MENT » Topics » Provision for Income Taxes

This excerpt taken from the MENT 10-Q filed Jun 9, 2009.

Provision for Income Taxes

 

Three months ended April 30,

   2009    Change     2008  

Income tax expense (benefit)

   $ 2,757    137 %   $ (7,549 )

We recorded income tax expense of $2.8 million for the three months ended April 30, 2009 and income tax benefit of $7.5 million for the three months ended April 30, 2008. Generally, the provision for income taxes is the result of the mix of profit and loss earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances. On a quarterly basis, we evaluate our provision for income tax expense (benefit) based on our projected results of operations for the full year and record an adjustment in the current quarter.

We expect to incur tax expense for the year ending January, 31, 2010, even though we project a loss on our income statement for the full fiscal year. This is primarily because we expect to record a net profit from international operations, thereby incurring expense while we anticipate losses in the U.S. Any tax benefit in the U.S. will generally be offset by an increase in the valuation allowance on U.S. deferred tax assets. This inability to utilize the benefit of our U.S. losses is the primary reason for our expected negative tax rate for fiscal 2010. For the three months ended April 30, 2009, our effective tax rate was (27)% after considering discrete items totaling $2.0 million of tax benefit. Our effective tax rate for the three months ended April 30, 2009 without discrete items was (47)%. For fiscal 2010, we project a (48)% effective tax rate, with the inclusion of discrete items. This differs from tax computed at the U.S. federal statutory rate primarily due to:

 

   

Projected U.S. losses for which no tax benefit will be recognized;

 

   

Withholding taxes in certain foreign jurisdictions;

 

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Increases in foreign tax reserves; and

 

   

Non-deductible employee stock purchase plan compensation expense.

These differences are partially offset by:

 

   

The benefit of lower tax rates on earnings of foreign subsidiaries; and

 

   

The application of tax incentives for research and development in certain jurisdictions.

Our current projected tax rate for fiscal 2010 could change significantly if actual results differ from our current outlook-based projections.

We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries because they are considered permanently re-invested outside of the U.S. If repatriated, some of these earnings would generate foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. We calculated the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entity will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Consistent with prior years, we recorded valuation allowances in fiscal 2009 and expect to continue to record valuation allowances in fiscal 2010 against the portion of those net deferred tax assets for which realization is uncertain. Valuation allowances relating to non-U.S. taxing jurisdictions were based on historical earnings patterns, which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Further, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, and 2004 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146.6 million of additional taxable income. The adjustments primarily concern transfer-pricing arrangements related to intellectual property rights acquired in acquisitions that were transferred to a foreign subsidiary. Although we continue to contest the adjustments with the Appeals Office of the IRS, we have reached a tentative settlement. The settlement is generally consistent with our reserve posture, and due to our valuation allowance position in the U.S., we do not expect any significant financial statement impact once this matter is effectively settled. The statute of limitations remains open for years on and after 2004 in Ireland and Japan.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter; and various events, some of which cannot be predicted, such as clarifications of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate. For the three months ended April 30, 2009, we reflected a $6.5 million reduction in reserves for potential tax liabilities principally due to the expiration of the statute of limitations in certain jurisdictions, with $2.6 million of that reduction included as a discrete item of tax benefit in the quarter. We expect to record additional reserves in future periods with respect to tax positions taken for the current year. It is reasonably possible that unrecognized tax positions may decrease by up to $20.0 million due to settlements or expirations of the statute of limitations within the next twelve months. To the extent that uncertain tax positions resolve in our favor, it could have a positive impact on our effective tax rate. A significant portion of reserves, which are expected to settle or expire within the next twelve months, may result in the booking of deferred tax assets subject to a valuation allowance for which no benefit would be recognized. Certain reductions in our reserves may require cash payments. Income tax-related interest and penalties were $0.3 million for the three months ended April 30, 2009.

 

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These excerpts taken from the MENT 10-K filed Mar 18, 2009.

