Income Taxes

6 Months Ended

Jul. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We compute our provision for income taxes by applying the estimated annual effective tax rate to year-to-date ordinary income and adjust the provision for discrete tax items recorded in the period. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to significant volatility due to several factors, including our ability to accurately predict the proportion of our pretax income in multiple jurisdictions and certain book-tax differences.

The following table provides details of the provision for income taxes:

	Three Months Ended July 31,						Six Months Ended July 31,
	2022			2021			2022			2021
	(in thousands, except percentages)
Income before provision for income taxes	$	90,399		$	323,884		$	234,071		$	552,815
Provision for income taxes	44,649			6,800			74,663			8,200
Effective tax rate	49.4		%	2.1		%	31.9		%	1.5		%

We had a provision for income taxes of $44.6 million and $6.8 million for the three months ended July 31, 2022 and 2021, respectively. The provision for income taxes was $74.7 million and $8.2 million for the six months ended July 31, 2022 and 2021, respectively. The year-over-year increase in effective tax rate for the three and six month periods ended July 31, 2022 was due primarily to tax shortfalls on share based compensation and the valuation allowance recorded on the deferred tax asset related to losses that are capital in nature as of July 31, 2022 compared to the full valuation allowance on the U.S. deferred tax assets as of July 31, 2021, which was released in the fourth quarter of fiscal year 2022. For the three and six months ended July 31, 2022, the effective tax rate differed from the U.S. federal statutory rate due primarily to tax shortfalls on share based compensation, and the valuation allowance recorded on the deferred tax asset related to losses that are capital in nature, partially offset by research credits and the foreign-derived intangible income deduction. For the three and six months ended July 31, 2021, the effective tax rate differed from the U.S. federal statutory rate due primarily to the full valuation allowance on the U.S. deferred tax assets.

The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence during the three and six months ended July 31, 2022, we continue to believe that it is more likely than not that the tax benefits of the U.K. net deferred tax assets may not be realized. Accordingly, we maintained a full valuation allowance against the tax benefits of these net deferred tax assets. Based on the available objective evidence during the three and six months ended July 31, 2022, we believe that it is more likely than not that the tax benefits relating to U.S. losses that are capital in nature may not be realized prior to expiration. Accordingly, we have recorded a valuation allowance during the quarter against these deferred tax assets. We intend to maintain the applicable valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

During the three and six months ended July 31, 2022, there were no material changes to the total amount of unrecognized tax benefits and we do not expect any significant changes in the next 12 months.

As required by the 2017 Tax Cuts and Jobs Act, we are capitalizing research and development expenses incurred in fiscal year 2023. These expenses are capitalized and amortized over five years for domestic research and fifteen years for international research. The mandatory capitalization requirement increases our cash tax liabilities but also decreases our effective tax rate due to increasing the foreign-derived intangible income deduction. The cash flow impact will decrease over time as capitalized research and development expenditures continue to amortize.