INCOME TAXES

12 Months Ended

Mar. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income (loss) before income tax expense (benefit) consisted of the following (in thousands):

	Fiscal Year Ended March 31,
	2021		2020		2019
Domestic	$	4,985	$	(1,502)	$	(107,088)
Foreign	17,319		3,426		14,176
	$	22,304	$	1,924	$	(92,912)

The components of the income tax expense (benefit) are as follows (in thousands):

	Fiscal Year Ended March 31,
	2021		2020		2019
Current income tax expense:
Federal	$	14,701	$	2,817	$	3,902
State	2,426		1,850		(136)
Foreign	9,902		9,712		10,618
	27,029		14,379		14,384
Deferred income tax benefit:
Federal	(18,190)		(5,287)		(25,347)
State	(3,404)		(2,897)		(3,845)
Foreign	(2,483)		(1,517)		(4,780)
	(24,077)		(9,701)		(33,972)
	$	2,952	$	4,678	$	(19,588)

The income tax expense (benefit) computed using the federal statutory income tax rate differs from NetScout's effective tax rate primarily due to the following:

	Fiscal Year Ended March 31,
	2021		2020		2019
Statutory U.S. federal tax rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal tax effect	2.1		(47.8)		3.4
U.S. research and development tax credits	(23.7)		(245.9)		7.1
Effect of foreign operations	(5.3)		(66.9)		(0.1)
Meals and entertainment	0.7		43.7		(1.0)
Change in valuation allowance	24.0		250.0		2.2
Internal restructuring charges	—		196.5		—
Stock compensation	5.2		172.1		(2.6)
Divestiture	—		—		(1.0)
GILTI/FDII	(20.2)		(174.3)		2.9
BEAT	—		—		(7.0)
2017 Tax Act (transition tax and re-measurement of deferreds)	—		—		0.4
Foreign withholding	13.8		220.6		(3.1)
Provision to return	(2.3)		(152.8)		(1.0)
Other permanent differences	(2.1)		26.9		(0.1)
	13.2	%	243.1	%	21.1	%

The components of net deferred tax assets and liabilities are as follows (in thousands):

	Fiscal Year Ended March 31,
	2021		2020
Deferred tax assets:
Accrued expenses	$	8,480	$	5,060
Deferred revenue	17,648		14,420
Reserves	2,898		3,216
Pension and other retiree benefits	6,160		5,078
Net operating loss carryforwards	11,526		12,443
Tax credit carryforwards	19,432		14,138
Share-based compensation	5,397		4,534
Operating lease liability	17,333		18,213
Other deferred tax assets	2,116		20
Total gross deferred tax assets	90,990		77,122
Valuation allowance	(11,406)		(5,641)
Net deferred tax assets	79,584		71,481
Deferred tax liabilities:
Intangible assets	(132,635)		(146,950)
Other deferred tax liabilities	(8,848)		(8,061)
Operating lease right-of-use asset	(14,474)		(15,152)
Depreciation	(7,818)		(9,492)
Total deferred tax liability	$	(84,191)	$	(108,174)

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. The Company weighs objective and verifiable evidence more heavily in this analysis. In situations where the Company concludes that it does not have sufficient objective and verifiable evidence to support the realizability of the asset it creates a valuation allowance against it. As a result, the Company established a valuation allowance of $5.6 million as of March 31, 2020 and $11.4 million as of March 31, 2021, representing an increase of $5.8 million. The increase in the valuation allowance as of March 31, 2021, as compared to March 31, 2020, is primarily due to deferred tax assets related to U.S. foreign tax credits that the Company believes are not more likely than not to be realized. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets as a tax benefit recorded in the period such determination is made.

At March 31, 2021, the Company had U.S. federal net operating loss carry forwards of approximately $11 million, state net operating loss carryforwards of approximately $44 million and tax credit carryforwards of approximately $15 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2026. The Company also had foreign net operating loss carryforwards of approximately $45 million at March 31, 2021 and foreign tax credit carryforwards of approximately $7 million. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2016, although carryforward attributes that were generated prior to 2016 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, for the fiscal years ended March 31, 2021, 2020 and 2019 is as follows (in thousands):

	Fiscal Year Ended March 31,
	2021		2020		2019
Balance at April 1,	$	1,151	$	1,314	$	2,215
Additions based on tax positions related to the current year	48		49		28
Release of tax positions of prior years	(286)		(212)		(194)
Decrease relating to settlements with taxing authorities	—		—		(735)
Balance at March 31,	$	913	$	1,151	$	1,314

The Company is unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.

During fiscal year 2019, the Company completed its analysis and recording of all the tax effects related to the Tax Cuts and Jobs Act (TCJA), as required under SAB 118, and recorded a benefit of $87.0 million due to the re-measurement of its deferred taxes and a $2.0 million one-time transition tax.

The Company is subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The Company has established an accounting policy to provide for GILTI as a tax expense in the year incurred.

The Company continues to assert that certain historical book over tax outside basis differences primarily related to foreign unremitted earnings and cumulative translation adjustments are permanently reinvested. The determination of the amount of unrecognized deferred tax liability related to such outside basis differences is not practicable due to the uncertainty in the manner and timing in which such differences become taxable and is dependent upon various circumstances and factors, including availability of tax planning. The Company's intent is to only make distributions from its foreign subsidiaries in the future when they can be made at no or immaterial net tax cost.