Taxes

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account the Company's estimations of annual pre-tax income, the geographic mix of pre-tax income and 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 January 31,
	2017			2016
	(in thousands)
Income before income taxes	$	108,361		$	64,342
Provision (benefit) for income taxes	$	21,773		$	4,307
Effective tax rate	20.1		%	6.7		%

The Company’s effective tax rate for the three months ended January 31, 2017 is lower than the statutory federal income tax rate of 35% primarily due to lower taxes on certain earnings considered as indefinitely reinvested in foreign operations, U.S. federal and California research tax credits and excess tax benefits from stock-based compensation, partially offset by state taxes and the tax effect of non-deductible stock-based compensation and the integration of acquired technologies. The integration of acquired technologies represents the income tax effect resulting from the transfer of certain intangible assets among company-controlled entities.

The Company's effective tax rate increased in the three months ended January 31, 2017, as compared to the same period in fiscal 2016, primarily due to the permanent reinstatement of the U.S. federal research tax credit in the first quarter of fiscal 2016.

On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes Act of 2015 which permanently reinstated the research tax credit retroactive to January 1, 2015. As a result of the new legislation, the Company recognized a benefit in the first quarter of fiscal 2016 related to ten months of fiscal 2015 and two months of fiscal 2016 as well as a benefit to the annual effective tax rate for ten months of fiscal 2016.

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. The U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations and the IRS has initiated an appeal of the Tax Court's opinion. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential favorable benefits to the Company, is unclear, the Company is recording no impact at this time and will continue to monitor developments related to this opinion and the potential impact of those developments on the Company's prior fiscal years. Effective February 1, 2016, the Company amended its cost-sharing arrangement to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its effective annual tax rate.

The Company’s total gross unrecognized tax benefits as of January 31, 2017 are $104.3 million exclusive of interest and penalties. If the total gross unrecognized tax benefits as of January 31, 2017 were recognized in the future, approximately $99.6 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 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 $12 million.

As discussed in Note 11, the Company adopted ASU 2016-09 in the first quarter of fiscal 2017. The Company recorded all income tax effects of share-based awards in its provision for income taxes in the condensed consolidated statement of operations on a prospective basis. Prior to adoption, the Company did not recognize excess tax benefits from stock-based compensation as a charge to capital in excess of par value to the extent that the related tax deduction did not reduce income taxes payable. Upon adoption of ASU 2016-09, the Company recorded a deferred tax asset of $106.5 million for the previously unrecognized excess tax benefits with an offsetting adjustment to retained earnings. Adoption of the new standard resulted in net excess tax benefits in our provision for income taxes of $3.0 million for the three months ended January 31, 2017.

State Examinations

In the first quarter of fiscal 2016, the Company reached final settlement with the California Franchise Tax Board for fiscal 2011, 2010 and 2009. As a result of the settlement, the Company reduced its deferred tax assets by $4.9 million, recognized $10.3 million in unrecognized tax benefits, and increased its valuation allowance by $5.4 million.

Non-U.S. Examinations

In October 2016, the Hungarian Tax Authority (HTA) completed an audit of the Company's Hungary subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has challenged certain of Synopsys Hungary's tax positions taken during these years, including the timing of deduction of certain research expenses and for withholding taxes on payments made to affiliates, resulting in a proposed aggregate tax assessment of approximately $46 million. If the assessment is ultimately upheld, Synopsys Hungary could also be liable for additional interest and penalties of approximately $19 million. While the ultimate outcome is not certain, the Company believes there is no merit to these assessments and intends to contest them. While the appeal could take several years, the Company believes that it will ultimately prevail against the positions taken by the HTA.

The Company is also under examination by the tax authorities in certain other jurisdictions, including the Republic of Korea. No assessments have been proposed in these examinations.