Prior to the consummation of the Spin-Off, Cerence’s operating results were included in Parent’s various consolidated U.S. federal and state income tax returns, as well as non-U.S. filings. For the purposes of our Consolidated and Combined Financial Statements for periods prior to the Spin-Off, income tax expense and deferred tax balances have been recorded as if we filed tax returns on a standalone basis separate from the Parent. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise prior to the separation from Parent.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) became law on March 27, 2020. The CARES ACT was in response to the market volatility and instability resulting from the COVID-19 pandemic and includes provisions to support individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. The CARES ACT did not have a material impact on our (benefit from) provision for income taxes during the period.

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing a hybrid territorial tax system and imposing a one-time repatriation tax on foreign cash and earnings.

We are subject to additional requirements of the TCJA during the year ended September 30, 2020. Those provisions include a tax on global intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”). We have elected to account for GILTI as a period cost and therefore included GILTI expense in the effective tax rate calculation. Our estimates may be revised in future period as we obtain additional data and as the IRS issues new guidance implementing the law changes.

As a result of the TCJA, in fiscal year 2018 we re-measured certain deferred tax assets and liabilities at the lower rates and recorded approximately $23.1 million of tax expense.

The components of (loss) income before income taxes are as follows (dollars in thousands):

	Year Ended September 30,
	2020			2019			2018
Domestic	$	(28,846	)	$	(22,904	)	$	16,371
Foreign		2,706			34,088			20,427
(Loss) income before income taxes	$	(26,140	)	$	11,184		$	36,798

The components of (benefit) provision for income taxes are as follows (dollars in thousands):

	Year Ended September 30,
	2020			2019			2018
Current:
Federal	$	—		$	5,352		$	11,413
State		—			1,059			2,500
Foreign		5,845			5,728			4,531
Total current	$	5,845		$	12,139		$	18,444
Deferred:
Federal		(1,871	)		(6,210	)		14,393
State		(239	)		(1,593	)		(1,284	)
Foreign		(9,244	)		(93,420	)		(636	)
Total deferred		(11,354	)		(101,223	)		12,473
(Benefit from) provision for income taxes	$	(5,509	)	$	(89,084	)	$	30,917
Effective income tax rate		21.1	%		(796.5	)%		84.0	%

The (benefit from) provision for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before income taxes as follows (dollars in thousands):

	Year Ended September 30,
	2020			2019			2018
Federal tax provision at statutory rate	$	(5,489	)	$	2,270		$	9,026
State tax, net of federal benefit		(239	)		(490	)		917
Foreign tax rate and other foreign related tax items		(2,463	)		(4,764	)		(104	)
Uncertain tax positions		(887	)		57,631			(95	)
Stock-based compensation		3,456			—			—
Global intangible low-taxed income		336			3,923			—
Foreign-derived intangible income		—			(547	)		—
Capital losses		—			8,187			—
Change in U.S. valuation allowance		—			(8,187	)		—
Non-deductible expenditures		2,728			2,707			514
R&D credits		(2,951	)		(1,675	)		(1,313	)
Domestic Production Activities Deduction		—			—			(1,143	)
TCJA impact		—			—			23,115
Intangible property transfers		—			(148,139	)		—
(Benefit from) provision for income taxes	$	(5,509	)	$	(89,084	)	$	30,917

The effective income tax rate is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates. We believe that it is not more likely than not that the tax benefit from the U.S. capital loss will be realized. As a result, we recorded a full valuation allowance against the capital loss.

The effective tax rate for the fiscal year 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings, U.S. inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, R&D incentives, and an income tax benefit of approximately $5.0 million related to an increase in tax rates in the Netherlands enacted in the first quarter.

The effective income tax rate in fiscal year 2019 differs from the U.S. federal statutory rate of 21.0% primarily due to a net tax benefit of $91.7 million related to intangible property transfers, partially offset by an uncertain tax position. The net tax benefit is also partially offset by GILTI tax expense of $3.9 million.

