15.

INCOME TAXES

The following table accounts for the differences between the federal statutory tax rate of 35% and the Company’s overall effective tax rate:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Statutory provision		35.0	%		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		1.2	%		2.3	%		1.6	%		1.1	%
City taxes		0.2	%		0.1	%		0.2	%		0.1	%
Foreign effective tax rates different from US statutory rate		(9.2	)%		(14.4	)%		(10.1	)%		(13.0	)%
Tax reserve		—			—			—			(1.5	%)
Prior Year related state tax payment		—			—			0.6	%		—
Valuation Reserve Adjustment		—			—			(1.8	%)		—
Tax related to repatriation		(10.8	)%		390.5	%		(4.0	)%		128.2	%

Effective Income Tax Rate		16.4	%		413.5	%		21.5	%		149.9	%

The effective tax rate for the three months ended September 30, 2017, was impacted by one time favorable adjustments of $6.26 million relating to the true up of tax provisions including the impact of foreign exchange rates, in the computation of the tax related to the dividend repatriation, upon the finalization of the Federal tax return.

The Company records provisions for income taxes based on enacted tax laws and rates in the various tax jurisdictions in which it operates. In determining the tax provisions, the Company provides for tax uncertainties in income taxes when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based on management’s estimates and accordingly, are subject to revision based on additional information. The provision no longer required for any particular tax year is credited to the current period’s income tax expenses. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the “more likely than not” concept.

Syntel, Inc. and its subsidiaries file income tax returns in various tax jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013 and for State tax examinations for years before 2012.

Syntel India, the Company’s India subsidiary, has disputed tax matters for the financial years 1996-97 to 2013-14 pending at various levels of the Indian tax authorities. Financial year 2014-15 and onwards are open for regular tax scrutiny by the Indian tax authorities. However, the tax authorities in India are authorized to reopen the already concluded tax assessments and may re-open the case of Syntel India for financial years 2010-11 and onwards.

During the three months ended March 31, 2017, the Company reversed a valuation allowance against deferred tax assets recognized on the minimum alternative tax (“MAT”) of $2.92 million due to the extension of the MAT credit carry forward period which was enacted in March 2017. The MAT credit can be carried forward and set-off against future taxes payable for up to 15 years versus the earlier provision on MAT credit that allowed the MAT credit to be carried forward and set-off against future taxes payable for only up to 10 years.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of income tax expense. During the three months ended September 30, 2017 and 2016, the Company has accrued interest of approximately $0.19 million and $0.08 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company has accrued interest of approximately $0.47 million and $0.12 million respectively. The Company has accrued approximately $1.98 million and $1.45 million for interest and penalties as of September 30, 2017 and December 31, 2016, respectively.

The Company has also classified an accrued tax liability of $6.79 million as unrecognized tax benefits related to repatriation upon the finalization of the Federal tax return.

The liability for unrecognized tax benefits was $76.99 million and $68.51 million as of September 30, 2017 and December 31, 2016, respectively. The Company has paid income taxes of $43.20 million and $41.41 million against the liabilities for unrecognized tax benefits of $76.99 million and $68.51 million, as of September 30, 2017 and December 31, 2016, respectively. The Company has paid the taxes in order to reduce the possible interest and penalties related to these unrecognized tax benefits.

The Company’s net amount of unrecognized tax benefits for tax disputes of $1.66 million could change in the next twelve months as the court cases and global tax audits progress. At this time, due to the uncertain nature of this process, it is not reasonably possible to estimate an overall range of possible change.

Syntel has not provided for India Income Taxes which are disputed and pending at various levels (including potential tax disputes) of $15.41 million for the financial year 1996-97 to September 30, 2017, which is after providing $53.58 million as unrecognized tax benefits under ASC740. Indian tax exposures involve complex issues and may need an extended period to resolve the issues with the Indian income tax authorities. Syntel’s management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Service Tax Audit

Syntel India regularly files quarterly service tax refund applications and claims refunds of service tax on input services, which remain unutilized against a lack of service tax on export of services. As of September 30, 2017, Syntel Indian entities have not provided against service tax refund claims of $4.13 million disputed by the Indian Service Tax Department which are pending at various levels.

