Note 15. Taxes

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes 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 for income taxes and the effective tax rates:


	Three Months Ended April 30,						Six Months Ended April 30,
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Income before income taxes	$	68,059		$	86,707		$	139,243		$	158,437
Provision (benefit) for income tax	$	4,742		$	18,016		$	8,230		$	19,824
Effective tax rate		7.0	%		20.8	%		5.9	%		12.5	%

The Company’s effective tax rate for the three and six months ended April 30, 2014 is lower than the statutory federal income tax rate of 35% primarily due to the lower tax rates applicable to its non-U.S. operations, U.S. federal and California research tax credits, and settlements with U.S. and Taiwan tax authorities, partially offset by state taxes and non-deductible stock compensation.

The effective tax rate decreased in the three months ended April 30, 2014, as compared to the same period in fiscal 2013, primarily due to the benefits of the Taiwan audit settlements recorded in the second quarter of fiscal 2014 and changes in geographical earnings mix. The effective tax rate decreased in the six months ended April 30, 2014, as compared to the same period in fiscal 2013, primarily due to the benefit of audit settlements with the Internal Revenue Service (IRS) and Taiwan in the first and second quarter of fiscal 2014, respectively, and changes in geographical earnings mix, partially offset by the reinstatement of the research tax credit and the reversal of deferred taxes resulting from the merger of a foreign affiliate in the first quarter of fiscal 2013.

The Company’s total gross unrecognized tax benefits at April 30, 2014 are $111.0 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at April 30, 2014 were recognized in the future, approximately $107.4 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. 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 $33 million.

IRS Examinations

On November 6, 2013, the Company reached final settlement with the IRS on the remaining fiscal 2012 issues and recognized approximately $10 million in unrecognized tax benefits in the first quarter of fiscal 2014.

Non-U.S. Examinations

On February 11, 2014 and April 1, 2014 the Company reached settlements with the Taiwan tax authorities for fiscal 2010 and 2009, respectively, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlement to other open fiscal years, the Company’s unrecognized tax benefits decreased by $5.1 million. The net tax benefit resulting from the settlements and the application to other open fiscal years was $3.9 million.