| Income Taxes | 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, 2018 2017 2016 (in thousands) United States $ (18,029 ) $ (2,702 ) $ 22,134 Foreign 381,572 385,800 307,414 Total income (loss) before provision for income taxes $ 363,543 $ 383,098 $ 329,548 The components of the provision (benefit) for income taxes were as follows: Year Ended October 31, 2018 2017 2016 (in thousands) Current: Federal $ (1,120 ) $ 25,420 $ (6,106 ) State 2,025 5,565 2,670 Foreign 140,430 92,498 80,195 141,335 123,483 76,759 Deferred: Federal (139,547 ) 95,003 (23,510 ) State (25,661 ) 24,440 11,950 Foreign (45,102 ) 3,609 (2,477 ) (210,310 ) 123,052 (14,037 ) Provision (benefit) for income taxes $ (68,975 ) $ 246,535 $ 62,722 The provision (benefit) for income taxes differs from the taxes computed with the statutory federal income tax rate as follows: Year Ended October 31, 2018 2017 2016 (in thousands) Statutory federal tax $ 85,142 $ 134,084 $ 115,343 State tax (benefit), net of federal effect (32,351 ) (20,071 ) (14,492 ) Tax credits (35,142 ) (24,365 ) (36,979 ) Tax on foreign earnings less than U.S. statutory tax (104,252 ) (52,413 ) (68,246 ) Tax settlements (14,691 ) (7,057 ) (16,479 ) Stock-based compensation (19,293 ) (26,205 ) 5,709 Changes in valuation allowance 78,192 47,745 25,590 Integration of acquired technologies 27,927 36,443 37,525 Undistributed earnings of foreign subsidiaries (974 ) (9,610 ) 9,940 Tax impact of repatriation — 166,152 — Impact of tax restructuring (171,979 ) — — Impact of Tax Act rate change 51,075 — — Transition tax 63,107 — — Other 4,264 1,832 4,811 Provision (benefit) for income taxes $ (68,975 ) $ 246,535 $ 62,722 The integration of acquired technologies represents the income tax effect resulting from the transfer of certain intangible assets among company-controlled entities. The income tax effect is generally recognized over five years. These intangible assets generally result from the acquisition of technology by a company-controlled entity as part of a business or asset acquisition. The Tax Cuts and Jobs Act (Tax Act), enacted on December 22, 2017, lowered the statutory federal corporate income tax rate from 35% to 21% effective on January 1, 2018. Because the Company's fiscal 2018 commenced on November 1, 2017, the annual statutory federal corporate tax rate applicable to fiscal 2018 is a blended rate of 23.4% . Beginning in the Company's fiscal 2019, the annual statutory federal corporate tax rate will be 21%. During the year, the Company made provisional estimates of the accounting impacts of certain provisions of the Tax Act. In the fourth quarter, as a result of further analyses of certain aspects of the Tax Act, the Company finalized the following provisional estimates. As a result of the reduction in the federal corporate tax rate, the Company remeasured its deferred taxes, resulting in a first-quarter provisional tax expense of $45.6 million based on the tax rate that will apply when these deferred taxes are settled or realized in future periods. In the fourth quarter, the Company finalized its calculations resulting in a tax expense for fiscal 2018 of $51.1 million . As part of the adoption of a new territorial tax system, the Tax Act required the Company to pay a one-time transition tax of 15.5% on previously untaxed earnings represented by foreign cash and certain other net current assets, and 8% on the remaining earnings. As of the third quarter of fiscal 2018, the Company had recorded a provisional transition tax expense of $73.4 million , as well as a provisional income tax payable of $17.9 million . In the fourth quarter, the Company finalized its calculations, resulting in a tax expense of $63.1 million and income tax payable of $8.9 million . The Company intends to elect to pay the transition tax over a period of eight years as permitted by the Tax Act. The Company continues to obtain, analyze and interpret additional guidance issued related to the Tax Act. The applicability and impact of the following new tax provisions, are dependent in part on forthcoming Internal Revenue Service guidance. • A tax on global intangible low-tax income (GILTI), which is determined annually based on the Company's aggregate foreign subsidiaries' income in excess of certain qualified business asset investment return, will be effective for the Company in its fiscal year 2019. The Company needs additional information to complete its analysis on whether to adopt an accounting policy to account for the tax effects of GILTI in the period that it is subject to such tax, or to provide deferred taxes for book and tax basis differences that upon reversal, may be subject to such tax. Accordingly, the Company has not recorded any tax or deferred tax assets or liabilities with respect to GILTI in fiscal year 2018. The Company will make its accounting policy decision and complete the required accounting in the first quarter of fiscal 2019. • A base erosion and anti-abuse tax (BEAT), which functions as a minimum tax that partially disallows deductions for certain related party transactions, that is not effective for the Company until its fiscal year 