The effective income tax rate in fiscal year 2018 differs from the U.S. federal statutory rate of 24.5% primarily due to the net tax expense resulting from the TCJA re-measurement of deferred tax assets and liabilities at the lower enacted rate, our research and development credits and the domestic production activities deduction.

As of September 30, 2020, we have not provided taxes on undistributed earnings of our foreign subsidiaries, which may be subject to foreign withholding taxes upon repatriation, as we consider these earnings indefinitely reinvested. Our indefinite reinvestment determination is based on the future operational and capital requirements of our domestic and foreign operations. We expect our international cash and cash equivalents and marketable securities will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2020, it is not practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax assets.

Deferred tax assets (liabilities) consist of the following as of September 30, 2020 and 2019 (dollars in thousands):

	September 30,
	2020			2019
Deferred tax assets:
Net operating loss carryforwards	$	17,582		$	6,567
Capital loss carryforwards		9,557			8,187
Federal credit carryforwards		3,665			9,367
Accrued expenses and other reserves		5,086			2,830
Difference in timing of revenue related items		51,483			50,677
Acquired intangibles		94,389			90,635
Interest limitations carryforward		9,399			—
Operating lease liabilities		6,568			—
Depreciation		1,682			—
Deferred compensation		1,465			—
Pension obligation		2,522			1,969
Other		1,726			—
Total deferred tax assets	$	205,124		$	170,232
Valuation allowance for deferred tax assets		(13,491	)		(11,064	)
Deferred tax assets	$	191,633		$	159,168
Deferred tax liabilities:
Depreciation	$	(3,381	)	$	(1,360	)
Acquired intangibles		(21,255	)		(7,179	)
Convertible debt		(4,406	)		—
Operating lease right-of-use assets		(5,677	)		—
Other		(2,457	)		—
Total deferred tax liabilities		(37,176	)		(8,539	)
Net deferred tax assets	$	154,457		$	150,629

We have determined that a revision was required to correct the September 30, 2019 disclosure of certain gross deferred tax liabilities and deferred tax assets, of $7.2 million, within the above table. Our disclosure of the related net deferred tax assets and valuation allowance at September 30, 2019 was correctly presented and this revision had no impact on our combined balance sheet, statement of operations or statement of cash flow as previously reported.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. As of September 30, 2020, we have $9.8 million and $3.7 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2019, we had $11.03 million and $0.03 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively.

We have U.S. federal net operating loss (“NOL”) carryforwards of $21.1 million, state NOL carryforwards of $22.7 million, and foreign NOL carryforwards of $57.4 million. These carryforwards will expire at various dates beginning in 2026 and extending up to an unlimited period.

ASC 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements. We regularly assess the outcome of potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax positions in our (benefit from) provision for income taxes line of our Consolidated and Combined Statements of Operations.

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands):

	September 30,
	2020			2019			2018
Balance at the beginning of the year	$	63,369		$	5,738		$	5,833
Beginning balance adjustment		3,392			—			—
Increases related to tax positions taken from prior periods		5,158			1,312			103
Decreases related to tax positions taken from prior periods		—			(120	)		(198	)
Increases related to tax positions taken during current period		328			56,439			—
Decreases for tax settlements and lapse in statutes		(1,215	)		—			—
Balance at the end of the year	$	71,032		$	63,369		$	5,738

For the periods prior to the Spin-Off, the unrecognized tax benefits reflected in the financial statements were determined using the Separate Return Method. As a result of the Spin-Off, we recognized $3.4 million of liabilities for unrecognized tax benefits, determined on an asset and liability method, that stay with the legal entities included in the Spin-Off of the Cerence business from the Parent, which were recorded through Parent company investment, net of corresponding indemnification assets.

As of September 30, 2020, $71.0 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. We recorded $0.4 million and $0.4 million of interest and penalties related to uncertain tax positions as of September 30, 2020 and September 30, 2019, respectively.

We are subject to U.S. federal income tax, various state and local taxes and international income taxes in numerous jurisdictions. The 2017 through 2019 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.