Income Taxes

12 Months Ended

Oct. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The domestic and foreign components of our total income (loss) before provision for income taxes are as follows:

	Year Ended October 31,
	2023		2022		2021
	(in thousands)
United States	$	1,142,132	$	1,036,279	$	640,531
Foreign	159,650		79,235		164,983
Total income (loss) before provision for income taxes	$	1,301,782	$	1,115,514	$	805,514

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

	Year Ended October 31,
	2023		2022		2021
	(in thousands)
Current:
Federal	$	244,523	$	105,493	$	85,950
State	22,193		23,201		11,898
Foreign	27,986		45,297		79,890
	294,702		173,991		177,738
Deferred:
Federal	(192,762)		(42,086)		(108,530)
State	(1,842)		1,519		1,796
Foreign	(16,441)		3,654		(21,849)
	(211,045)		(36,913)		(128,583)
Provision (benefit) for income taxes	$	83,657	$	137,078	$	49,155

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

	Year Ended October 31,
	2023		2022		2021
	(in thousands)
Statutory federal tax	$	273,374	$	234,257	$	168,745
State tax (benefit), net of federal effect	617		(2,514)		(2,419)
Federal tax credits	(65,878)		(61,582)		(45,503)
Tax (benefit) on foreign earnings	(12,454)		25,930		7,988
Foreign-derived intangible income deduction	(82,436)		(38,924)		(31,214)
Tax settlements	(23,752)		—		(7,134)
Stock-based compensation	(43,153)		(52,625)		(62,620)
Changes in valuation allowance	29,631		19,794		15,232
Other	7,708		12,742		6,080
Provision (benefit) for income taxes	$	83,657	$	137,078	$	49,155

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which significantly changed prior U.S. tax law and includes numerous provisions that affect our business. Effective in our fiscal 2023 year, the Tax Act requires that research and development expenditures are capitalized and amortized instead of being deducted when incurred. Domestic research is capitalized over five years and foreign research is capitalized over fifteen years. For fiscal 2023, this resulted in a significant increase to our current cash tax liabilities; however, the tax payment deadline was extended until November 16, 2023, due to IRS tax relief for the California winter storms. Capitalization of research and development expenditures also results in a corresponding deferred tax benefit and decreased our effective tax rate due to increasing the foreign-derived intangible income deduction.

We have provided for foreign withholding taxes on undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries. Where foreign subsidiaries are considered indefinitely reinvested, and if the tax effect of undistributed earnings and other outside basis differences were recognized, the nature of taxes expected would be primarily be withholding taxes, taxes in non-conforming states, and taxes on intermediate holding companies outside of the U.S., net of foreign tax credits where available. As of October 31, 2023, the taxes due, after allowable foreign tax credits, are not expected to be material.

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

	As of October 31,
	2023		2022
	(in thousands)
Net deferred tax assets:
Deferred tax assets:
Deferred revenue	37,641		41,941
Deferred compensation	69,824		67,782
Intangible and depreciable assets	94,564		119,791
Capitalized research and development costs	592,536		231,733
Stock-based compensation	65,039		60,537
Tax loss carryovers	62,779		59,754
Foreign tax credit carryovers	41,972		27,153
Research and other tax credit carryovers	182,999		316,650
Operating Lease Liabilities	118,679		119,575
Accruals and reserves	27,636		—
Other	—		16,887
Gross deferred tax assets	1,293,669		1,061,803
Valuation allowance	(229,259)		(198,213)
Total deferred tax assets	1,064,410		863,590
Deferred tax liabilities:
Intangible assets	116,465		102,796
Operating lease Right-of-Use-Assets	94,068		96,598
Accruals and reserves	—		5,998
Undistributed earnings of foreign subsidiaries	8,900		1,000
Other	18,006		—
Total deferred tax liabilities	237,439		206,392
Net deferred tax assets	$	826,971	$	657,198

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 provided against our deferred tax assets as of October 31, 2023 is mainly attributable to foreign tax credits available to non-U.S. subsidiaries and the California research credits. The valuation allowance increased by a net of $31.0 million in fiscal 2023 primarily related to the net increase of valuation allowance on California research credits.

