INCOME TAXES

Our effective tax rate represents the net effect of the mix of income earned in various tax jurisdictions that are subject to a wide range of income tax rates.

The following is a geographical breakdown of income before the provision for income taxes:



	Year Ended June 30,
	2017		2016			2015
Domestic income (loss)	$	110,562	$	(80,066	)	$	(26,927	)
Foreign income	138,989		370,843			292,971
Income before income taxes	$	249,551	$	290,777		$	266,044

The provision for (recovery of) income taxes consisted of the following:



	Year Ended June 30,
	2017			2016			2015
Current income taxes (recoveries):
Domestic	$	12,238		$	(3,119	)	$	(839	)
Foreign	82,593			63,862			47,055
	94,831			60,743			46,216
Deferred income taxes (recoveries):
Domestic	(851,683		)	(44,569		)	3,390
Foreign	(19,512		)	(9,892		)	(17,968		)
	(871,195		)	(54,461		)	(14,578		)
Provision for (recovery of) income taxes	$	(776,364	)	$	6,282		$	31,638

A reconciliation of the combined Canadian federal and provincial income tax rate with our effective income tax rate is as follows:



	Year Ended June 30,
	2017			2016			2015
Expected statutory rate	26.5		%	26.5		%	26.5		%
Expected provision for income taxes	$	66,131		$	77,056		$	70,501
Effect of foreign tax rate differences	8,647			(71,478		)	(57,017		)
Change in valuation allowance	520			(34,999		)	6,617
Amortization of deferred charges	6,298			11,316			10,525
Effect of permanent differences	3,673			10,711			1,321
Effect of changes in unrecognized tax benefits	14,427			(264		)	(1,800		)
Effect of withholding taxes	3,845			3,457			3,045
Difference in tax filings from provision	(7,836		)	8,959			1,657
Other Items	4,045			1,524			(3,211		)
Impact of internal reorganization of subsidiaries	(876,114		)	—			—
	$	(776,364	)	$	6,282		$	31,638

In Fiscal 2017, substantially all the tax rate differential for international jurisdictions was driven by earnings in the United States. In Fiscal 2016 and Fiscal 2015, respectively, this differential was driven by earnings in Luxembourg.

The effective tax rate decreased to a recovery of 311.1% for Fiscal 2017, compared to a provision of 2.2% for Fiscal 2016. The decrease in tax expense of $782.6 million was primarily due to (i) a significant tax benefit of $876.1 million resulting from an internal reorganization as described below, (ii) a decrease of $16.8 million relating to differences in tax filings from provisions, (iii) a decrease of $10.9 million on account of the Company having lower income before taxes, (iv) a decrease of $7.0 million resulting from the effects of permanent differences and (v) a decrease of $5.0 million relating to a decrease in amortization of deferred charges. These decreases were partially offset by (i) an increase of $80.1 million resulting from the impact of foreign tax rates as it relates to changes in the proportion of income earned in domestic jurisdictions compared to foreign jurisdictions with different statutory rates, (ii) an increase of $35.5 million relating to the release of a valuation allowance that occurred in Fiscal 2016 but did not reoccur in Fiscal 2017, and (iii) an increase of $14.7 million primarily related to the reversal of reserves in Fiscal 2016 that did not reoccur in Fiscal 2017. The remainder of the difference was due to normal course movements and non-material items.

In July 2016, we implemented a reorganization of our subsidiaries worldwide with the view to continuing to enhance operational and administrative efficiencies through further consolidated ownership, management, and development of our intellectual property (IP) in Canada, continuing to reduce the number of entities in our group and working towards our objective of having a single operating legal entity in each jurisdiction. We believe our reorganization also reduces our exposure to global political and tax uncertainties, particularly in Europe. We believe that further consolidating our IP in Canada will continue to ensure appropriate legal protections for our consolidated IP, simplify legal, accounting and tax compliance, and improve our global cash management. A significant tax benefit of $876.1 million, associated primarily with the recognition of a net deferred tax asset arising from the entry of the IP into Canada, was recognized in the first quarter of Fiscal 2017. We believe it is more likely than not that the deferred tax asset will be realized and therefore no valuation allowance was required. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction, including but not limited to factors such as estimated taxable income, any historical experience of losses for tax purposes and the future growth of OpenText.

As of June 30, 2017, we have approximately $83.4 million of domestic non-capital loss carryforwards. In addition, we have $294.0 million of foreign non-capital loss carryforwards of which $68.6 million have no expiry date. The remainder of the domestic and foreign losses expires between 2018 and 2037. In addition, investment tax credits of $49.1 million will expire between 2027 and 2037.