2019. • A special tax deduction for foreign-derived intangible income (FDII), which, in general, allows a deduction of certain intangible income earned in the U.S. and derived from foreign sources, that is not effective for the Company until its fiscal year 2019. As part of the adoption of a territorial tax system, the Tax Act also provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, that were not subject to the one-time transition tax. The Company has provided for foreign withholding taxes on undistributed earnings of certain of its foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries. In the fourth quarter of 2018, the Company made significant changes to its international tax structure by transferring intangible assets between certain foreign subsidiaries and changing the tax status of these subsidiaries for U.S. tax purposes. As a result, the Company recorded a deferred tax benefit of $172.0 million for the future U.S. tax deduction related to these intangible assets. The Company paid foreign income tax of $67.7 million associated with the gain recognized on certain of these transactions. The tax liabilities associated with these transfers are treated as prepaid taxes. A portion of these foreign taxes may result in a U.S. foreign tax credit, but the amount realized cannot be determined at this time. The tax liabilities and benefits are subject to examination by U.S. and foreign tax authorities in future years. The significant components of deferred tax assets and liabilities were as follows: October 31, 2018 2017 (in thousands) Net deferred tax assets: Deferred tax assets: Accruals and reserves $ 17,766 $ 36,906 Deferred revenue 37,072 42,420 Deferred compensation 50,096 67,145 Intangible and depreciable assets 185,940 51,679 Capitalized research and development costs 4,817 12,508 Stock-based compensation 19,825 23,679 Tax loss carryovers 37,029 23,623 Foreign tax credit carryovers 64,803 7,662 Research and other tax credit carryovers 250,069 157,817 Other 4,480 — Gross deferred tax assets 671,897 423,439 Valuation allowance (201,258 ) (121,770 ) Total deferred tax assets 470,639 301,669 Deferred tax liabilities: Intangible assets 72,682 62,299 Undistributed earnings of foreign subsidiaries 523 1,300 Other — 1,758 Total deferred tax liabilities 73,205 65,357 Net deferred tax assets $ 397,434 $ 236,312 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 the Company's deferred tax assets as of October 31, 2018 is mainly attributable to U.S. and international foreign tax credits and the California research credit. The valuation allowance increased by a net of $79.5 million in fiscal 2018 primarily related to the realizability of approximately $50.8 million U.S. foreign tax credits generated as a result of the foreign tax on the transfer of intangibles associated with the tax restructuring. Proposed regulations providing guidance related to the foreign tax credit were issued on November 28, 2018. If these regulations were to be finalized in their current form, the Company could release all or a portion of the valuation allowance on these foreign tax credits. The remainder of the increase in the valuation allowance was primarily due to the amount of California research credits that the Company does not expect to be realized, taking into account the impact of certain provisions of the Tax Act. 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 $ 139,526 2019-2037 Federal research credit carryforward 109,760 2019-2037 Federal foreign tax credit carryforward 2,427 2019-2027 International foreign tax credit carryforward 12,943 Indefinite California research credit carryforward 188,826 Indefinite Other state research credit carryforward 10,873 2023-2033 State net operating loss carryforward 104,174 2024-2037 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 federal research tax credit was permanently reinstated in fiscal 2016 . The gross unrecognized tax benefits increased by approximately $39.3 million during fiscal 2018 resulting in gross unrecognized tax benefits of $131.0 million as of October 31, 2018 . A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is summarized as follows: As of October 31, 2018 As of October 31, 2017 (in thousands) Beginning balance $ 91,637 $ 106,542 Increases in unrecognized tax benefits related to prior year tax positions 2,572 3,117 Decreases in unrecognized tax benefits related to prior year tax positions (27,615 ) (49,456 ) Increases in unrecognized tax benefits related to current year tax positions 67,961 31,007 Decreases in unrecognized tax benefits related to settlements with taxing authorities (175 ) (784 ) Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations (8,828 ) (2,635 ) Increases in unrecognized tax benefits acquired 7,886 1,934 Changes in unrecognized tax benefits due to foreign currency translation (2,419 ) 1,912 Ending balance $ 131,019 $ 91,637 As of October 31, 2018 and 2017 , approximately $120.9 million and $88.5 million , respectively, of the unrecognized tax benefits would affect the Company's 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 $9.4 million , $0.2 million and $0.8 million for fiscal years 2018 , 2017 and 2016 , respectively. As of October 31, 2018 and 2017 , the combined amount of accrued interest and penalties related to tax positions taken on the Company’s tax returns was approximately $12.6 million and $3.2 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. 