Provision for Income Taxes

6 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Provision for Income Taxes

10.Provision for Income Taxes

The Company accounts for income taxes using the asset and liability approach by recognizing deferred tax assets and liabilities for the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In addition, the Company accounts for uncertain tax positions that have reached a minimum recognition threshold.

The income tax provision for the three months ended June 30, 2022 and 2021 was $19.9 million and $21.3 million, respectively, representing effective tax rates of 28.6% and 26.6%, respectively. The income tax provision for the six months ended June 30, 2022 and 2021 was $51.8 million and $48.8 million, respectively, representing effective tax rates of 31.7% and 29.5%, respectively. The increase in our effective tax rate was primarily due to the impact of U.S. legislation that became effective as of January 1, 2022 limiting the deductibility of research and development expenses and the benefit relating to foreign tax credits, and impact of Mutual Agreement Procedures ("MAP") resolution. The Company’s effective tax rate may change over time as the amount or mix of income and tax changes among the jurisdictions in which the Company is subject to tax.

As of June 30, 2022 and December 31, 2021, the Company had gross unrecognized tax benefits, excluding penalties and interest, of approximately $49.8 million and $51.4 million, respectively, which, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2022 and December 31, 2021, approximately $3.6 million and $3.1 million, respectively, of accrued interest and penalties related to uncertain tax positions and were included in other long-term liabilities on the Company’s unaudited condensed consolidated balance sheets. Penalties and interest of $0.2 million were recorded in the provision for income taxes for unrecognized tax benefits during both of the three months ended June 30, 2022 and 2021. Penalties and interest of $0.7 million and $0.3 million were recorded in the provision for income taxes for unrecognized tax benefits during the six months ended June 30, 2022 and 2021, respectively.

The Company has been subject to a tax examination in Germany for the years 2009 through 2012 whereby the German tax authorities had imposed additional tax assessments for those years. Due to the nature of the additional tax assessments, the Company filed for competent authority relief from those assessments under MAP of the United States-Germany income tax treaty. A final resolution has been reached with the respective tax authorities in Germany and the United States during the first quarter of 2022 and the liability was paid in the second quarter of 2022.

The Company files tax returns in the United States, which include federal, state and local jurisdictions, and many foreign jurisdictions with varying statutes of limitations. The Company considers Germany, the United States and Switzerland to be its significant tax jurisdictions. The majority of the Company’s earnings are derived in Germany and Switzerland. Accounting for the various federal and local taxing authorities, the statutory rates for 2022 are approximately 30.0% and 20.0% for Germany and Switzerland, respectively. The mix of earnings in those two jurisdictions resulted in an increase of 5.3% from the U.S. statutory rate of 21.0% in the six months ended June 30, 2022.