Avid 2005 Annual Report Download - page 51

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Provision for (Benefit from) Income Taxes
We account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns.
Years Ended December 31, 2005 and 2004
(dollars in thousands)
2005 2004 Change
Provision for (benefit from) income taxes $8,355 ($1,612) $9,967
As a percentage of net revenues 1.1% (0.3%) 1.4%
Years Ended December 31, 2004 and 2003
(dollars in thousands)
2004 2003 Change
Provision for (benefit from) income taxes ($1,612) $550 ($2,162)
As a percentage of net revenues (0.3%) 0.1% (0.4%)
Our effective tax rate was 20%, (2)% and 1%, respectively, for 2005, 2004 and 2003. Excluding the impact of acquired net operating
loss carryforwards, in-process research and development and the decrease in the valuation allowance, our effective tax rate would
have been 32% for 2005, 28% for 2004 and 26% for 2003. These rates differ from the Federal statutory rate of 35% primarily due
to income in foreign jurisdictions which have lower tax rates. The tax rate in each year is significantly affected by net changes in the
valuation allowance against our deferred tax assets. The net tax provision of $8.4 million for 2005 reflected a current tax provision
of $8.6 million and a non-cash deferred tax charge of $1.8 million related to utilization of acquired net operating loss carryforwards,
offset by a $1.2 million tax benefit related to the amortization of non-deductible acquisition-related intangible assets and other
benefits totaling $0.8 million. The net tax benefit for 2004 reflected tax resulting from the removal of a valuation allowance of $2.1
million on net operating loss carryforwards in Ireland that were previously unbenefited, the reversal of a $1.2 million tax reserve
resulting from the expiration of the statute of limitations on that reserve item, an adjustment for refunds of approximately $0.3
million of taxes previously paid in Canada and other benefits totaling $0.2 million, partially offset by a tax provision of $2.2 million.
The net tax provision for 2003 reflected a tax provision of $1.0 million, partially offset by recognition of deferred tax benefits totaling
$0.3 million related to fixed assets and the reversal of tax reserves totaling $0.1 million. The tax provisions noted above for 2005,
2004 and 2003 were substantially comprised of taxes payable by our foreign subsidiaries with only alternative minimum tax provided
on anticipated U.S. taxable profits.
The tax provision in each year is significantly affected by net changes in the valuation allowance against our deferred tax assets. We
regularly review our deferred tax assets for recoverability taking into consideration such factors as historical losses after deductions
for stock compensation, projected future taxable income and the expected timing of the reversals of existing temporary differences.
SFAS No. 109 requires us to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based on the level of deferred tax assets as of December 31, 2005, the level of historical U.S. losses after
deductions for stock compensation and the level of outstanding stock options which we anticipate will generate significant U.S. tax
deductions in the future, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant
the continued establishment of a full valuation allowance against the U.S. net deferred tax assets. In the quarter ended December
31, 2004, we removed the valuation allowance related to deferred tax assets of our Irish manufacturing operations. The decision to
remove the valuation allowance was based on the conclusion that it was more likely than not that the deferred tax asset in Ireland
would be realized. Due to the removal of the valuation allowance, we now have a non-cash provision for income taxes related to our
Irish operations.