Note 8 - Income Taxes

6 Months Ended

Jul. 31, 2016

8. INCOME TAXES

The Company’s income tax provision for each of the second quarters of fiscal 2017 and fiscal 2016 reflects estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur.

The Company recorded income tax (benefit) expense of $(1.6) million and $1.2 million for the first six months of fiscal 2017 and 2016, respectively. Our effective tax rate increased to 43% from 36% for the same period in the prior year. The increase in our annual effective tax rate is primarily due to the impact of fixed withholding tax expense on a substantially lower forecasted book income in fiscal 2017.

The Company recorded income tax (benefit) expense of $(0.5) million and $1.0 million in the second quarter of fiscal 2017 and fiscal 2016, respectively. Our effective tax rate decreased to (782)% during the second quarter of fiscal 2017 compared to 38% for the same period in the prior year. The difference in rates is primarily due to the near breakeven results in the second quarter of fiscal 2017.

The gross amount of unrecognized tax benefits was $1.5 million at July 31, 2016, including interest and penalties. As a result of adoption of ASU 2013-11, the Company reduced its unrecognized tax benefits by $1.0 million with an accompanying reduction of deferred tax assets by $1.0 million. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date. In the next twelve months, due to potential settlements with domestic tax authorities related to tax credits and lapse in statute of limitations, an estimated $0.1 million of gross unrecognized tax benefits may be recognized.

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of July 31, 2016, the Company has accrued approximately $0.2 million of interest and penalty expense relating to unrecognized tax benefits.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

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India for fiscal years ended March

31, 1998, 1999, 2009, 2010, 2013 and 2014

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Japan for fiscal years ended January 31, 2013, 2014, 2015, 2016 through July 31, 2016

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France for fiscal year ended January 31, 2013

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Iowa for fiscal year ended January 31, 2014

During fiscal year 2017, QAD has settled the following audits:

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Italy for the fiscal years ended January 31, 2011 and 2012

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Wisconsin for the fiscal years ended January 31, 2012, 2013 and 2014

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Thailand for fiscal year ended January 31, 2014