Note 9 - Income Taxes

3 Months Ended

Apr. 30, 2020

9 .	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

2021

and

2020,

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

2021

and

2020

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

The Company recorded income tax expense of

$1.0

million and

$0.7

million for the

first

three

months of fiscal

2021

and

2020,

respectively. The Company’s effective tax rate was

170%

and (

28%

) during the

first

quarter of fiscal

2021

and

2020,

respectively. The change in the effective tax rate is primarily due to recording a pre-tax profit of

$0.6

million in the

first

quarter of fiscal

2021

compared to the pre-tax loss for the same period of fiscal

2020.

March 27, 2020,

in response to the coronavirus (COVID-

) pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-

pandemic. In the

first

quarter of fiscal year

2021,

the Company’s income tax provision was

not

significantly impacted by the CARES Act. The Company will continue to closely monitor the impact of the COVID-

pandemic, as well as any effects that

may

result from future legislation.

When calculating QAD’s income tax expense for the

first

three

months of fiscal

2021,

the Company considered the Tax Act. The Company calculated an estimate for global intangible low-tax income (GILTI) in the Company’s tax expense based on the final GILTI regulations released on

June 14, 2019

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 addition, the technical change in depreciation on qualified improvement property enacted in the CARES Act was also considered in the GILTI calculation. In the

first

quarter of fiscal

2021,

cash taxes were

not

impacted by GILTI since the Company remained in a taxable loss position despite a GILTI inclusion. In the

first

quarter of fiscal

2020,

the Company did

not

have a GILTI inclusion because of 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”).

April 30, 2020

and

2019,

the gross amount of unrecognized tax benefits was

$1.2

million and

$1.3

million respectively, including interest and penalties. The unrecognized tax benefits for the

first

three

months of fiscal

2021

and fiscal

2020

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, 2020

and

2019,

the Company accrued approximately

$0.1

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

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. During the

first

quarter of fiscal year

2021

management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country in which the entity operates, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

A valuation allowance has been established for select foreign jurisdictions along with U.S. federal and state deferred tax assets. The following table discloses the Company’s valuation allowance by entity (in millions):

Jurisdiction	April 30, 2020		January 31, 2020
U.S. federal and state	$	30.9	$	30.3
Ireland		11.0		11.6
Brazil		6.3		5.7
Germany		2.5		2.6
Hong Kong		0.6		0.6
South Africa		0.1		0.2
Total valuation allowance	$	51.4	$	51.0

April 30, 2020

and

January 31, 2020,

the worldwide valuation allowance attributable to deferred tax assets was

$51.4

million and

$51.0

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 2018
	●	Germany for fiscal years ended January 31, 2015, 2016 and 2017
	●	Thailand for fiscal year ended January 31, 2018

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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