under the Tax Matters Agreement for this uncertain tax position. We also recorded a $5.7 million adjustment to increase additional paid-in capital and accumulated deficit in stockholders’ equity during the fourth quarter of the year ended January 31, 2023 in connection with this adjustment. The impact of these adjustments was not material, individually or in the aggregate, to any of our previously issued consolidated financial statements. During the fourth quarter of the year ended January 31, 2024, the uncertain tax positions associated with Cognyte, as well as the corresponding indemnification asset, were reversed due to the expiration of the statute of limitations.

We had unrecognized income tax benefits of $83.3 million (excluding interest and penalties) as of January 31, 2024, that, if recognized, would impact the effective income tax rate. We recorded $1.4 million, $1.4 million, and $0.5 million of tax expense for interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2024, 2023, and 2022, respectively. The accrued liability for interest and penalties was $6.4 million and $5.2 million at January 31, 2024 and 2023, respectively. Interest and penalties are recorded as a component of the provision for income taxes in the consolidated statements of operations.

Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In the United Kingdom, with the exception of years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31, 2021. In the United States, our federal returns are no longer subject to income tax examination for years prior to January 31, 2021. However, to the extent we generated NOLs or tax credits in closed tax years, future use of the NOL or tax credit carry forward balance would be subject to examination within the relevant statute of limitations for the year in which the carryforward is utilized.

As of January 31, 2024, income tax returns are under examination in the following significant tax jurisdictions:
JurisdictionTax Years
United KingdomDecember 31, 2006, January 31, 2008
IndiaMarch 31, 2010 - March 31, 2013, March 31, 2017, March 31, 2020, March 31, 2022
IsraelJanuary 31, 2019 - January 31, 2022
BrazilDecember 31, 2018
PhilippinesJanuary 31, 2021 - January 31, 2023

We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at January 31, 2024 could decrease by approximately $7.6 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made.

The Organization for Economic Co-operation and Development (“OECD”) Pillar 2 guidelines address the increasing digitalization of the global economy, re-allocating taxing rights among countries. The European Union and many other member states have committed to adopting Pillar 2 which calls for a global minimum tax of 15% to be effective for tax years beginning in 2024. Certain jurisdictions in which we operate have enacted Pillar 2 legislation and others are considering changes to their tax laws to adopt the Pillar 2 proposals. We are monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for safe harbor rules.