INCOME TAXES

3 Months Ended

Apr. 30, 2025

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

We compute our tax provision for interim periods by applying the estimated annual effective tax rate to year-to-date income from continuing operations and adjusting for discrete items arising in that quarter.

During the three months ended April 30, 2025, we incurred a discrete tax expense upon recording a long-term tax contingency of $136.0 million related to the APA matter, as discussed further below. Additionally, in connection with the APA matter, we released a valuation allowance upon the recognition of Israeli deferred tax assets of $4.7 million. Without respect to these two discrete items, we had an effective tax rate of (3.0)% and (2.2)% for the three months ended April 30, 2025 and 2024, respectively. The effective tax rate is primarily attributable to minimum taxes and profits in our foreign jurisdictions.

In 2022, we began negotiating an APA with the United States Internal Revenue Service (IRS) and the Israel Tax Authority (ITA), covering various transfer pricing matters for intercompany transactions, with the primary issue relating to the valuation of the intergroup utilization of our Israeli subsidiary’s intellectual property (APA matter). The proposed APA would cover our fiscal years ended or ending January 31, 2022 through January 31, 2026. An APA, if obtained, would provide us with a more predictable future business operating model, ensure certainty to timing and amounts of cash tax payments, and preclude the relevant tax authorities from making certain transfer pricing adjustments within the scope of these agreements. While this effort is ongoing, the process of negotiating has been lengthy and may take more time to resolve. While we still continue to vigorously defend our tax position, during the three months ended April 30, 2025, in the context of the APA negotiations, we discussed a framework for a final settlement and resolution of this matter with the ITA. As a result of such discussions, we reassessed our uncertain tax position in respect of the APA matter, and based on this reassessment, incurred a tax expense of $136.0 million in the three months ended April 30, 2025, and recorded a long-term tax contingency for this matter. We currently expect that any payments pursuant to an APA (if an APA is concluded) or negotiated settlement would be made over a number of years and subject to other terms and conditions. However, no agreements between us and the IRS and the ITA have been reached at this time. By its nature, a concluded APA is a tri-party agreement between the two competent tax authorities and the taxpayer, and therefore, a successful resolution of such requires compromise by all three parties in order to achieve such aforementioned certainty and conclusion, and accordingly there can be no assurance that the APA process will be successful. Alternatively, the APA process could be terminated without an agreed upon resolution. In such case, the ITA may initiate an audit of these agreements and transactions, the result of which could be a potential tax assessment. In this case, we intend to exhaust all administrative and judicial remedies necessary to resolve the matter, as necessary, which could be another lengthy process.

We believe that the tax positions we have taken on our Israeli filed tax returns related to these intercompany transactions are sustainable and meet the more likely than not criteria for recognition and measurement, prescribed by ASC Topic 740, Accounting for Income Taxes. We believe that our transfer pricing for these intercompany transactions are on arm’s-length terms, our assumptions, judgements, and estimates are reasonable, and the transactions are characterized appropriately based upon U.S. and OECD guidance and Israeli law. However, ASC 740 also requires that we consider all new information during the quarter, such as the framework for a final settlement and resolution of this matter as discussed with the ITA, without the limitation that the new information must change the technical merits of the position. As noted above, there can be no assurance that this matter will be resolved in our favor, or at the amount recorded, and any taxes, penalties, settlements or adverse judgments relating to this matter could materially and adversely impact our business, operating results, financial condition, and cash flows and the unrecognized tax benefit recorded during the three months ended April 30, 2025 could increase or decrease based on further developments relating to this matter.