Income Taxes

12 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

Our Income (loss) before income taxes consisted of the following:

(in thousands)	Year ended September 30,
	2023			2022		2021
Domestic	$	(49,193	)	$	97,460	$	41,199
Foreign		381,759			299,638		350,556
Total income before income taxes	$	332,566		$	397,098	$	391,755

Our Provision (benefit) for income taxes consisted of the following:

(in thousands)	Year ended September 30,
	2023			2022			2021
Current:
Federal	$	7,311		$	767		$	4,774
State		10,020			6,675			1,609
Foreign		53,019			33,612			66,554
		70,350			41,054			72,937
Deferred:
Federal		(11,821	)		25,730			(152,311	)
State		(10,028	)		(3,177	)		(27,228	)
Foreign		38,525			20,410			21,434
		16,676			42,963			(158,105	)
Provision (benefit) for income taxes	$	87,026		$	84,017		$	(85,168	)

Taxes computed at the statutory federal income tax rates are reconciled to the Provision (benefit) for income taxes as follows:

(in thousands)	Year ended September 30,
	2023					2022					2021
Statutory federal income tax rate	$	69,839		21	%	$	83,391		21	%	$	82,268		21	%
Change in valuation allowance		—		—			—		—			(134,695	)	(34	)%
State income taxes, net of federal tax benefit		577		0	%		6,518		2	%		(28,768	)	(8	)%
Federal research and development credits		(7,751	)	(2	)%		(7,477	)	(2	)%		(5,764	)	(2	)%
Uncertain tax positions		23,302		7	%		2,418		1	%		3,398		1	%
Foreign tax credit		(11,415	)	(3	)%		(9,078	)	(2	)%		(35,368	)	(9	)%
Foreign rate differences		(20,829	)	(6	)%		(8,982	)	(2	)%		(34,584	)	(9	)%
Foreign tax on U.S. provision		11,415		3	%		9,078		2	%		5,931		2	%
Excess tax benefits from restricted stock		(6,963	)	(2	)%		(8,278	)	(2	)%		(6,141	)	(2	)%
Audits and settlements		—		—			—		—			33,370		9	%
U.S. permanent items		5,341		2	%		3,453		—			7,449		2	%
Non-deductible compensation		8,344		3	%		11,851		3	%		10,940		3	%
Base Erosion Anti-Abuse Tax (BEAT)		—		—			—		—			2,936		1	%
GILTI, net of foreign tax credits		17,861		5	%		2,705		1	%		18,217		4	%
Foreign-Derived Intangible Income (FDII)		(8,987	)	(3	)%		(6,848	)	(2	)%		(4,428	)	(1	)%
Non-deductible imputed interest		6,292		2	%		—		—			—		—
Sale of a portion of the PLM services business		—		—			6,844		2	%		—		—
Other, net		—		(1	)%		(1,578	)	(1	)%		71		—
Provision (benefit) for income taxes	$	87,026		26	%	$	84,017		21	%	$	(85,168	)	(22	)%

In 2023, 2022, and 2021, our effective tax rate is impacted by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2023, 2022, and 2021, the foreign rate differential predominantly relates to these earnings. In addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax due to the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation.

Additionally in 2023, our results include tax expense of $21.8 million relating to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit. Our rate was also impacted by non-deductible imputed interest related to the deferred payment on the acquisition of ServiceMax, Inc.

In 2022, our results include tax expense relating to the book over tax basis difference in goodwill disposed of as part of the sale of a portion of the PLM services business.

In 2021, our tax rate includes a benefit due to the release of the valuation allowance on the majority of our U.S. net deferred tax assets and the tax impact related to the effects of a tax matter in the Republic of Korea (South Korea).

At September 30, 2023 and 2022, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $30.4 million ($14.9 million in Accrued income taxes, $4.8 million in Accrued expenses and other current liabilities and $10.7 million in Other liabilities) and $17.3 million ($5.1 million in Accrued income taxes, $5.6 million in Accrued expenses and other current liabilities and $6.6 million in Other liabilities), respectively. At September 30, 2023 and 2022, prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were $22.7 million and $25.8 million, respectively. We made net income tax payments of $65.9 million, $55.0 million and $56.0 million in 2023, 2022 and 2021, respectively.