The Company obtained a tax consultant’s advice on the aforesaid disputes. The consultant is of the view that the tax disputes are contrary to the wording of the service tax notifications and provisions. The Company therefore believes that its claims of service tax refunds should be upheld at the appellate stage and the refunds should be accordingly granted. Based on the consultant’s tax advice, the Company believes that it has a reasonable basis to defend the rejection of the refunds. Accordingly, no provision has been made in the Company’s books.

Undistributed Earnings of Foreign Subsidiaries

During the three months ended September 30, 2016, and after a comprehensive review of anticipated sources and uses of capital both domestically and abroad, as well as other considerations, the Board of Directors determined that it was in the best interests of the Company and its shareholders to declare a special cash dividend of fifteen dollars ($15.00) per share. In conducting this evaluation, the Board of Directors considered, among other factors, the operational and financial objectives of the Company, long-term and short-term capital needs, the Company’s projections on growth and working capital needs, planned uses of U.S. and foreign earnings, the available sources of liquidity in the U.S., and growth plans outside of the U.S. As part of this evaluation, the Company determined that certain amounts which had been previously designated for internal and external expansion and investment at its foreign subsidiaries were no longer required for these purposes. The special cash dividend was funded through a one-time repatriation of approximately $1.03 billion (net of foreign income tax $210 million paid outside of the U.S) of cash held by the Company’s foreign subsidiaries and a portion of borrowings under the new Senior Credit Facility. In connection with the one-time repatriation, the Company recognized a one-time tax expense of approximately $270.6 million (net of foreign tax credits) in the third quarter of 2016. The Company has recorded additional state tax of $0.9 million, attributable to the above repatriation, in quarter ended March 31, 2017. The Company has reversed $6.26 million relating to the true up of tax provisions including the impact of foreign exchange rates, in the computation of the tax related to the dividend repatriation, upon the finalization of the Federal tax return attributable to the above repatriation, in quarter ended September 30, 2017.

Management regularly evaluates foreign earnings to determine whether future foreign earnings that accumulate will be permanently invested outside the U.S. In conducting this evaluation, management considers, among other factors, the operational and financial objectives of the Company, long-term and short-term capital needs, the Company’s projections on growth and working capital needs, planned uses of U.S. and foreign earnings, the available sources of liquidity in the U.S., and growth plans outside of the U.S. The Company provides taxes on any foreign earnings in excess of these requirements. The September 30, 2017 provision includes the impact of certain foreign earnings that are not permanently invested. If in the future, management were to conclude that any additional portion of foreign earnings will not be permanently reinvested outside the U.S., this would result in an additional provision for income taxes, which could affect the Company’s future effective tax rate. If the Company determines to repatriate all undistributed repatriable earnings of foreign subsidiaries as of September 30, 2017, the Company would have accrued taxes of approximately $30.9 million.

Local Taxes

As of September 30, 2017, the Company had a local tax liability provision of approximately $0.4 million, equal to $0.3 million net of federal tax benefit, relating to local taxes including employer withholding taxes, employer payroll expense taxes, business licenses, and corporate income taxes. As of December 31, 2016, the local tax liability provision was approximately $0.4 million, equal to $0.3 million net of tax, relating to local taxes including employer withholding taxes, employer payroll expense taxes, business license registrations, and corporate income taxes.

Minimum Alternate Tax (MAT)

Minimum Alternate Tax (“MAT”) is payable on the Book Income, including the income for which deduction is claimed under section 10A and section 10AA of the Indian Income Tax Act. The excess MAT over the normal tax liability is “MAT Credit”. MAT Credit can be carried forward for 15 years (as amended by the Finance Act, 2017, as compared to 10 years, as previously provided) and set-off against future tax liabilities, if normal tax provisions are in excess of taxes payable under MAT. Accordingly, for the three months ended March 31, 2017, the Company has reversed a valuation allowance of $2.92 million against deferred tax assets which was recognized on MAT Credit. The MAT credit as of September 30, 2017 of $39.94 million (net of valuation allowance of $2.45 million) must be utilized before March 31 of the following financial years and will expire as follows:


Year of Expiry Of MAT Credit	Amount in USD (in millions)
2022-2023		0.18
2023-2024		0.27
2024-2025		0.99
2025-2026		1.83
2026-2027		0.74
2027-2028		6.09
2028-2029		7.22
2029-2030		7.92
2030-2031		10.19
2031-2032		5.47
2032-2033		1.49

Total		42.39

Less: valuation allowance		(2.45	)

Total (net of valuation allowance)		39.94