Provision for Income Taxes

9 Months Ended

Sep. 30, 2021

Income Taxes

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 September 30, 2021 and 2020 was $20.7 million and $20.0 million, respectively, representing effective tax rates of 19.0% and 26.6%, respectively. The decrease in our effective tax rate was primarily due to the jurisdictional profit mix and the impact of favorable discrete items in the period. The income tax provision for the nine months ended September 30, 2021 and 2020 was $69.5 million and $30.0 million, respectively, representing effective tax rates of 25.4% and 25.0%, respectively. The increase in the Company’s effective tax rate was primarily due to the increase in profit before income tax and the jurisdictional profit mix, partially offset by the impact of discrete items in the period. 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 September 30, 2021 and December 31, 2020, the Company had gross unrecognized tax benefits, excluding penalties and interest, of approximately $34.8 million and $22.7 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 September 30, 2021 and December 31, 2020, approximately $2.3 million and $1.8 million, respectively, of accrued interest and penalties related to uncertain tax positions was included in other long-term liabilities on the Company’s unaudited condensed consolidated balance sheets. Penalties and interest of $0.2 million and $0.1 million were recorded in the provision for income taxes for unrecognized tax benefits during both the three months ended September 30, 2021 and 2020. Penalties and interest of $0.6 million and $0.4 million was recorded in the provision for income taxes for unrecognized tax benefits during the nine months ended September 30, 2021 and 2020, respectively.

The Company files tax returns in the United States, which includes 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 2021 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 5.5% from the U.S. statutory rate of 21.0% in the nine months ended September 30, 2021.