The significant temporary differences that created deferred tax assets and liabilities are shown below:

(in thousands)	September 30,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	22,272		$	40,419
Foreign tax credits		3,750			14,527
Capitalized research and development		83,748			23,274
Pension benefits		5,327			7,639
Prepaid expenses		15,040			15,886
Deferred revenue		5,902			2,146
Stock-based compensation		19,684			19,486
Other reserves not currently deductible		19,604			14,689
Amortization of intangible assets		90,888			130,825
Research and development and other tax credits		64,618			78,862
Lease liabilities		50,102			46,672
Fixed assets		83,796			78,249
Capital loss carryforward		3,700			3,955
Other		2,279			1,256
Gross deferred tax assets		470,710			477,885
Valuation allowance	$	(21,695	)	$	(22,283	)
Total deferred tax assets		449,015			455,602
Deferred tax liabilities:
Acquired intangible assets not deductible	$	(263,178	)	$	(118,360	)
Lease assets		(37,332	)		(36,940	)
Pension prepayments		(1,808	)		(2,622	)
Deferred revenue		(17,400	)		(35,193	)
Depreciation		(5,779	)		(6,937	)
Deferred income		(8,656	)		(5,991	)
Prepaid commissions		(13,757	)		(13,356	)
Other		(7,294	)		(8,508	)
Total deferred tax liabilities		(355,204	)		(227,907	)
Net deferred tax assets	$	93,811		$	227,695

We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets.

For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2023, we had U.S. federal tax effected NOL carryforwards from acquisitions of $6.4 million, of which $1.2 million expire in 2025 to 2034. The remaining carryforwards of $5.2 million do not expire. The use of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382.

As of September 30, 2023, we had federal R&D credit carryforwards of $46.7 million, which expire beginning in 2025 and ending in 2043, and Massachusetts R&D credit carryforwards of $27.3 million, which expire beginning in 2024 and ending in 2038. We also had foreign tax credits of $3.7 million, which expire beginning in 2030 and ending in 2033.

We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $6.8 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $2.3 million that expire beginning in 2030 and ending in 2041. Additionally, we have tax effected amortization carryforwards of $85.3 million in a foreign jurisdiction. There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits.

As of September 30, 2023, we have a valuation allowance of $17.4 million against net deferred tax assets in the United States and a valuation allowance of $4.3 million against net deferred tax assets in certain foreign jurisdictions. The $17.4 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily

for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits.

The changes to the valuation allowance were primarily due to the following:

(in thousands)	Year ended September 30,
	2023			2022			2021
Valuation allowance, beginning of year	$	22,283		$	52,085		$	205,423
Net release of valuation allowance(1)		—			—			(134,235	)
Net decrease in deferred tax assets with a full valuation allowance(2)		(588	)		(29,802	)		(19,103	)
Valuation allowance, end of year	$	21,695		$	22,283		$	52,085

(1)In 2021, this is attributable to the release in the United States.

(2)In 2022, this change included the loss of foreign attributes upon liquidation of a foreign subsidiary. In 2021, this change includes the loss of state attributes upon merger of two wholly-owned subsidiaries.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2023, 2022 and 2021 we recorded interest expense of $0.5 million, $0.2 million and $2.2 million, respectively. In 2023 and 2022 we had no penalty expenses in our income tax provision. In 2021 we had $2.0 million tax penalty expense in our income tax provision. As of September 30, 2023 and 2022, we had accrued $1.4 million and $0.9 million of net estimated interest expense, respectively. We had no accrued tax penalties as of September 30, 2023, 2022 or 2021.

	Year ended September 30,
Unrecognized tax benefits (in thousands)	2023			2022			2021
Unrecognized tax benefit, beginning of year	$	23,923		$	21,166		$	16,107
Tax positions related to current year:
Additions		7,075			3,144			4,844
Tax positions related to prior years:
Additions		20,855			785			30,130
Reductions		—			(1,172	)		(478	)
Settlements		—			—			(29,437	)
Statute expirations		(1,111	)		—			—
Unrecognized tax benefit, end of year	$	50,742		$	23,923		$	21,166

If all of our unrecognized tax benefits as of September 30, 2023 were to become recognizable in the future, we would record a benefit to the income tax provision of $50.7 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.7 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $26 million as audits close and statutes of limitations expire.

Our results for the year ended September 30, 2021 include a charge of $37.3 million related to the effects of a tax matter in the Republic of Korea (South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of $2.9 million, and additional payments of approximately $20 million to South Korea in settlement of the amounts previously accrued.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions, including Germany, Ireland, and Italy. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2023, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

Major Tax Jurisdiction	Open Years
United States	2020 through 2023
Germany	2015 through 2023
France	2020 through 2023
Japan	2018 through 2023
Ireland	2019 through 2023

Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are used in later periods.

We incurred expenses related to stock-based compensation in 2023, 2022 and 2021 of $206.5 million, $174.9 million and $177.3 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $33.4 million, $27.1 million and $39.9 million in 2023, 2022 and 2021, respectively. Upon vesting of the stock-based awards, the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2023, 2022 and 2021, net windfall tax benefits of $7.8 million, $5.2 million and $9.9 million were recorded to the tax provision.

Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the United States unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.