Income Taxes

9 Months Ended

Jul. 31, 2021

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 July 31,						Nine Months Ended July 31,
	2021			2020			2021			2020
	(in thousands)
Income before income taxes	$	213,337		$	236,854		$	606,436		$	446,593
Provision (benefit) for income taxes	$	14,945		$	(16,057)		$	51,214		$	(20,299)
Effective tax rate	7.0		%	(6.8)		%	8.4		%	(4.5)		%

The Company’s effective tax rate for the nine months ended July 31, 2021 is lower than the statutory federal corporate tax rate of 21.0% primarily due to U.S. federal research tax credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, and U.S. foreign tax credits, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.

The Company’s effective tax rate increased in the three and nine months ended July 31, 2021 as compared to the same periods in fiscal 2020, primarily due to enacted legislation in California which limits the use of California research and development tax credits commencing in fiscal 2021 and the federal taxation of foreign earnings offset by deemed paid foreign tax credits during the three months ended July 31, 2020. The Company's effective tax rate also increased in the nine months ended July 31, 2021 as compared to the same period in fiscal 2020 primarily due to the realizability of U.S. foreign tax credits in the nine months ended July 31, 2020.

The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing 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 and ongoing tax litigation 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 $48 million.

U.S. Examinations

In the third quarter of fiscal 2020, the Company reached a final settlement with the California Franchise Tax Board for fiscal years 2015 through 2017 and recognized $19.2 million in previously unrecognized tax benefits. In the third quarter of fiscal 2021, there were no material audit settlements.

Non-U.S. Examinations

Hungarian Tax Authority

In July 2017, the Hungarian Tax Authority (the HTA) issued a final assessment against the Company’s Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately $25.0 million and interest and penalties of $11.0 million. On August 2, 2017, Synopsys Hungary filed a claim contesting the final assessment with the Hungarian Administrative Court (the Administrative Court). In the first quarter of fiscal 2018, Synopsys Hungary paid the assessments, penalties and interest as required by law and recorded these amounts as prepaid taxes on its balance sheet, while continuing its challenge to the assessment in court. On April 30, 2019, the Administrative Court ruled against Synopsys Hungary. The Administrative Court’s opinion was received on May 16, 2019 and Synopsys Hungary filed an appeal with the Hungarian Supreme Court on July 5, 2019. In the second quarter of 2019, as a result of the Court’s decision, the Company recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits for the tax assessments. The Hungarian Supreme Court heard the Company's appeal on November 12, 2020 and remanded the case to the Administrative Court for further proceedings. The Company received the Hungarian Supreme Court’s written decision in the first quarter of fiscal 2021. On April 27, 2021, the Administrative Court reheard the case and again ruled against Synopsys Hungary. The Company received the written opinion from the Administrative Court on May 19, 2021. Synopsys Hungary filed an appeal with the Hungarian Supreme Court on July 19, 2021.

In the second quarter of fiscal 2020, the Company reached a final settlement with the HTA for fiscal years 2014 through 2018 and recognized a net $6.9 million in previously unrecognized tax benefits.

The Company is also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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