Provision for Income Taxes

 

Year ended

   January 31,
2009
   Change     January 31,
2008
   Change     December 31,
2006

Income tax expense

   $ 10,850    (62 %)   $ 28,556    128 %   $ 12,541

In the year ended January 31, 2009, our loss before taxes of $77,952 consisted of $128,150 of pre-tax loss in the U.S. and $50,198 of foreign pre-tax income, reflecting the decline in the North American and Pacific Rim markets in relation to our business in Europe. Generally, the provision for income taxes is the result of the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), and changes in tax reserves. Deferred tax assets consist of net operating loss carryforwards in several jurisdictions, including the U.S., credit carryovers, and timing differences between book and taxable income. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized.

We have tax expense in the year ended January 31, 2009 even though we have a loss on our income statement for the full fiscal year. This is mainly because we have tax expense on our net profit in our international operations, while any tax benefit from our losses in the U.S. is generally offset by an increase in the valuation allowance on U.S. deferred tax assets. This inability to utilize the benefits of our U.S. losses was the primary reason for our negative tax rate of 14% for the year ended January 31, 2009. Our tax rate differs from our federal statutory rate of 35% principally due to:

 

   

U.S. losses for which no tax benefit has been recognized;

 

   

Withholding taxes in certain foreign jurisdictions;

 

   

Increases in foreign tax reserves;

 

   

Non-deductible employee stock purchase plan compensation expense; and

 

   

Non-deductible in-process research and development;

These amounts are partially offset by: (i) the benefit of lower tax rates on earnings of foreign subsidiaries and (ii) the application of tax incentives for research and development in certain jurisdictions. Lower withholding taxes and higher income in low-tax jurisdictions combined to result in a significantly lower tax impact from international operations in fiscal 2009 as compared to fiscal 2008.

We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries to the extent they are considered permanently re-invested outside of the U.S. As of January 31, 2009, the cumulative amount of earnings upon which U.S. income taxes have not been provided for is approximately $278,000. Upon repatriation, some of these earnings may be sheltered by U.S. loss carryforwards or carry foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

As of January 31, 2009, for federal income tax purposes, we had net operating loss carryforwards of approximately $145,327, foreign tax credits of $3,415, research and experimentation credit carryforwards of $35,975, alternative minimum tax credits of $4,483, and childcare credits of $913. As of January 31, 2009, for state income tax purposes, we had net operating loss carryforwards totaling $173,624 from multiple jurisdictions and research and experimentation and other miscellaneous state credits of $6,302. Portions of our loss carryforwards, inherited through various acquisitions, are subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code. If not used to reduce U.S. taxable income in future periods,

 

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the net operating loss carryforwards will substantially expire in the fiscal years ending January 31, 2019 through 2029. The foreign tax credits will expire in fiscal years ending 2011 through 2019, research and experimentation credit carryforwards will expire between fiscal years ending 2016 through 2029, and childcare credits will expire between fiscal years ending 2023 and 2029. The alternative minimum tax credits do not expire. As of January 31, 2009, we have net operating losses in multiple foreign jurisdictions of $14,341. In general, the net operating losses for these foreign jurisdictions can be carried forward indefinitely.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when we expect differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entities will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Accordingly, we recorded valuation allowances against the portion of those deferred tax assets for which realization is uncertain. Valuation allowances relating to non-U.S. taxing jurisdictions were based on the historical earnings patterns which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

