Note 15. Taxes

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter, taking into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s 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,
	2012			2011			2012			2011
	(in thousands)						(in thousands)
Income before income taxes	$	61,085		$	55,967		$	158,403		$	165,558
Provision (benefit) for income tax	$	(14,571	)	$	3,885		$	5,082		$	(15,864	)
Effective tax rate		(23.9	)%		6.9	%		3.2	%		(9.6	)%

The Company’s effective tax rate for the three months ended July 31, 2012 is lower than the statutory federal income tax rate of 35% primarily due to the tax impact of a final settlement with the Internal Revenue Service (IRS) for fiscal years 2010 and 2011 and a settlement with the Taiwan tax authorities for fiscal year 2008, as well as lower tax rates applicable to its non-U.S. operations and the U.S. federal R&D tax credit, partially offset by state taxes and non-deductible stock compensation. The effective tax rate decreased in the three months ended July 31, 2012, as compared to the same period in fiscal 2011, primarily due to the tax impact of the IRS settlement for fiscal years 2010 and 2011 and the Taiwan settlement for fiscal year 2008, recorded in the third quarter of fiscal 2012. The effective tax rate increased in the nine months ended July 31, 2012, as compared to the same period in fiscal 2011, primarily due to the extension of the U.S. federal R&D credit in the first quarter of fiscal 2011 as well as additional tax benefits from fiscal 2011 tax settlements for fiscal years 2006 through 2009 compared to the fiscal 2012 tax settlements. This extension resulted in an additional tax credit for ten months of fiscal 2010 as well as a full year credit for fiscal 2011, compared to only two months of credit in fiscal 2012 as a result of the expiration of the credit on December 31, 2011.

The Company’s total gross unrecognized tax benefits at July 31, 2012 are $119 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at July 31, 2012 were recognized in the future, approximately $74 million would decrease the effective tax rate.

The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. During the three months ended July 31, 2012, there were significant changes to the Company’s total gross unrecognized tax benefits as a result of the IRS settlement and Taiwan settlement described above. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits 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 $44 million.

The Company’s subsidiaries remain subject to tax examination in the following jurisdictions:


Jurisdiction		Year(s) Subject to Examination
Hungary		Fiscal 2011
Taiwan and Japan		Fiscal years after 2006

IRS Examinations

The Company is regularly audited by the IRS. In fiscal 2011, the Company reached a final settlement with the Examination Division of the IRS for its audits of fiscal years 2006 through 2009. As a result of the settlement, the Company’s unrecognized tax benefits decreased by $35.9 million and the impact to other balance sheet tax accounts was not material. The net tax benefit resulting from the settlement was $32.8 million. In the third quarter of fiscal 2012, the Company reached a final settlement with the Examination Division of the IRS for its audits of fiscal years 2010 and 2011. As a result of the settlement, the Company’s unrecognized tax benefits decreased by $24.7 million and the impact to other balance sheet tax accounts was not material. The net tax benefit resulting from the settlement was $15.9 million.

Non-U.S. Examinations

The Company’s subsidiaries are being audited in a number of jurisdictions, including Taiwan (for fiscal 2010) and Hungary (for fiscal 2011). The Company believes that it has adequately provided for potential tax adjustments in both jurisdictions, including interest and potential penalties. The Hungarian tax authorities have disallowed the Company’s claim to tax benefits with respect to certain intercompany charges, which resulted in additional tax and interest for the years under examination and for subsequent years. On March 5, 2012, the Company reached a settlement with the Hungarian tax authorities with regard to its fiscal years 2007 and 2008. The settlement did not have a material impact on income tax expense, but resulted in a $5.1 million cash payment. On May 10, 2012 the Company reached a settlement with the Hungarian tax authorities for fiscal years 2009 and 2010. The settlement did not have a material impact on income tax expense but resulted in a $3.2 million reduction to prepaid taxes in the third quarter and will require future cash payments of $10.9 million. Including the cash payments above, the settlements of fiscal years 2007 through 2010 reduced unrecognized tax benefits by $27.0 million and $24.2 million in the second and third quarter of fiscal 2012, respectively with the remaining $10.9 million to be paid when payment terms are determined.

On June 21, 2012, the Company reached a settlement with the Taiwan tax authorities for fiscal 2008 with regard to certain transfer pricing issues. As a result of the settlement and the application of the settlement to other open fiscal years, the Company’s unrecognized tax benefits decreased by $16.5 million. The net tax benefit resulting from the settlement and the application to other open fiscal years was $14.7 million.