10.	INCOME TAXES

In determining the quarterly provision for income taxes, the Company calculated income tax expense based on actual quarterly results in the

first

quarters of fiscal years

2020

and

2019,

respectively. These results were adjusted for discrete items recorded during the period. Actual quarterly results were used in fiscal

2020

and

2019

since they provided a more reliable estimate of quarterly tax expense.

The Company recorded income tax expense of

$0.7

million and

$1.2

million for the

first

three

months of fiscal

2020

and

2019,

respectively. The Company’s effective tax rate decreased to (

28%

) during the

first

quarter of fiscal

2020

compared to

46%

for the same period in the prior year. The decrease in the effective tax rate is primarily due to a taxable loss for the

first

three

months of fiscal

2020

compared to a taxable profit for the same period of fiscal

2019

in addition to change in jurisdictional mix.

When calculating QAD’s income tax expense for the

first

three

months of fiscal

2020,

the Company considered the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted

December 22, 2017.

The Company included a provision for global intangible low-tax income (“GILTI”) in the Company’s tax expense. The provisional GILTI estimate considered the proposed regulations released on

September 13, 2018

by the U.S. Department of Treasury. These regulations provide computational, definitional, and anti-avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. In the

first

quarter of fiscal

2019,

cash taxes were

not

impacted by GILTI since the Company had sufficient tax credits to offset the additional liability. For the

first

quarter of fiscal

2020,

the Company does

not

have a GILTI inclusion due to the losses sustained in Ireland.

The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when incurred (the “period cost method”).

The gross amount of unrecognized tax benefits was

$1.3

million at

April 30, 2019,

including interest and penalties. The unrecognized tax benefits were reduced by

million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU

2013

11.

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.

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

April 30, 2019,

the Company has accrued approximately

$0.1

million of interest and penalty expense relating to unrecognized tax benefits.

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. Management assesses historic, current and future financial projections by jurisdiction to draw its conclusion. A valuation allowance has been established for select foreign jurisdictions (i.e. Germany, Belgium, Hong Kong and Brazil) along with U.S. federal and state deferred tax assets. For the quarter ended

April 30, 2019,

the Company continues to maintain a full valuation allowance on its U.S. federal and state deferred tax assets. At

April 30, 2019

and

January 31, 2019,

the valuation allowance attributable to deferred tax assets was

$35.6

million and

$34.9

million, respectively.

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:

	●	India for fiscal years ended March 31, 2010, 2013 and 2014

	●	Netherlands for fiscal year ended January 31, 2016

	●	Germany for fiscal years ended January 31, 2015, 2016 and 2017

	●	Switzerland for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018

During fiscal

2020,

the Company closed the following audits with an immaterial adjustment:

●

Tennessee for fiscal years ended

January 31, 2014,

2015,

2016

and

2017