Net deferred tax assets of $33,008 as of January 31, 2009, reflect a net increase of $4,705 compared to $28,303 as of January 31, 2008. Gross assets increased by $41,944 from January 31, 2008 to January 31, 2009 principally due to the generation of net operating losses in the U.S. and recording of the tax effect of stock-based compensation expense under SFAS 123(R). There was a $6,285 decrease in deferred tax liabilities from January 31, 2008 to January 31, 2009 related to the amortization of developed technology and other intangibles acquired with the acquisition of Sierra Design Automation, Inc. The valuation allowance increased by $43,524 from January 31, 2008 to January 31, 2009.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Further, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitation from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, and 2004 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146,600 of additional taxable income. The adjustments primarily concern transfer pricing arrangements related to intellectual property rights acquired in acquisitions which were transferred to a foreign subsidiary. Although we continue to contest the adjustments with the Appeals Office of the IRS, we have reached a tentative settlement. The tentative settlement is generally consistent with our reserve posture. Due to the availability of net operating loss carryforwards and our previously recorded reserves in the U.S., we do not expect any significant financial statement impact or cash payments once this matter is effectively settled. In Ireland and Japan, our statute of limitations remains open for years on or after 2004.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities, even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur that would require us to increase or decrease our reserves and effective tax rate. We may continue to build reserves, consistent with past years. It is reasonably possible that unrecognized tax positions may decrease by up to $24,000 due to settlements or expiration of the statute of limitations within the next twelve months. To the extent that uncertain tax positions resolve in our favor, it may have a positive impact on our effective tax rate. A significant portion of reserves which are expected to settle or expire within the next twelve months may result in the booking of deferred tax assets subject to a valuation allowance for which no benefit would be recognized. Certain reductions in our reserves may require cash payments. Please refer to “Liquidity and Capital Resources” in this Item 7. for additional discussion. Income tax-related interest and penalty expenses were $3,122 for the year ended January 31, 2009.

 

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On February 1, 2007, we adopted FIN 48. The adoption did not have a cumulative effect on our Retained earnings. The liability for income taxes associated with uncertain tax positions was $59,078 as of January 31, 2009 and $51,474 as of January 31, 2008. Tax benefits which could offset this liability were $2,451 as of January 31, 2009 and $2,472 as of January 31, 2008. Such offsetting tax benefits consider the correlative effects of deductible interest and state income taxes and other deductible tax adjustments. We expect uncertain tax positions of $39,443, if recognized, would favorably affect our effective tax rate whereas the recognition of other uncertain tax positions could result in reductions to goodwill or an increase in deferred tax assets being subject to valuation allowances. As part of the adoption of FIN 48, we reclassified $42,730 from income tax payable to other long-term liabilities. As of January 31, 2009, the full reserve for taxes of $59,078 was reflected in income tax liability.

Provision for Income Taxes

 

Year ended

   January 31,
2009
   Change     January 31,
2008
   Change     December 31,
2006

Income tax expense

   $ 10,850    (62 %)   $ 28,556    128 %   $ 12,541

In the year ended January 31, 2009, our loss before taxes of $77,952 consisted of $128,150 of pre-tax loss in the U.S. and $50,198 of foreign pre-tax income, reflecting the decline in the North American and Pacific Rim markets in relation to our business in Europe. Generally, the provision for income taxes is the result of the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), and changes in tax reserves. Deferred tax assets consist of net operating loss carryforwards in several jurisdictions, including the U.S., credit carryovers, and timing differences between book and taxable income. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized.

We have tax expense in the year ended January 31, 2009 even though we have a loss on our income statement for the full fiscal year. This is mainly because we have tax expense on our net profit in our international operations, while any tax benefit from our losses in the U.S. is generally offset by an increase in the valuation allowance on U.S. deferred tax assets. This inability to utilize the benefits of our U.S. losses was the primary reason for our negative tax rate of 14% for the year ended January 31, 2009. Our tax rate differs from our federal statutory rate of 35% principally due to:

 

   

U.S. losses for which no tax benefit has been recognized;

 

   

Withholding taxes in certain foreign jurisdictions;

 

   

Increases in foreign tax reserves;

 

   

Non-deductible employee stock purchase plan compensation expense; and

 

   

Non-deductible in-process research and development;

These amounts are partially offset by: (i) the benefit of lower tax rates on earnings of foreign subsidiaries and (ii) the application of tax incentives for research and development in certain jurisdictions. Lower withholding taxes and higher income in low-tax jurisdictions combined to result in a significantly lower tax impact from international operations in fiscal 2009 as compared to fiscal 2008.

