INCOME TAXES

6 Months Ended

Apr. 30, 2019

11.

INCOME TAXES

In December 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted. The Tax Reform Act lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax system from a worldwide system, imposed a tax on deemed repatriation of earnings of foreign subsidiaries, and added provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-derived Intangible Income (“FDII”), among other provisions.

The Tax Reform Act created a new requirement that GILTI income earned by Controlled Foreign Corporations (“CFC’s”) must be included in the gross income of the CFC’s U.S. shareholder effective in fiscal 2019. Under U.S. generally accepted accounting principles (“U.S. GAAP”), we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of deferred taxes (the “deferred method”). We have included an estimate of the GILTI tax using the period cost method in our annualized effective tax rate used to determine tax expense for the three and six months ended April 30, 2019.

The Tax Reform Act also created the FDII for U.S. companies that derive income from the export of tangible and intangible property and services effective in fiscal 2019. We have included an estimate of the deduction attributable to FDII in our annualized effective tax rate used to determine tax expense for the three and six months ended April 30, 2019.

We recorded income tax expense during the first six months of fiscal 2019 of $4.9 million compared to $6.2 million for the same period in fiscal 2018. Our effective tax rate for the first six months of fiscal 2019 was 29%, compared to 48% in the corresponding prior year period.

Our unrecognized tax benefits were $234,000 as of April 30, 2019 and $205,000 as of October 31, 2018, and in each case included accrued interest.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. As of April 30, 2019, the gross amount of interest accrued, reported in Accrued expenses and other, was approximately $30,000, which did not include the federal tax benefit of interest deductions.

We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. The statutes of limitations with respect to unrecognized tax benefits will expire between July 2019 and July 2022.