Note 8—Income Taxes

The income tax expense we record in any interim period is based on our estimated effective tax rate for the fiscal year for those tax jurisdictions in which we can reliably estimate that rate. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction as well as total tax expense for the fiscal year. Accordingly, our annual estimated effective tax rate is subject to adjustment if there are changes to our initial estimates of total tax expense or pre-tax income, including the mix of income by jurisdiction. For those tax jurisdictions for which we are unable to reliably estimate an overall effective tax rate, we calculate income tax expense based upon the actual effective tax rate for the year-to-date period.

Provision for Income Taxes

We recorded an income tax benefit of $3.5 million and $4.5 million for the three months ended December 31, 2018 and 2017, respectively. In the three months ended December 31, 2018, the income tax benefit we recorded was driven largely by discrete tax benefits of $3.3 million relating to stock-based compensation. The income tax benefit for the three months ended December 31, 2017 was principally due to a discrete tax benefit of $4.4 million relating to the consequences of the Tax Act (discussed below) and a tax benefit associated with our Swiss and Israeli operations, offset in part by tax expense associated with our U.S. and UK operations.

We recorded an income tax benefit of $4.9 million and $4.0 million for the six months ended December 31, 2018 and 2017, respectively. In the six months ended December 31, 2018 the income tax benefit we recorded was driven largely by discrete tax benefits of $4.0 million relating to stock-based compensation and a discrete tax benefit of $0.5 million arising from a reduction to deferred tax liabilities related to state tax consequences of repatriated foreign earnings. The income tax benefit for the six months ended December 31, 2017 was principally due to a discrete tax benefit of $4.4 million relating to the consequences of the Tax Act (discussed below) and a tax benefit associated with our Swiss and Israeli operations, offset in part by tax expense associated with our U.S. and UK operations.

We currently anticipate that our unrecognized tax benefits will decrease within the next twelve months by approximately $0.4 million as a result of the expiration of certain statutes of limitations associated with intercompany transactions subject to tax in multiple jurisdictions.

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not.

At December 31, 2018, we had a total valuation allowance of $32.3 million against our deferred tax assets given the uncertainty of recoverability of these amounts. The change in our valuation allowance during the six months ended December 31, 2018 include the reduction in valuation allowance as a result of the adoption of the new accounting standard for revenue recognition.

U.S. Tax Cuts and Jobs Act

The U.S. Tax Cuts and Jobs Act (the Tax Act) was signed into U.S. law on December 22, 2017 and made broad and complex changes to the U.S. tax code. This legislation contained a variety of income tax changes, including a reduction to the federal corporate income tax rate from 35% to 21%, a repeal of the corporate alternative minimum tax, a one-time transition tax on accumulated foreign earnings, a move to a territorial tax system, a limitation on the tax deductibility of interest expense and an acceleration of tax deductions for qualifying capital expenditures.

The Tax Act resulted in four consequences to us in our prior fiscal year, as follows:

•

Assessing whether we would incur any tax liability under the one-time transition tax. Under the Tax Act, un-repatriated foreign earnings post-1986 are subject to a one-time transition tax at rates that vary depending on the composition of foreign assets. We did not incur any transition tax liability due to our accumulated deficit position with respect to our foreign subsidiaries.

•

Re-valuing our U.S. deferred tax balances to reflect lower income tax rates. Deferred tax assets and deferred tax liabilities are recorded based on the income tax rates expected to be in effect when book and tax basis differences reverse. We are in a net U.S. deferred tax liability position. During the fiscal year ended June 30, 2018 we reduced the carrying value of our net deferred tax liabilities to reflect the impact of lower future income tax rates and recognized a non-recurring income tax benefit of $3.7 million.

•

Recognizing the ability to recover amounts paid for alternative minimum tax. The Tax Act eliminated the alternative minimum tax calculation and provided for the ability to recover certain amounts previously paid for such tax. We expect to receive a tax refund of $0.7 million and recognized a non-recurring income tax benefit in this amount in the fiscal year ended June 30, 2018.

•

Reversal of indefinite-lived deferred tax liabilities as a source of future taxable income when assessing the realizability of indefinite-lived net operating loss carryforwards. Under the Tax Act, net operating loss carryforwards arising in tax years beginning after December 31, 2017 are limited to 80% of taxable income in any year, and net operating losses generated in tax years ending after December 31, 2017 can be carried forward indefinitely. Based on the projection of future reversals of our deferred tax differences as of June 30, 2018 we determined that a portion of our indefinite-lived deferred tax liabilities could be used as a source of taxable income when assessing the realizability of future indefinite-lived net operating loss carryforwards. Accordingly, we recognized an income tax benefit of $4.1 million through a reduction to our valuation allowance in the fiscal year ended June 30, 2018.

All of our accounting calculations and financial reporting positions for consequences arising from the Tax Act are final as of December 31, 2018.

A provision of the Tax Act subjects a U.S. shareholder to current tax on “global intangible low-taxed income” (GILTI) of its controlled foreign corporations. We have elected to treat any tax related to GILTI as current tax expense in the period the tax is incurred.

The Tax Act also provides that the repatriation to the U.S. of foreign earnings can be done without federal tax consequence. During fiscal year 2018, as a result of the Tax Act provisions, we reassessed and changed our assertion that cumulative earnings by our UK and Switzerland subsidiaries were indefinitely reinvested. We continue to permanently reinvest the earnings, if any, of our international subsidiaries other than the UK and Switzerland and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we would likely be subject to additional U.S. state income taxes. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these undistributed earnings.