We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries to the extent they are considered permanently re-invested outside of the U.S. As of January 31, 2009, the cumulative amount of earnings upon which U.S. income taxes have not been provided for is approximately $278,000. Upon repatriation, some of these earnings may be sheltered by U.S. loss carryforwards or carry foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

As of January 31, 2009, for federal income tax purposes, we had net operating loss carryforwards of approximately $145,327, foreign tax credits of $3,415, research and experimentation credit carryforwards of $35,975, alternative minimum tax credits of $4,483, and childcare credits of $913. As of January 31, 2009, for state income tax purposes, we had net operating loss carryforwards totaling $173,624 from multiple jurisdictions and research and experimentation and other miscellaneous state credits of $6,302. Portions of our loss carryforwards, inherited through various acquisitions, are subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code. If not used to reduce U.S. taxable income in future periods,

 

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the net operating loss carryforwards will substantially expire in the fiscal years ending January 31, 2019 through 2029. The foreign tax credits will expire in fiscal years ending 2011 through 2019, research and experimentation credit carryforwards will expire between fiscal years ending 2016 through 2029, and childcare credits will expire between fiscal years ending 2023 and 2029. The alternative minimum tax credits do not expire. As of January 31, 2009, we have net operating losses in multiple foreign jurisdictions of $14,341. In general, the net operating losses for these foreign jurisdictions can be carried forward indefinitely.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when we expect differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entities will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Accordingly, we recorded valuation allowances against the portion of those deferred tax assets for which realization is uncertain. Valuation allowances relating to non-U.S. taxing jurisdictions were based on the historical earnings patterns which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

Net deferred tax assets of $33,008 as of January 31, 2009, reflect a net increase of $4,705 compared to $28,303 as of January 31, 2008. Gross assets increased by $41,944 from January 31, 2008 to January 31, 2009 principally due to the generation of net operating losses in the U.S. and recording of the tax effect of stock-based compensation expense under SFAS 123(R). There was a $6,285 decrease in deferred tax liabilities from January 31, 2008 to January 31, 2009 related to the amortization of developed technology and other intangibles acquired with the acquisition of Sierra Design Automation, Inc. The valuation allowance increased by $43,524 from January 31, 2008 to January 31, 2009.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Further, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitation from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, and 2004 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146,600 of additional taxable income. The adjustments primarily concern transfer pricing arrangements related to intellectual property rights acquired in acquisitions which were transferred to a foreign subsidiary. Although we continue to contest the adjustments with the Appeals Office of the IRS, we have reached a tentative settlement. The tentative settlement is generally consistent with our reserve posture. Due to the availability of net operating loss carryforwards and our previously recorded reserves in the U.S., we do not expect any significant financial statement impact or cash payments once this matter is effectively settled. In Ireland and Japan, our statute of limitations remains open for years on or after 2004.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities, even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur that would require us to increase or decrease our reserves and effective tax rate. We may continue to build reserves, consistent with past years. It is reasonably possible that unrecognized tax positions may decrease by up to $24,000 due to settlements or expiration of the statute of limitations within the next twelve months. To the extent that uncertain tax positions resolve in our favor, it may have a positive impact on our effective tax rate. A significant portion of reserves which are expected to settle or expire within the next twelve months may result in the booking of deferred tax assets subject to a valuation allowance for which no benefit would be recognized. Certain reductions in our reserves may require cash payments. Please refer to “Liquidity and Capital Resources” in this Item 7. for additional discussion. Income tax-related interest and penalty expenses were $3,122 for the year ended January 31, 2009.

 

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On February 1, 2007, we adopted FIN 48. The adoption did not have a cumulative effect on our Retained earnings. The liability for income taxes associated with uncertain tax positions was $59,078 as of January 31, 2009 and $51,474 as of January 31, 2008. Tax benefits which could offset this liability were $2,451 as of January 31, 2009 and $2,472 as of January 31, 2008. Such offsetting tax benefits consider the correlative effects of deductible interest and state income taxes and other deductible tax adjustments. We expect uncertain tax positions of $39,443, if recognized, would favorably affect our effective tax rate whereas the recognition of other uncertain tax positions could result in reductions to goodwill or an increase in deferred tax assets being subject to valuation allowances. As part of the adoption of FIN 48, we reclassified $42,730 from income tax payable to other long-term liabilities. As of January 31, 2009, the full reserve for taxes of $59,078 was reflected in income tax liability.

