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Income Taxes
9 Months Ended
Oct. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The significant differences that impact the effective tax rate relate to the difference between the U.S. federal statutory rate and the rates in foreign jurisdictions, incremental valuation allowances, investments in affiliates and tax contingencies.
For the nine months ended October 31, 2012, the Company recorded an income tax provision from continuing operations of $26.0 million, which represents an effective tax rate of 348.1%. The effective tax rate is greater than the US statutory rate primarily due to the fact that the Company did not record an income tax benefit on losses incurred in certain of its U.S. and foreign jurisdictions in which the Company maintains valuation allowances against net deferred tax assets. The income tax provision from continuing operations for the nine months ended October 31, 2012 is comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes, certain tax contingencies and taxes recorded with respect to investments in affiliates.
For the nine months ended October 31, 2011, the Company recorded an income tax provision from continuing operations of $19.3 million, which represents an effective tax rate of (87.1%). The effective tax rate is negative due to the fact that the Company recorded income tax expense on a consolidated pre-tax loss, primarily due to the mix of income and losses by jurisdiction. The Company did not record an income tax benefit on the loss for the period, primarily because it maintains a valuation allowance against certain of its U.S. and foreign net deferred tax assets. The income tax provision from continuing operations for the nine months ended October 31, 2011 is comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes, certain tax contingencies and taxes recorded with respect to investments in affiliates.
The change in the Company's effective tax rate for the nine months ended October 31, 2012, compared to the nine months ended October 31, 2011 primarily attributable to changes in the relative mix of income and losses across various jurisdictions, the effect of permanent book/tax differences and the changes in the basis of the Company's investment in Verint.
The Company currently maintains a deferred tax liability of approximately $36.5 million associated with its investment in Verint. The Verint Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes, and accordingly, CTI may eliminate the requirement to maintain the deferred tax liability. The Company anticipates releasing the deferred tax liability in the period in which the Verint Merger plan is approved. The release of this deferred tax liability will result in a tax provision benefit in the amount of the deferred tax liability at the time of its release.
The Company and Comverse entered into an agreement that governs their respective rights, responsibilities and obligations after the Share Distribution with respect to tax obligations, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns. The agreement provides that Comverse will be responsible for all tax obligations with respect to periods before the Share Distribution. Accordingly, the Company recorded a tax indemnification receivable from Comverse of $13.9 million, offset by a $13.9 million increase in additional paid-in capital.
On September 19, 2012, the Company contributed to Comverse its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement .The Company had recorded a deferred tax asset and related valuation allowance of approximately $12.4 million for the three months ended July 31, 2012 in anticipation of its disposition of Starhome. The deferred tax asset and related valuation allowance were reversed through income from discontinued operations, net of tax in the three months ended October 31, 2012, upon the contribution of Starhome to Comverse.
As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance. The Company determined that there is sufficient negative evidence to maintain valuation allowances against certain of the Company's federal, state and foreign deferred tax assets as a result of historical losses in the most recent three-year period in the U.S. and certain state and foreign jurisdictions. During the three months ended October 31, 2012, the Company reassessed its valuation allowance requirements taking into consideration the distribution of Comverse and concluded that it intends to maintain its valuation allowance until sufficient positive evidence exists to support its reversal.
The Company regularly assesses the adequacy of the Company's provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. As a result of the Share Distribution, unrecognized tax benefits decreased by approximately $281.4 million representing unrecognized tax benefits attributable to or assumed by Comverse in connection with the Share Distribution. As of October 31, 2012, the total amount of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate were approximately $43.6 million. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of October 31, 2012 could decrease by approximately $3.8 million in the next 12 months as a result of settlements of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of deferred taxes, including the need for additional valuation allowances and the recognition of tax benefits. The Company's income tax returns are subject to ongoing tax examinations in several jurisdictions in which the Company operates. The Company believes that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits. However, an estimate of such changes cannot reasonably be made.
The Company's policy is to include interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes in the condensed consolidated statements of operations. Accrued interest and penalties was $18.4 million as of October 31, 2012.