Income Taxes

The domestic and foreign components of the Company’s total income (loss) before provision for income taxes are as follows:



	Year Ended October 31,
	2014			2013		2012
	(in thousands)
United States	$	(7,638	)	$	61,818	$	39,855
Foreign	279,780			213,848		161,280
	$	272,142		$	275,666	$	201,135

The components of the (benefit) provision for income taxes were as follows:



	Year Ended October 31,
	2014			2013			2012
	(in thousands)
Current:
Federal	$	(14,951	)	$	11,692		$	(12,443	)
State	279			(5,949		)	(547		)
Foreign	42,085			29,428			6,826
	27,413			35,171			(6,164		)
Deferred:
Federal	(4,612		)	4,969			22,506
State	(4,141		)	933			14
Foreign	(5,642		)	(13,207		)	2,377
	(14,395		)	(7,305		)	24,897
Provision (Benefit) for income taxes	$	13,018		$	27,866		$	18,733

The provision (benefit) for income taxes differs from the taxes computed with the statutory federal income tax rate as follows:



	Year Ended October 31,
	2014			2013			2012
	(in thousands)
Statutory federal tax	$	95,251		$	96,483		$	70,397
State tax (benefit), net of federal effect	(4,306		)	(2,697		)	1,078
Tax credits(1)	(5,153		)	(24,972		)	(4,289		)
Tax on foreign earnings less than U.S. statutory tax	(56,661		)	(36,670		)	(21,288		)
Deferred tax reversal resulting from merger of foreign affiliate	—			(6,808		)	—
Tax settlements	(19,645		)	(1,130		)	(36,882		)
Stock based compensation	5,675			4,671			9,016
Changes in valuation allowance	(235		)	(776		)	10
Federal statute lapses	(6,746		)	—			—
Other	4,838			(235		)	691
	$	13,018		$	27,866		$	18,733


(1)	As a result of the reinstatement of the federal research and development tax credit in fiscal 2013, the Company reflected a benefit of approximately $19 million in the above amount for the period January 1, 2012 through October 31, 2013. The federal research tax credit expired on December 31, 2013 resulting in only two months of credit for fiscal 2014.

The significant components of deferred tax assets and liabilities were as follows:



	October 31,
	2014			2013
	(in thousands)
Net deferred tax assets:
Deferred tax assets:
Accruals and reserves	$	28,608		$	35,548
Deferred revenue	42,766			36,551
Deferred compensation	56,920			45,662
Capitalized costs	66,616			84,390
Capitalized research and development costs	32,710			36,650
Stock compensation	18,508			16,790
Tax loss carryovers	64,273			63,869
Foreign tax credit carryovers	18,846			13,961
Research and other tax credit carryovers	110,247			108,044
Other	4,689			3,736
Gross deferred tax assets	444,183			445,201
Valuation allowance	(45,996		)	(43,374		)
Total deferred tax assets	398,187			401,827
Deferred tax liabilities:
Intangible assets	81,218			82,662
Undistributed earnings of foreign subsidiaries	726			11,982
Total deferred tax liabilities	81,944			94,644
Net deferred tax assets	$	316,243		$	307,183

It is more likely than not that the results of future operations will be able to generate sufficient taxable income to realize the net deferred tax assets. The valuation allowance increased by $2.6 million.

The Company has the following tax loss and credit carryforwards available to offset future income tax liabilities:



Carryforward	Amount		Expiration Date
	(in thousands)
Federal net operating loss carryforward	$	162,289	2018-2033
Federal research credit carryforward	126,649		2018-2034
Federal foreign tax credit carryforward	13,557		2018-2024
International foreign tax credit carryforward	10,429		Indefinite
California research credit carryforward	131,069		Indefinite
Other state research credit carryforward	8,074		2015-2034
State net operating loss carryforward	159,496		2015-2033

The federal and state net operating loss carryforward is from acquired companies and the annual use of such loss is subject to significant limitations under Internal Revenue Code Section 382. Foreign tax credits may only be used to offset tax attributable to foreign source income. The federal research tax credit expired as of December 31, 2013.

The Company has unrecognized deferred tax assets of approximately $70.7 million as of October 31, 2014 attributable to excess tax deductions related to stock options, the benefit of which will be credited to equity when realized.

The Company has not provided taxes for undistributed earnings of its foreign subsidiaries except to the extent that the Company does not plan to reinvest such earnings indefinitely outside the United States. If the cumulative foreign earnings exceed the amount the Company intends to reinvest in foreign countries in the future, the Company would provide for taxes on such excess amount. As of October 31, 2014, there were approximately $948.0 million of earnings upon which U.S. income taxes of approximately $206.0 million have not been provided for.