Provision for Income Taxes

 

Year ended

   January 31,
2009
   Change     January 31,
2008
   Change     December 31,
2006

Income tax expense

   $ 10,850    (62 %)   $ 28,556    128 %   $ 12,541

In the year ended January 31, 2009, our loss before taxes of $77,952 consisted of $128,150 of pre-tax loss in the U.S. and $50,198 of foreign pre-tax income, reflecting the decline in the North American and Pacific Rim markets in relation to our business in Europe. Generally, the provision for income taxes is the result of the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), and changes in tax reserves. Deferred tax assets consist of net operating loss carryforwards in several jurisdictions, including the U.S., credit carryovers, and timing differences between book and taxable income. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized.

We have tax expense in the year ended January 31, 2009 even though we have a loss on our income statement for the full fiscal year. This is mainly because we have tax expense on our net profit in our international operations, while any tax benefit from our losses in the U.S. is generally offset by an increase in the valuation allowance on U.S. deferred tax assets. This inability to utilize the benefits of our U.S. losses was the primary reason for our negative tax rate of 14% for the year ended January 31, 2009. Our tax rate differs from our federal statutory rate of 35% principally due to:

 

   

U.S. losses for which no tax benefit has been recognized;

 

   

Withholding taxes in certain foreign jurisdictions;

 

   

Increases in foreign tax reserves;

 

   

Non-deductible employee stock purchase plan compensation expense; and

 

   

Non-deductible in-process research and development;

These amounts are partially offset by: (i) the benefit of lower tax rates on earnings of foreign subsidiaries and (ii) the application of tax incentives for research and development in certain jurisdictions. Lower withholding taxes and higher income in low-tax jurisdictions combined to result in a significantly lower tax impact from international operations in fiscal 2009 as compared to fiscal 2008.

We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries to the extent they are considered permanently re-invested outside of the U.S. As of January 31, 2009, the cumulative amount of earnings upon which U.S. income taxes have not been provided for is approximately $278,000. Upon repatriation, some of these earnings may be sheltered by U.S. loss carryforwards or carry foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

As of January 31, 2009, for federal income tax purposes, we had net operating loss carryforwards of approximately $145,327, foreign tax credits of $3,415, research and experimentation credit carryforwards of $35,975, alternative minimum tax credits of $4,483, and childcare credits of $913. As of January 31, 2009, for state income tax purposes, we had net operating loss carryforwards totaling $173,624 from multiple jurisdictions and research and experimentation and other miscellaneous state credits of $6,302. Portions of our loss carryforwards, inherited through various acquisitions, are subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code. If not used to reduce U.S. taxable income in future periods,

 

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the net operating loss carryforwards will substantially expire in the fiscal years ending January 31, 2019 through 2029. The foreign tax credits will expire in fiscal years ending 2011 through 2019, research and experimentation credit carryforwards will expire between fiscal years ending 2016 through 2029, and childcare credits will expire between fiscal years ending 2023 and 2029. The alternative minimum tax credits do not expire. As of January 31, 2009, we have net operating losses in multiple foreign jurisdictions of $14,341. In general, the net operating losses for these foreign jurisdictions can be carried forward indefinitely.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when we expect differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entities will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Accordingly, we recorded valuation allowances against the portion of those deferred tax assets for which realization is uncertain. Valuation allowances relating to non-U.S. taxing jurisdictions were based on the historical earnings patterns which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

