Income Taxes

9 Months Ended

Jul. 31, 2020

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account the Company’s estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and possible outcomes of audits.

The following table presents the provision (benefit) for income taxes and the effective tax rates:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2020			2019			2020			2019
	(in thousands)
Income before income taxes	$	236,854		$	132,911		$	446,593		$	413,883
Provision (benefit) for income taxes	$	(16,057	)	$	32,982		$	(20,299	)	$	42,230
Effective tax rate	(6.8		)%	24.8		%	(4.5		)%	10.2		%

Beginning in the Company’s fiscal 2019, the annual statutory federal corporate tax rate is 21%.

The Company’s effective tax rate for the nine months ended July 31, 2020 is lower than the statutory federal corporate tax rate of 21.0% primarily due to U.S. federal and California tax research credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, and the realizability of U.S. foreign tax credits, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.

On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion (Altera Corp. et al. v. Commissioner) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. In view of the Tax Court opinion, the Company amended its cost-sharing arrangement effective February 1, 2016 to exclude stock-based compensation expense on a prospective basis and reflected the corresponding benefits in its income tax expense for fiscal years 2016, 2017 and 2018. On July 24, 2018, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) reversed the decision of the Tax Court, and then subsequently withdrew its decision on August 7, 2018. A rehearing of the case was held on June 7, 2019. The Ninth Circuit subsequently overturned the July 27, 2015 Tax Court decision. In the third quarter of 2019, as a result of the Ninth Circuit decision, the Company recorded a tax expense of $18.3 million related to fiscal years 2016, 2017 and 2018. The Company's intercompany cost-sharing arrangement was terminated at the end of fiscal 2018 as part of a restructuring. During the third quarter of 2020, the U.S. Supreme Court declined to review the Ninth Circuit decision.

The Company’s effective tax rate decreased in the three months ended July 31, 2020 as compared to the same period in fiscal 2019, primarily due to federal taxation of foreign earnings offset by deemed paid foreign tax credits reported on the Company's fiscal 2019 federal tax return filed during the three months ended July 31, 2020 and the impact of the Altera Ninth Circuit decision recorded in the three months ended July 31, 2019. The Company’s effective tax rate decreased in the nine months ended July 31, 2020, as compared to the same period in fiscal 2019, primarily due to an increase in excess tax benefits from stock-based compensation and the realization of U.S. foreign tax credits.

The U.S. Treasury Department has issued proposed regulations that could impact the calculation of income taxes. While the Company continues to evaluate the potential impact on its estimated annual tax rate, certain regulations have not been finalized and are subject to change. The Company will take into account these regulations once finalized.

In response to the fiscal impact of the COVID-19 pandemic, the State of California enacted legislation on June 29, 2020 that would suspend the use of certain corporate research and development tax credits for a three-year period beginning in our fiscal 2021, which could impact the Company's tax expense.

The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits and ongoing tax litigation will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $43 million.

Intra-Entity Transfers of Assets

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU was adopted on the first day of fiscal 2019. As a result of the adoption, the Company recorded a decrease of approximately $130.5 million in retained earnings as of the beginning of the period of adoption, with a corresponding decrease in prepaid taxes related to the unamortized tax expense attributed to intra-entity transfers of assets other than inventory previously deferred. The Company will recognize the income tax consequences of new intra-entity transfers of assets other than inventory in the consolidated statements of operations in the period when the transaction takes place.

U.S. Examinations

In the third quarter of fiscal 2020, the Company reached a final settlement with the California Franchise Tax Board for fiscal years 2015 through 2017 and recognized $19.2 million in previously unrecognized tax benefits.

Non-U.S. Examinations

Hungarian Tax Authority

In July 2017, the Hungarian Tax Authority (the HTA) issued a final assessment against the Company’s Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately $25.0 million and interest and penalties of $11.0 million. On August 2, 2017, Synopsys Hungary filed a claim contesting the final assessment with the Hungarian Administrative Court (the Court). In the first quarter of fiscal 2018, Synopsys Hungary paid the assessments, penalties and interest as required by law and recorded these amounts as prepaid taxes on its balance sheet, while continuing its challenge to the assessment through the Court. On April 30, 2019, the Court ruled against Synopsys Hungary. The Court’s opinion was received on May 16, 2019 and Synopsys Hungary filed an appeal with the Hungarian Supreme Court on July 5, 2019. In the second quarter of 2019, as a result of the Court’s decision, the Company recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits for the tax assessments. A Hungarian Supreme Court hearing date set for April 16, 2020 was postponed due to the COVID-19 pandemic and is now rescheduled for September 10, 2020.

In the second quarter of fiscal 2020, the Company reached a final settlement with the HTA for fiscal years 2014 through 2018 and recognized a net $6.9 million in previously unrecognized tax benefits.

National Taxation Bureau of Taipei

In the first quarter of fiscal 2019, the Company reached final settlement with the National Taxation Bureau of Taipei for fiscal year 2017 and recognized $5.5 million in previously unrecognized tax benefits.

The Company is also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.