Autodesk 2005 Annual Report Download - page 44

Provision for income taxes
Absent the impact of the one-time income tax benefits of $15.5 million relating to the Dividends Received
Deduction Legislation (“DRD Legislation”) and $8.9 million relating to income tax audit closures, our effective
income tax rate was 20% in fiscal 2005, 24% in fiscal 2004 (absent the impact of the non-recurring tax benefit
from the resolution of the Foreign Sales Corporation (“FSC”) issue and the closure of other tax audits) and 27%
in fiscal 2003 (absent the impact of the non-recurring tax benefit from the IRS audit resolution for fiscal 1997-
1999). The effective tax rate for fiscal 2005 is lower than the fiscal 2004 and 2003 tax rates primarily due to the
new DRD Legislation and our belief that current year foreign earnings will be taxed at a rate lower than previously
projected. The effective tax rate for fiscal 2005 is less than the federal statutory rate of 35% due to the
extraterritorial income exclusion (“ETI”), research credits, tax-exempt interest, and the tax benefits from low-
taxed foreign earnings and the DRD Legislation. The effective tax rate for fiscal 2004 was less than the federal
statutory rate of 35% due to the ETI, research credits and tax-exempt interest.
Our future effective tax rate may be materially impacted by the amount of benefits associated with our
foreign earnings, which are taxed at rates different from the federal statutory rate, ETI, research credits, tax-
exempt interest, DRD election and changes in the tax law which include, but not limited to, provisions such as
the deduction for Domestic Production Activities.
During fiscal 2005, Autodesk recognized a one-time income tax benefit of $15.5 million relating to the new
tax legislation surrounding the Dividends Received Deduction Legislation. This DRD Legislation, which was signed
into law during the third quarter of fiscal 2005 as part of the American Jobs Creation Act of 2004, allows for
the repatriation of certain foreign dividends at a rate lower than the 35% federal statutory rate. Because Autodesk
believes that it will be able to repatriate foreign earnings under this DRD Legislation, the deferred tax liability
whichwas previously accrued on prior year foreign earnings was reduced, whichresulted in a $15.5 million one-time
income tax benefit. This one-time income tax benefit relates to the difference between the taxes previously
provided on the earnings of a foreign subsidiary at the federal statutory tax rate and the lower rate afforded
under the new DRD Legislation. Also during fiscal 2005, the Company accrued $19.0 million of U.S. and foreign
deferred taxes relating to current year foreign earnings which the Company intends to repatriate in fiscal 2006
under this DRD Legislation. The net tax expense represents the Company’s intention to repatriate approximately
$248.0 million of foreign earnings accumulated through fiscal 2005 under this DRD Legislation.
Also, as a result of the Company’s resolution and closure of its Internal Revenue Service (“IRS”) audit for
fiscal 2001 as well as the closure of certain state and foreign tax years, and the lapse of the statute of limitations
with respect to certain federal, state, and foreign tax years, Autodesk recognized a current income tax benefit
of approximately $8.9 million during fiscal 2005, which reduced accrued income taxes.
During fiscal 2005, following certain business changes, Autodesk completed an internal reorganization of
the ownership of Autodesk Canada. As a result of the reorganization, Autodesk believes that it will be able to
claim U.S. tax deductions for the remaining unamortized portion of the purchase price from the March 1999
acquisition of Discreet (now Autodesk Canada). The amount of the potential deferred tax asset arising from this
reorganization is approximately $96.2 million, reflecting future U.S. tax amortization deductions of goodwill and
other intangible assets. Autodesk determined that, at the present time, it is not probable that these tax benefits
will be realized and accordingly has not yet recognized these benefits. Instead, the tax benefits arising from this
reorganization will be recognized if and when the tax treatment is verified with tax authorities or such other
factors occur that would permit a probable confidence level to be achieved.
During fiscal 2004, we recognized an income tax benefit of $19.7 million due to a favorable resolution of
an industry-wide matter surrounding our FSC for the fiscal years ended 1993 through 1998. In connection with
the refund of these tax payments previously made, the Company received payment and recognized interest
income of $4.2 million during fiscal 2004.
Also during the fourth quarter of fiscal 2004, we recognized a non-recurring income tax benefit of $7.0 million
resulting from the resolution of an IRS audit for the fiscal year ended 2000.
Liquidity and Capital Resources
Our primary source of cash is receipts from revenue. The primary uses of cash are employee-related
(compensation and related benefits), general operating expenses (marketing, facilities and overhead) and cost
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