The gross unrecognized tax benefits increased by approximately $6.3 million during fiscal 2014 resulting in gross unrecognized tax benefits of $124.1 million as of October 31, 2014. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is summarized as follows:



	As of October 31, 2014			As of October 31, 2013
	(in thousands)
Beginning balance	$	117,760		$	109,680
Increases in unrecognized tax benefits related to prior year tax positions	2,037			4,189
Decreases in unrecognized tax benefits related to prior year tax positions	(23,271		)	(3,328		)
Increases in unrecognized tax benefits related to current year tax positions	35,277			14,128
Decreases in unrecognized tax benefits related to settlements with taxing authorities	(1,858		)	(4,967		)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(8,816		)	(7,728		)
Increases in unrecognized tax benefits acquired	3,575			5,718
Changes in unrecognized tax benefits due to foreign currency translation	(602		)	68
	$	124,102		$	117,760

As of October 31, 2014 and 2013, approximately $120.5 million and $117.8 million, respectively, of the unrecognized tax benefits would affect our effective tax rate if recognized upon resolution of the uncertain tax positions.

Interest and penalties related to estimated obligations for tax positions taken in the Company’s tax returns are recognized as a component of income tax expense (benefit) in the consolidated statements of operations and totaled approximately $0.5 million, $0.2 million and $(5.8) million for fiscal years 2014, 2013 and 2012, respectively. As of October 31, 2014 and 2013, the combined amount of accrued interest and penalties related to tax positions taken on the Company’s tax returns was approximately $1.3 million and $0.8 million, respectively.

The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $25 million.

The Company and/or its subsidiaries remain subject to tax examination in the following jurisdictions:




Jurisdiction	Year(s) Subject to Examination
United States—Synopsys	Fiscal 2014
United States—Magma Design Automation	Fiscal years after 2010
California—Synopsys	Fiscal years after 2009
California—Magma Design Automation	Fiscal years after 2010
Hungary	Fiscal years after 2007
Japan	Fiscal years after 2009
Ireland and Taiwan	Fiscal years after 2008

In addition, the Company has made acquisitions with operations in several of its significant jurisdictions which may have years subject to examination different from the years indicated in the above table.

IRS Examinations

In the first quarter of fiscal 2014, the Company reached final settlement with the Examination Division of the IRS on the remaining fiscal 2012 issues and recognized approximately $10.0 million in unrecognized tax benefits. In the fourth quarter of fiscal 2014, the Company reached final settlement with the IRS for its audit of fiscal 2013 and recognized approximately $5.5 million in unrecognized tax benefits.

In the third and fourth quarters of fiscal 2013, the Company reached settlement with the IRS for its audit of certain fiscal 2012 issues, which resulted in a decrease in unrecognized tax benefits of $6.0 million, decrease in deferred tax assets of $4.9 million and a $1.1 million net tax benefit.

In the third quarter of fiscal 2012, the Company reached a final settlement with the IRS for its audits of fiscal years 2010 and 2011. As a result of the settlement, the Company’s unrecognized tax benefits decreased by $24.7 million and the impact to other balance sheet tax accounts was not material. The net tax benefit resulting from the settlement was $15.9 million.

Non-U.S. Examinations

Taiwan

On February 11, 2014 and April 1, 2014, the Company reached settlements with the Taiwan tax authorities for fiscal years 2010 and 2009, respectively, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlement to other open fiscal years, the Company’s unrecognized tax benefits decreased by $5.1 million. The net tax benefit resulting from the settlements and the application to other open fiscal years was $3.9 million.

On June 21, 2012, the Company reached a settlement with the Taiwan tax authorities for fiscal 2008 with regard to certain transfer pricing issues. As a result of the settlement and the application of the settlement to other open fiscal years, the Company’s unrecognized tax benefits decreased by $16.5 million. The net tax benefit resulting from the settlement and the application to other open fiscal years was $14.7 million.

Certain of the Company’s income tax returns in Taiwan are under review for fiscal years 2011 through 2013. The Company believes that it has adequately provided for potential tax adjustments, including interest and potential penalties.

Hungary

On March 5, 2012, the Company reached a settlement with the Hungarian tax authorities with regard to its fiscal years 2006 through 2008. The settlement resulted in a $5.1 million cash payment.

On May 10, 2012 the Company reached a settlement with the Hungarian tax authorities for fiscal years 2009 and 2010. The settlement resulted in a $6.3 million benefit principally from interest in the second quarter, a $3.2 million reduction to prepaid taxes in the third quarter, and a cash payment of $10.9 million in the fourth quarter of fiscal 2012.

The settlements of fiscal years 2006 through 2010 reduced unrecognized tax benefits by $27.0 million and $24.2 million in the second and third quarter of fiscal 2012, respectively.