Net deferred tax assets of $33,008 as of January 31, 2009, reflect a net increase of $4,705 compared to $28,303 as of January 31, 2008. Gross assets increased by $41,944 from January 31, 2008 to January 31, 2009 principally due to the generation of net operating losses in the U.S. and recording of the tax effect of stock-based compensation expense under SFAS 123(R). There was a $6,285 decrease in deferred tax liabilities from January 31, 2008 to January 31, 2009 related to the amortization of developed technology and other intangibles acquired with the acquisition of Sierra Design Automation, Inc. The valuation allowance increased by $43,524 from January 31, 2008 to January 31, 2009.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Further, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitation from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, and 2004 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146,600 of additional taxable income. The adjustments primarily concern transfer pricing arrangements related to intellectual property rights acquired in acquisitions which were transferred to a foreign subsidiary. Although we continue to contest the adjustments with the Appeals Office of the IRS, we have reached a tentative settlement. The tentative settlement is generally consistent with our reserve posture. Due to the availability of net operating loss carryforwards and our previously recorded reserves in the U.S., we do not expect any significant financial statement impact or cash payments once this matter is effectively settled. In Ireland and Japan, our statute of limitations remains open for years on or after 2004.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities, even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur that would require us to increase or decrease our reserves and effective tax rate. We may continue to build reserves, consistent with past years. It is reasonably possible that unrecognized tax positions may decrease by up to $24,000 due to settlements or expiration of the statute of limitations within the next twelve months. To the extent that uncertain tax positions resolve in our favor, it may have a positive impact on our effective tax rate. A significant portion of reserves which are expected to settle or expire within the next twelve months may result in the booking of deferred tax assets subject to a valuation allowance for which no benefit would be recognized. Certain reductions in our reserves may require cash payments. Please refer to “Liquidity and Capital Resources” in this Item 7. for additional discussion. Income tax-related interest and penalty expenses were $3,122 for the year ended January 31, 2009.

 

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On February 1, 2007, we adopted FIN 48. The adoption did not have a cumulative effect on our Retained earnings. The liability for income taxes associated with uncertain tax positions was $59,078 as of January 31, 2009 and $51,474 as of January 31, 2008. Tax benefits which could offset this liability were $2,451 as of January 31, 2009 and $2,472 as of January 31, 2008. Such offsetting tax benefits consider the correlative effects of deductible interest and state income taxes and other deductible tax adjustments. We expect uncertain tax positions of $39,443, if recognized, would favorably affect our effective tax rate whereas the recognition of other uncertain tax positions could result in reductions to goodwill or an increase in deferred tax assets being subject to valuation allowances. As part of the adoption of FIN 48, we reclassified $42,730 from income tax payable to other long-term liabilities. As of January 31, 2009, the full reserve for taxes of $59,078 was reflected in income tax liability.

This excerpt taken from the MENT 10-Q filed Dec 5, 2008.

Provision for Income Taxes

 

     Three months ended October 31,     Nine months ended October 31,  
     2008    Change     2007     2008    Change     2007  

Income tax expense (benefit)

   $ 50,369    (2,110 %)   $ (2,506 )   $ 27,024    (6,105 %)   $ (450 )

We recorded an income tax expense of $50,369 for the three months ended October 31, 2008 and $27,024 for the nine months ended October 31, 2008 compared to an income tax benefit of $2,506 for the three months ended October 31, 2007 and $450 for the nine months ended October 31, 2007. Generally, the provision for income taxes is the result of the mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances. On a quarterly basis, we evaluate our provision for income tax expense (benefit) based on our projected results of operations for the full year and record an adjustment in the current quarter. For the nine months ended October 31, 2008, our effective tax rate was (29%), after considering discrete items totaling $177 of tax expense. Our effective tax rate for the nine months ended October 31, 2008 without discrete items was also (29%). We expect tax expense in fiscal year 2009 even though we expect a loss on our income statement for the full fiscal year. This is because, in significant part, we have net profits in our international operations and a loss in the U.S. The tax benefit of the U.S. financial reporting loss is expected to be offset by an increase in the valuation allowance on U.S. deferred tax assets. The effect of these circumstances is to create a negative

 

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tax rate both in the three and nine months ended October 31, 2008. For fiscal 2009, we project a (31%) effective tax rate, after the inclusion of discrete items. This differs from tax computed at the U.S. federal statutory rate primarily due to:

 

   

Projected losses in the U.S. for which no tax benefit will be recognized;

 

   

Non-deductible incentive stock option and employees stock purchase plan compensation expense;

 

   

Withholding taxes in certain foreign jurisdictions; and

 

   

Increases in foreign tax reserves.

