Note 8 - Income Taxes

9 Months Ended

Oct. 31, 2016

8. INCOME TAXES

The Company’s income tax provision for each of the third 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 $(0.5) million and $1.9 million for the first nine months of fiscal 2017 and 2016, respectively. The Company’s effective tax rate increased to 63% from 29% for the same period in the prior year. The increase in the annual effective tax rate is primarily due to substantially lower forecasted and actual book income in fiscal 2017.

The Company recorded income tax expense of $1.2 million and $0.7 million in the third quarter of fiscal 2017 and fiscal 2016, respectively. The Company’s effective tax rate increased to 43% during the third quarter of fiscal 2017 compared to 22% for the same period in the prior year. The increase in rates is due to lower forecasted and actual book income in fiscal 2017.

The gross amount of unrecognized tax benefits was $1.4 million at October 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 October 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, 2010, 2013 and 2014

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France for fiscal year ended January 31, 2013

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Canada for fiscal year ended January 31, 2014

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Iowa for fiscal year ended January 31, 2014

During fiscal year 2017, QAD has settled the following audits with immaterial or no adjustments made as a result of the settlements:

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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

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India for fiscal year ended March 31, 2009 and 2012

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