Income Taxes

9 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

(in thousands)	Three months ended						Nine months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Income before income taxes	$	100,778		$	58,469		$	259,720		$	222,233
Provision for income taxes	$	30,302		$	7,266		$	53,476		$	38,253
Effective income tax rate		30	%		12	%		21	%		17	%

In the third quarter and first nine months of 2022 and 2021, our effective tax rate differed from the statutory federal income tax rate of 21% due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2022 and 2021, the foreign rate differential predominantly relates to these earnings.

In 2022 and 2021, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.

Additionally, in the third quarter and first nine months of FY’22 our results include tax expense related to the sale of a portion of our PLM services business of $15.5 million, including $8.1 million of expense which relates to the basis difference on goodwill. In the third quarter and first nine months of 2021, our results also include the effects of the full valuation allowance, which was maintained against our U.S. net deferred tax assets at that time. Additionally, in the first nine months of 2021, our results include the reduction of our previously established U.S. valuation allowance by $42.3 million as a result of the Arena acquisition and a charge of $37.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes.

We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended September 30, 2021, we concluded it was more likely than not that our deferred tax assets related to United States federal and state income would be realizable, and therefore, the United States federal and the majority of the state valuation allowances were released in the fourth quarter of 2021. In the third quarter of 2022, we continue to maintain this conclusion.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits.

As of June 30, 2022 and September 30, 2021, we had unrecognized tax benefits of $24.1 million and $21.2 million, respectively. If all our unrecognized tax benefits as of June 30, 2022 were to become recognizable in the future, we would record a benefit to the income tax provision of $24.1 million, which would be partially offset by an increase in the U.S. valuation allowance of $4.9 million.

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $3 million.