These differences are offset by:

 

   

The benefit of lower tax rates on earnings of foreign subsidiaries; and

 

   

The application of tax incentives for research and development in certain jurisdictions.

Our current projected tax rate for fiscal 2009 of (31%) decreased from 46% projected as of the end of the second quarter of fiscal 2009 primarily as a result of the change in projected earnings. The effective tax rate for the remainder of fiscal 2009 could change significantly if actual results are different than current outlook-based projections. We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries because they are considered permanently re-invested outside of the U.S. If repatriated, some of these earnings would generate foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. We then measured the difference using the enacted tax rates and laws that will be in effect when we expect differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entity will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Accordingly, we recorded valuation allowances in fiscal 2008 against the portion of those deferred tax assets for which realization is not more likely than not. We expect to continue applying valuation allowances in fiscal 2009, to the extent net deferred tax assets are generated, consistent with prior years. A portion of the valuation allowances for deferred tax assets relates to certain of the tax attributes acquired from IKOS Systems, Inc. in 2002 and 0-In Design Automation, Inc. in 2004 for which subsequently recognized tax benefits will be applied directly to reduce goodwill. Valuation allowances relating to non-U.S. taxing jurisdictions were based on the historical earnings patterns which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions in the ordinary course of business and, as a result, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Furthermore, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, 2004, 2005, and 2006 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146,600 of additional taxable income. The adjustments primarily concern transfer pricing arrangements related to intellectual property rights acquired in acquisitions which were transferred to a foreign subsidiary. While we continue to be in the process of contesting the adjustments with the Appeals Office of the IRS, we have reached a tentative settlement. The settlement is generally consistent with our reserve posture, and due to our valuation allowance position in the U.S. we do not expect any significant financial statement impact once this matter is effectively settled. Our statute of limitations remains open for years on and after 2003 in Ireland and 2004 in Japan.

We have reserves for potential tax liabilities to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter; and various events, some of which cannot be predicted, such as

 

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clarifications of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate. In our financial results for the current period, we have included a gross increase in unrecognized tax benefits as a result of tax positions taken during a prior year of approximately $4,343. Further, we have recorded additional reserves in the nine months ended October 31, 2008, and expect to record additional reserves in future periods, with respect to tax positions taken for the current year; however, it is reasonably possible that reserves for prior years’ tax positions will decrease by a range of $0 to $18,000 due to settlements or expirations of the statute of limitations within the next twelve months. Uncertain tax positions that resolve in our favor will have a positive impact on our effective tax rate, except to the extent such resolution results in a reduction to goodwill or the booking of deferred tax assets subject to a valuation allowance. Certain reductions in our reserves may require cash payments. Please refer to “Liquidity and Capital Resources” in this Item 2. for additional discussion. Accrued tax-related interest and penalties were $331 for the three months ended October 31, 2008 and $3,112 for the nine months ended October 31, 2008.

This excerpt taken from the MENT 10-Q filed Sep 4, 2008.

Provision for Income Taxes

 

     Three months ended July 31,    Six months ended July 31,
     2008     Change     2007    2008     Change     2007

Income tax expense (benefit)

   $ (15,796 )   (1,456 %)   $ 1,165    $ (23,345 )   (1,235 %)   $ 2,056

We recorded an income tax benefit of $15,796 for the three months ended July 31, 2008 and $23,345 for the six months ended July 31, 2008 and income tax expense of $1,165 for the three months ended July 31, 2007 and $2,056 for the six months ended July 31, 2007. Generally, the provision for income taxes is the result of the mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), and changes in tax reserves. On a quarterly basis, we evaluate our provision for income tax expense (benefit) based on our projected results of operations for the full year and record an adjustment in the current quarter. For the six months ended July 31, 2008, our effective tax rate was 36%, after considering discrete items totaling $1,425 of tax expense. Without discrete items, our effective tax rate for the six months ended July 31, 2008 was 38%. For fiscal 2009, we project a 46% effective tax rate, after the inclusion of discrete items. This differs from tax computed at the U.S. federal statutory rate primarily due to:

 

   

Projected losses in the U.S. for which no tax benefit will be recognized;

 

   

Non-deductible incentive stock option and employees stock purchase plan compensation expense;

 

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Withholding taxes in certain foreign jurisdictions; and

 

   

Increases in foreign tax reserves.