The primary components of the deferred tax assets and liabilities are as follows, for the periods indicated below:



	June 30,
	2017			2016
Deferred tax assets
Non-capital loss carryforwards	$	109,060		$	230,936
Capital loss carryforwards	246			473
Undeducted scientific research and development expenses	101,998			92,595
Depreciation and amortization	887,735			20,977
Restructuring costs and other reserves	22,956			16,008
Deferred revenue	75,248			72,537
Other	74,668			41,985
Total deferred tax asset	$	1,271,911		$	475,511
Valuation Allowance	$	(58,925	)	$	(88,208	)
Deferred tax liabilities
Scientific research and development tax credits	$	(12,070	)	$	(11,478	)
Acquired intangibles	—			(145,891		)
Other	(79,928		)	(68,004		)
Deferred tax liabilities	$	(91,998	)	$	(225,373	)
Net deferred tax asset	$	1,120,988		$	161,930
Comprised of:
Long-term assets	1,215,712			241,161
Long-term liabilities	(94,724		)	(79,231		)
	$	1,120,988		$	161,930

We believe that sufficient uncertainty exists regarding the realization of certain deferred tax assets that a valuation allowance is required. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction, including but not limited to factors such as estimated taxable income, any historical experience of losses for tax purposes and the future growth of OpenText.

The aggregate changes in the balance of our gross unrecognized tax benefits (including interest and penalties) were as follows:



Unrecognized tax benefits as of July 1, 2015	$	180,249
Increases on account of current year positions	4,669
Increases on account of prior year positions	8,366
Decreases due to settlements with tax authorities	(1,147		)
Decreases due to lapses of statutes of limitations	(17,652		)
Unrecognized tax benefits as of July 1, 2016	$	174,485
Increases on account of current year positions	5,675
Increases on account of prior year positions	18,938
Decreases due to settlements with tax authorities	(16,332		)
Decreases due to lapses of statutes of limitations	(8,236		)
Unrecognized tax benefits as of June 30, 2017	$	174,530

Included in the above tabular reconciliation are unrecognized tax benefits of $11.6 million relating to deferred tax assets in jurisdictions in which these deferred tax assets are offset with valuation allowances. The net unrecognized tax benefit excluding these deferred tax assets is approximately $163.0 million as of June 30, 2017 (June 30, 2016—$150.9 million). Increases on account of prior year positions includes $9.4 million that is subject to recovery as an indemnified asset (June 30, 2016—nil).

We recognize interest expense and penalties related to income tax matters in income tax expense.

For the years ended June 30, 2017, 2016 and 2015, we recognized the following amounts as income tax-related interest expense and penalties:



	Year Ended June 30,
	2017		2016			2015
Interest expense	$	13,028	$	6,534		$	4,451
Penalties expense (recoveries)	438		(2,761		)	(2,032		)
Total	$	13,466	$	3,773		$	2,419

As of June 30, 2017 and 2016, the following amounts have been accrued on account of income tax-related interest expense and penalties:



	As of June 30, 2017		As of June 30, 2016
Interest expense accrued *	$	47,402	$	34,476
Penalties accrued *	$	2,160	$	1,615


*	These balances have been included within "Long-term income taxes payable" within the Consolidated Balance Sheets.

We believe that it is reasonably possible that the gross unrecognized tax benefits, as of June 30, 2017, could decrease tax expense in the next 12 months by $1.9 million, relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions.

Our four most significant tax jurisdictions are Canada, the United States, Luxembourg and Germany. Our tax filings remain subject to audits by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The earliest fiscal years open for examination are 2009 for Germany, 2010 for the United States, 2011 for Luxembourg, and 2012 for Canada.

We are subject to tax audits in all major taxing jurisdictions in which we operate and currently have tax audits open in Canada, the United States, France, Germany, India, Italy, Malaysia, and the United Kingdom. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Statements regarding the United States and Canada audits are included in note 13 "Guarantees and Contingencies".

The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes. For more information relating to certain tax audits, please refer to note 13 "Guarantees and Contingencies".

As at June 30, 2017, we have provided $22.1 million (June 30, 2016—$15.9 million) in respect of both additional foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries, and planned periodic repatriations from certain United States and German subsidiaries, that will be subject to withholding taxes upon distribution. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian subsidiaries, since such earnings are considered permanently invested in those subsidiaries, or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.