We have 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	$	156,991	2024-2042
Federal research credit carryforward	14,705		2024-2038
Federal foreign tax credit carryforward	27,522		2027-2033
International foreign tax credit carryforward	10,929		Indefinite
International net operating loss carryforward	48,823		2027-Indefinite
California research credit carryforward	243,960		Indefinite
Other state research credit carryforward	25,176		2025-2043
State net operating loss carryforward	236,391		2024-2045

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 and certain provisions of the Tax Act. Foreign tax credits may only be used to offset tax attributable to foreign source income.

The gross unrecognized tax benefits decreased by approximately $6.8 million during fiscal 2023 resulting in gross unrecognized tax benefits of $74.4 million as of October 31, 2023. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is summarized as follows:

	As of October 31,
	2023		2022
	(in thousands)
Beginning balance	$	81,183	$	82,360
Increases in unrecognized tax benefits related to prior year tax positions	211		435
Decreases in unrecognized tax benefits related to prior year tax positions	(25,678)		(9,791)
Increases in unrecognized tax benefits related to current year tax positions	8,223		6,794
Decreases in unrecognized tax benefits related to settlements with taxing authorities	—		(1,104)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(249)		(2,601)
Increases in unrecognized tax benefits acquired	165		14,121
Changes in unrecognized tax benefits due to foreign currency translation	10,504		(9,031)
Ending balance	$	74,359	$	81,183

As of October 31, 2023 and 2022, approximately $74.4 million and $81.2 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 our tax returns are recognized as a component of income tax expense (benefit) in the consolidated statements of income and totaled approximately $(10.6) million, $0.8 million and $0.4 million for fiscal years 2023, 2022 and 2021, respectively. As of October 31, 2023 and 2022, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $2.1 million and $12.7 million, respectively.

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. We believe 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 $0.0 and $10.0 million.

We and/or our subsidiaries remain subject to tax examination in the following jurisdictions:

Jurisdiction	Year(s) Subject to Examination
United States	Fiscal years after 2020
California	Fiscal years after 2018
Hungary	Fiscal years after 2018
Ireland	Fiscal years after 2018
Japan	Fiscal years after 2017
Korea and Taiwan	Fiscal years after 2021
China	Fiscal years after 2013
India	Fiscal years after 2019

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

IRS Examinations

In fiscal 2021, the Examination Division of the IRS completed its pre-filing review for fiscal 2020 and as a result we recognized approximately $7.1 million in unrecognized tax benefits, primarily due to the allowance of research tax credits.

Non-U.S. Examinations

Hungarian Tax Authority

In 2017, the Hungarian Tax Authority (the HTA) assessed withholding taxes of approximately $25.0 million and interest and penalties of $11.0 million, against our Hungary subsidiary (Synopsys Hungary). Synopsys Hungary contested the assessment with the Hungarian Administrative Court (Administrative Court). In 2019, as required under Hungarian law, Synopsys Hungary paid the assessment and recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits. During 2021 and 2022 a series of appeals, hearings and re-hearings occurred at the Administrative Court and Hungarian Supreme Court. Hearings with the Administrative Court were held on June 30, 2022, September 22, 2022 and April 25, 2023. The Administrative Court issued its written decision in favor of Synopsys Hungary on May 17, 2023, and subsequently refunded Synopsys Hungary the tax, penalty and interest paid in fiscal 2018, as well as additional interest all totaling $39.1 million (including the effect of currency movement). The refunded tax, penalty and interest was recognized as an income tax benefit. The HTA had until July 14, 2023, to file an appeal with the Hungarian Supreme Court and the HTA did not appeal. This concludes the litigation. During the third quarter of fiscal 2023, Synopsys released its unrecognized tax benefit and offsetting U.S. foreign tax credits, resulting in a net benefit of $23.8 million.

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

Legislative Developments

On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. The IR Act includes a 15% minimum tax based primarily on global consolidated U.S. GAAP profits with a $1 billion minimum threshold. The tax takes effect in fiscal 2024, with the $1 billion threshold measured as an average over three years commencing in the current fiscal year. Computation of the tax includes adjustments which, among others, provide for an offset of income taxes paid or accrued in non-U.S. jurisdictions. The details of the computation will be subject to regulations to be issued by the U.S. Department of the Treasury. Synopsys will monitor regulatory developments and will continue to evaluate the impact, if any, of the minimum tax.

The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. As of October 31, 2023, this does not have any impact on our consolidated financial statements.

On August 9, 2022, the CHIPS and Science Act of 2022 (the CHIPS Act) was enacted in the United States. The CHIPS Act provides financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States. We are evaluating potential opportunities related to the CHIPS Act.