These differences are offset by:

 

   

The benefit of lower tax rates on earnings of foreign subsidiaries; and

 

   

The application of tax incentives for research and development in certain jurisdictions.

The effective tax rate for the remainder of fiscal 2009 could change significantly if actual results are different than current outlook-based projections. Our current projected tax rate for fiscal 2009 of 46% increased from 31% projected as of the end of the first quarter of fiscal 2009 primarily as a result of the change in accounting for the refundable credit for French-based research and development as well as the recognition of in-process research and development expense in the second quarter for which a current year tax benefit is not expected. See Note 4, “Change in Accounting for Research and Development Credits” for further discussion.

We have not provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries because they are considered permanently re-invested outside of the U.S. If repatriated, some of these earnings would generate foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend.

Under SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), we determined deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. We then measured the difference using the enacted tax rates and laws that will be in effect when we expect differences to reverse. SFAS 109 provides for the recognition of deferred tax assets without a valuation allowance if realization of such assets is more likely than not. Since 2004, we have determined it is uncertain whether our U.S. entity will generate sufficient taxable income and foreign source income to utilize foreign tax credit carryforwards, research and experimentation credit carryforwards, and net operating loss carryforwards before expiration. Accordingly, we recorded valuation allowances in fiscal 2008 against the portion of those deferred tax assets for which realization is not more likely than not. We expect to continue applying valuation allowances in fiscal 2009, to the extent net deferred tax assets are generated, consistent with prior years. A portion of the valuation allowances for deferred tax assets relates to certain of the tax attributes acquired from IKOS Systems, Inc. in 2002 and 0-In Design Automation, Inc. in 2004 for which subsequently recognized tax benefits will be applied directly to reduce goodwill. Valuation allowances relating to non-U.S. taxing jurisdictions were based on the historical earnings patterns which indicated uncertainty that we will have sufficient income in the appropriate jurisdictions to realize the full value of the assets. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions in the ordinary course of business and, as a result, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Further, attribute carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such attribute was originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. In the U.S., the statute of limitations remains open for fiscal years 2002 and forward. We are currently under examination in various jurisdictions, including the U.S. The examinations are in different stages and timing of their resolution is difficult to predict. The examination in the U.S. by the Internal Revenue Service (IRS) pertains to our 2002, 2003, 2004, 2005, and 2006 tax years. In March 2007, the IRS issued a Revenue Agent’s Report for 2002 through 2004 in which adjustments were asserted totaling $146,600 of additional taxable income. The adjustments primarily concern transfer pricing arrangements related to intellectual property rights acquired in acquisitions which were transferred to a foreign subsidiary. We disagree with the adjustments, and we are in the process of contesting the adjustments with the Appeals Office of the IRS. Our statute of limitations remains open for years on and after 2003 in Ireland and 2004 in Japan.

We have reserves for potential tax liabilities to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter; and various events, some of which cannot be predicted, such as clarifications of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate. We recorded additional reserves in the six months ended July 31, 2008, and expect to record additional reserves in future periods, with respect to tax positions taken for the current year; however, it is reasonably possible that reserves for prior years’ tax positions will decrease by a range of $0 to $4,000 due to settlements or expirations of the statute of limitations within the next twelve months. Uncertain tax positions that resolve in our favor will have a

 

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positive impact on our effective tax rate, except to the extent such resolution results in a reduction to goodwill or the booking of deferred tax assets subject to a valuation allowance. Certain reductions in our reserves may require cash payments. Please refer to “Liquidity and Capital Resources” in this Item 2. for additional discussion. Accrued tax-related interest and penalties were $314 for the three months ended July 31, 2008 and $2,781 for the six months ended July 31, 2008.

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