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 $0.0 and $7.0 million . The Company and/or its subsidiaries remain subject to tax examination in the following jurisdictions: Jurisdiction Year(s) Subject to Examination United States Fiscal 2018 California Fiscal years after 2014 Hungary and Ireland Fiscal years after 2013 Japan and Taiwan Fiscal years after 2011 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. On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion ( Altera Corp. et al. v. Commissioner ) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. In view of the Tax Court opinion, the Company amended its cost-sharing arrangement effective February 1, 2016 to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its income tax expense for fiscal 2016 and 2017 and in its effective annual rate for fiscal year 2018. On July 24, 2018, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) reversed the decision of the Tax Court, but subsequently withdrew the decision on August 7, 2018. A rehearing of the case was held on October 16, 2018, but a decision has not yet been issued. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential impact on 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. The Company's intercompany cost-sharing arrangement was terminated at the end of fiscal 2018 as part of the tax restructuring. IRS Examinations In fiscal 2018, the Company reached final settlement with the Examination Division of the IRS for fiscal 2017 and recognized approximately $21.8 million in unrecognized tax benefits, primarily due to the allowance of certain foreign tax credits, and research tax credits from acquired companies. In fiscal 2017, the Company reached final settlement with the Examination Division of the IRS for fiscal 2016 and recognized approximately $4.6 million in unrecognized tax benefits. In fiscal 2016, the Company reached final settlement with the Examination Division of the IRS for fiscal 2015 and recognized approximately $20.7 million in unrecognized tax benefits. State Examinations In fiscal 2017, the Company reached an agreement with the California Franchise Tax Board for fiscal 2014, 2013, and 2012. As a result of the agreement, the Company recognized tax expense of $0.4 million , reduced its deferred tax assets by $1.1 million , recognized $14.6 million in unrecognized tax benefits, and increased its valuation allowance by $13.2 million . In 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 Hungary In July 2017, the Hungarian Tax Authority (HTA) issued a final assessment against the Company's Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has disallowed Synopsys Hungary's tax positions taken during these years regarding the timing of the deduction of research expenses and applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately $44.5 million and interest and penalties of $18.0 million (at current exchange rates). On August 2, 2017, Synopsys Hungary filed a claim contesting the final assessment with the Hungarian Administrative Court. On November 16, 2017, Synopsys Hungary paid the assessment as required by law, which was recorded as a prepaid tax on its balance sheet, while continuing its challenge to the assessment in court. In fiscal 2018, the Company reevaluated its strategy and subsequently withdrew its contest concerning the Hungary tax litigation for the issue related to the timing of the deduction of research expenses and recorded a tax expense of $5.7 million . The Company's position regarding the applied withholding taxes on certain payments made to affiliates has not changed. If the Company prevails on the remaining issue, the remaining assessment of $36.2 million including the associated interest and penalties would be canceled, but the Hungarian statutory accounting treatment could have an indirect adverse impact on certain tax benefits in the year of the cancellation. Korea In fiscal 2017, the Company settled certain transfer pricing issues with the Korea National Tax Service for fiscal years 2012 to 2016. As a result of the settlement, the Company recognized income tax expense of $7.9 million . Taiwan In fiscal 2017, the Company reached an agreement with the Taiwanese tax authorities on certain tax positions for fiscal year 2014 resulting in an income tax benefit of $10.9 million . In fiscal 2016, the Company reached final settlement with the Taiwanese tax authorities for fiscal 2011, with regard to certain transfer pricing issues. As a result of the settlement, the Company paid $0.3 million of tax and recognized $0.7 million in unrecognized tax benefits. India In fiscal 2016, the Company agreed to settle certain transfer pricing issues with the Indian tax authorities for various fiscal years. As a result of the settlement, the Company recognized income tax expense, net of foreign tax credits, of $4.6 million . |
