10. Income Taxes

In the third quarter of 2011, our effective tax rate was a provision of 15% on pre-tax income of $18.3 million, compared to a provision of 8% on pre-tax income of $11.7 million in the third quarter of 2010. In the first nine months of 2011, our effective tax rate was a provision of 16% on pre-tax income of $56.9 million, compared to a provision of 15% on pre-tax income of $44.4 million in the first nine months of 2010. In the third quarter and first nine months of 2011, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and, in the first nine months of 2011, a $1.8 million tax benefit related to research and development (R&D) triggered by a retroactive extension of the R&D tax credit enacted in the first quarter of 2011. In the third quarter and first nine months of 2010, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate tax structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate.

As of July 2, 2011 and September 30, 2010, we had unrecognized tax benefits of $18.3 million ($18.0 million net of state tax benefits) and $15.9 million ($15.6 million net of state tax benefits), respectively. If all of our unrecognized tax benefits as of July 2, 2011 were to become recognizable in the future, we would record a $17.4 million benefit to the income tax provision.

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 the first nine months of 2011 and 2010, we included $0.2 million and $0.8 million of interest expense, respectively, and no tax penalty expense in our income tax provision. As of July 2, 2011, we had accrued $1.9 million of estimated interest expense and we had no accrued tax penalties, compared to $1.0 million accrued as of September 30, 2010, which was net of interest receivable of $0.7 million refunded in the first quarter of 2011. Changes in our unrecognized tax benefits in the nine months ended July 2, 2011 were as follows:


	(in millions)
Balance as of October 1, 2010	$	15.9
Tax positions related to current year		0.9
Tax positions related to prior years		1.5

Balance as of July 2, 2011	$	18.3

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 anticipate the settlement of certain tax audits may be finalized within the next twelve months and could result in a decrease to our unrecognized tax benefits of up to $5 million.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the United States. As of July 2, 2011, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:


Major Tax Jurisdiction		Open Years
United States		2003, 2008 through 2010
Germany		2007 through 2010
France		2007 through 2010
Japan		2005 through 2010
Ireland		2006 through 2010