Income Taxes

6 Months Ended

Mar. 31, 2022

Income Taxes

Income Taxes

10.   Income Taxes

The Company’s effective tax rate was 24.8% and 25.0% for the six months ended March 31, 2022 and 2021, respectively. The most significant items contributing to the difference between the statutory U.S. federal corporate tax rate of 21.0% and the Company’s effective tax rate for the six-month period ended March 31, 2022 were a tax benefit of $26.5 million related to income tax credits and incentives, tax expense of $19.5 million related to foreign residual income, a tax benefit of $13.9 million related to changes in valuation allowances, tax expense of $14.9 million primarily related to changes in foreign uncertain tax positions, and tax expense of $11.1 million related to state income taxes. All of these items are expected to have a continuing impact on the effective tax rate for the remainder of the fiscal year except for the changes in valuation allowance and uncertain tax positions.

The most significant items contributing to the difference between the statutory U.S. federal corporate tax rate of 21.0% and the Company’s effective tax rate for the six-month period ended March 31, 2021 were a tax benefit of $28.4 million related to income tax credits and incentives, tax expense of $20.7 million related to foreign residual income, tax expense of $10.7 million related to state income taxes, and tax expense of $3.2 million related to nondeductible costs.

During the six-month period ended March 31, 2022, valuation allowances in the amount of $21.9 million primarily related to net operating losses in certain foreign entities were released due to sufficient positive evidence obtained during the first quarter. The positive evidence included a realignment of the Company’s global transfer pricing methodology that was implemented during the first quarter which resulted in forecasting the utilization of the net operating losses within the foreseeable future.

During the six-month period ended March 31, 2022, valuation allowances in the amount of $6.4 million on the net deferred tax assets of the Company’s Russia business were recorded due to the Company exiting all business operations in Russia. It is now more likely than not the net deferred tax assets will not be realized.

The Company is utilizing the annual effective tax rate method under ASC 740 to compute its interim tax provision. The Company’s effective tax rate fluctuates from quarter to quarter due to various factors including the change in the mix of global income and expenses, outcomes of administrative audits, changes in the assessment of valuation allowances due to management’s consideration of new positive or negative evidence during the quarter, and changes in enacted tax laws. The U.S.and many international legislative and regulatory bodies have proposed legislation that could significantly impact how our business activities are taxed. These proposed changes could have a material impact on the Company’s income tax expense and deferred tax balances.

The Company is currently under tax audit in several jurisdictions including the U.S. and believes the outcomes which are reasonably possible within the next twelve months, including lapses in statutes of limitations, could result in future adjustments, but will not result in a material change in the liability for uncertain tax positions.

Generally, the Company does not provide for U.S. taxes or foreign withholding taxes on gross book-tax differences in its non-U.S. subsidiaries because such basis differences of approximately $1.5 billion are able to and intended to be reinvested indefinitely. If these basis differences were distributed, foreign tax credits could become available under current law to partially or fully reduce the resulting U.S. income tax liability. There may also be additional U.S. or foreign income tax liability upon repatriation, although the calculation of such additional taxes is not practicable.