The determination of the estimated annual effective tax rate is based upon a number of significant estimates and judgments. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, issuance of future guidance, interpretation, and rule-making, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:

	Three-Months Ended						Nine-Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Earnings before income taxes	$	58,698		$	45,016		$	184,769		$	213,763
Income tax expense		9,837			6,551			26,025			30,607
Effective tax rate		16.8	%		14.6	%		14.1	%		14.3	%

The year-over-year increase in the current fiscal year third quarter effective tax rate is primarily attributable to increased foreign earnings in higher tax jurisdictions and the current quarter discrete impact of the current quarter enactment of a retroactive law disallowing foreign interest expense. This increase was partially offset by a favorable increase in the net excess income tax benefit from stock-based compensation in the current quarter, adjustments to prior period tax items related to Global Intangible Low-Taxed Income (“GILTI”), and an increase in certain state income tax credits in the current year quarter.

The year-over-year decrease in the year-to-date effective tax rate is primarily attributable to a favorable increase in the net excess income tax benefits from stock-based compensation, and adjustments to prior period tax items related to GILTI. This decrease is partially offset by (i) the tax benefit associated with the impairment of assets held for sale, and a benefit from a change in India’s dividend withholding tax law in fiscal year 2020, neither of which repeated in the current fiscal year, and (ii) increased foreign earnings in higher tax jurisdictions.

Gross unrecognized tax benefits were $14,026 as of June 30, 2021, and $9,851 as of September 30, 2020. At June 30, 2021, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $7,796. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,714 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward’s tax expense includes accruals for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitation may result in changes to tax expense. Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2018 and thereafter. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.