Taxes

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s interpretations of tax laws and possible outcomes of audits.

The following table presents the provision (benefit) for income taxes and the effective tax rates:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Income before income taxes	$	65,193		$	70,771		$	225,692		$	210,014
Provision (benefit) for income taxes	$	9,806		$	5,115		$	49,520		$	13,345
Effective tax rate	15.0		%	7.2		%	21.9		%	6.4		%

The Company’s effective tax rate for the three and nine months ended July 31, 2015 is lower than the statutory federal income tax rate of 35% primarily due to the lower tax rates applicable to its non-U.S. operations and U.S. federal and California research tax credits, partially offset by state taxes, non-deductible stock compensation, and the integration of acquired technologies.

The Company's effective tax rate increased in the three and nine months ended July 31, 2015, as compared to the same periods in fiscal 2014, primarily due to the net impact of the integration of acquired technologies, partially offset by the reinstatement of the U.S. federal research tax credit through December 31, 2014. The effective tax rate for the three and nine months ended July 31, 2014 was lower due to the tax benefits of statutes of limitation lapses and settlements with the Taiwan tax authorities for fiscal 2010 and 2009 and with the IRS for fiscal 2012.

On December 19, 2014, the president signed into law the Tax Increase Prevention Act of 2014 which reinstated the research tax credit retroactive to January 1, 2014 and extended the credit through December 31, 2014. As a result of the new legislation, the Company recognized a benefit in the first quarter of fiscal 2015 related to ten months of fiscal 2014 as well as a benefit to the annual effective tax rate for two months of fiscal 2015.

On July 27, 2015, the Tax Court issued an opinion (Altera Corp. et al. v. Commissioner) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. However, U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Also, there is uncertainty related to the IRS response to the Tax Court opinion, the final resolution of this issue, and the potential favorable benefits to the Company. As such, no impact will be recorded at this time. The Company will continue to monitor developments related to this opinion and the potential impact of those developments on the Company’s current and prior fiscal years.

The Company’s total gross unrecognized tax benefits at July 31, 2015 are $115.0 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at July 31, 2015 were recognized in the future, approximately $115.0 million would decrease the effective tax rate.

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 twelve 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 $23 million.

IRS Examinations

In the third quarter of fiscal 2015, the Company reached final settlement with the Examination Division of the IRS on the integration of acquired technologies for fiscal 2015 and research tax credit for fiscal 2014 that resulted in $7.0 million and $3.2 million in tax benefits, respectively.

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.

Non-U.S. Examinations

In the first quarter of fiscal 2015, the Company reached final settlement with the Taiwan tax authorities for fiscal 2012, with regard to certain transfer pricing issues. As a result of the settlement the Company recognized approximately $1.1 million in unrecognized tax benefits.

In the second quarter of fiscal 2014, the Company reached settlements with the Taiwan tax authorities for fiscal 2010 and 2009, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlements 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.