INCOME TAXES

12 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

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

	Fiscal Year Ended March 31,
	2023		2022		2021
Domestic	$	56,463	$	27,690	$	4,985
Foreign	11,952		15,202		17,319
	$	68,415	$	42,892	$	22,304

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

	Fiscal Year Ended March 31,
	2023		2022		2021
Current income tax expense:
Federal	$	48,853	$	7,240	$	14,701
State	5,766		2,897		2,426
Foreign	7,879		9,343		9,902
	62,498		19,480		27,029
Deferred income tax benefit:
Federal	(47,297)		(7,240)		(18,190)
State	(4,006)		(3,406)		(3,404)
Foreign	(2,428)		(1,816)		(2,483)
	(53,731)		(12,462)		(24,077)
	$	8,767	$	7,018	$	2,952

The income tax expense computed using the U.S. statutory federal income tax rate differs from NetScout's effective tax rate primarily due to the following:

	Fiscal Year Ended March 31,
	2023		2022		2021
U.S. statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal tax effect	3.6		1.1		2.4
U.S. federal and state research and development tax credits	(9.0)		(11.9)		(23.7)
Effect of foreign operations	1.8		6.3		(4.5)
Meals and entertainment	0.4		0.2		0.8
Change in valuation allowance	3.5		5.1		24.0
Stock compensation	(0.6)		2.0		5.1
Global intangible low taxed income	—		(0.1)		0.8
Foreign derived intangible income	(11.7)		(12.6)		(24.5)
Foreign withholding	4.1		5.2		13.8
Other permanent differences	(0.3)		0.1		(2.0)
	12.8	%	16.4	%	13.2	%

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

	Fiscal Year Ended March 31,
	2023		2022
Deferred tax assets:
Accrued expenses	$	6,074	$	8,721
Capitalized R&D expenses	40,909		—
Deferred revenue	24,112		17,267
Reserves	3,902		3,106
Pension and other retiree benefits	2,319		4,903
Net operating loss carryforwards	9,016		11,611
Tax credit carryforwards	21,512		21,132
Share-based compensation	7,338		6,172
Operating lease liability	14,020		15,639
Other deferred tax assets	35		658
Total gross deferred tax assets	129,237		89,209
Valuation allowance	(15,612)		(13,160)
Net deferred tax assets	113,625		76,049
Deferred tax liabilities:
Intangible assets	(104,245)		(117,839)
Operating lease right-of-use asset	(11,854)		(13,189)
Depreciation	(5,563)		(6,612)
Other deferred tax liabilities	(12,368)		(10,425)
Total deferred tax liabilities	$	(20,405)	$	(72,016)

The 2017 Tax Cuts and Jobs Act (TCJA) contained a provision which became effective for R&D expenditures incurred in years beginning on or after Jan. 1, 2022, that R&D expenditures incurred are no longer allowed as an immediate deduction for federal income tax purposes. Rather, R&D expenditures incurred must be capitalized and amortized over a five-year period or fifteen -year period depending on if the expenditures are domestic or foreign, respectively.

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. 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 $13.2 million as of March 31, 2022 and $15.6 million as of March 31, 2023, representing an increase of $2.4 million. The increase in the valuation allowance as of March 31, 2023, as compared to March 31, 2022, 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, 2023, the Company had U.S. federal net operating loss carry forwards of $4 million and state net operating loss carryforwards of $19 million that are subject to expire at various dates beginning in 2025 and 2036, respectively. At March 31, 2023, the Company also had U.S. foreign tax credit carryforwards and state tax credits of $7 million and $9 million that are subject to expire at various dates beginning 2030 and 2036, respectively. At March 31, 2023, the Company had foreign net operating loss carryforwards of $40 million and foreign tax credit carryforwards of $7 million, respectively. The majority of foreign net operating losses and foreign tax credits have no expiration dates. As of March 31, 2023, the Company does not expect any U.S. federal and state net operating losses or research and development tax credits to go unutilized.

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 jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2018, although carryforward attributes that were generated prior to 2018 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 tax returns 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, 2023, 2022 and 2021 is as follows (in thousands):

	Fiscal Year Ended March 31,
	2023		2022		2021
Balance at April 1,	$	638	$	913	$	1,151
Additions based on tax positions related to the current year	28		28		48
Reductions of prior years tax positions due to lapse of statute of limitations	—		(303)		(286)
Increase in unrecognized tax benefits as a result of a tax position taken during a prior period	358		—		—
Balance at March 31,	$	1,024	$	638	$	913

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. The interest and penalties are immaterial to the provision.

Over the next twelve months, previously unrecognized tax benefits primarily due to the lapse of statute of limitations will be immaterial.

The Company continues to assert that certain historical book over tax outside basis differences primarily related to unremitted foreign earnings are permanently reinvested. The Company's intent is to only make distributions from its foreign subsidiaries in the future when they can be made at no or an immaterial net tax cost. Unremitted foreign earnings total approximately $144 million. The Company does not expect taxes related to the unremitted foreign earnings to be material if they were distributed which would primarily consist of foreign withholding taxes.