CSG SYSTEMS INTERNATIONAL INC Income Taxes Disclosure

The 2025 effective income tax rate increase was primarily driven by the following permanent and non-cash expense items: (i) the tax impact of the accelerated vesting of certain stock awards; (ii) the disallowance of transaction-related costs associated with the Merger; and (iii) the impact of the DGIT earn-out compensation recognized in 2025, for which a valuation allowance has been established for income tax purposes.

We have undistributed earnings of approximately $88 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings; therefore, a provision has not been made for foreign withholding taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexities of the hypothetical calculation.

Beginning January 1, 2022, certain R&D expenditures are required to be capitalized in accordance with Section 174 of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act of 2017, and amortized over a 5-year period if incurred domestically or a 15-year period if incurred outside the U.S. Of the total R&D related deferred income tax assets as of December 31, 2025, $75.3 million is attributable to capitalized R&D (net of applicable amortization) with the remaining amount attributable to foreign and state R&D credits.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted. Among the provisions, OBBBA added Section 174A to the Internal Revenue Code, which allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred during taxable years beginning after December 31, 2024, or to elect capitalization and amortization over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefit from the expenditures. The election must be made no later than the due date of the taxpayer’s federal income tax return (including extensions) and would apply to the tax year for which the election is made and all subsequent tax years unless the taxpayer receives consent to change to a different method or period. We are currently evaluating the impact of Section 174A and the related transition elections, and we anticipate making the election to continue capitalizing and amortizing domestic R&D expenditures over a period of 60 months. Other provisions of this legislation that were effective and adopted in 2025 did not have a significant impact on our consolidated financial statements.

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2025, we have federal deferred tax assets of $71.0 million and a federal valuation allowance of $1.4 million against those assets. As of December 31, 2025, we also have net foreign deferred tax assets of $41.6 million and a foreign valuation allowance of $27.4 million against those assets.

As of December 31, 2025 and 2024, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $0.1 million and $2.0 million, respectively, which will begin to expire in 2029 and can be utilized through 2033. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired businesses. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2025 and 2024, we have: (i) state NOL carryforwards of approximately $11 million and $31 million, respectively, which will expire beginning in 2032 with a portion of the losses available over an indefinite period of time; and (ii) foreign subsidiary NOL carryforwards of approximately $107 million and $98 million, respectively, which will expire beginning in 2031, with a portion of the losses available over an indefinite period of time.

Pillar Two. Numerous foreign jurisdictions have enacted or are in the process of enacting legislation to adopt a minimum effective tax rate. Pillar Two, which was established by the Organization for Economic Co-operation and Development (OECD), generally provides for a 15 percent minimum effective tax rate for multinational enterprises in every jurisdiction in which they operate. The U.S. has not yet adopted Pillar Two, however, various governments around the world have adopted, some of which are effective for tax periods beginning on or after December 31, 2023. We considered the applicable tax law changes on Pillar Two implementation in the relevant countries, and there is no material impact to our tax provision for the year ended December 31, 2025. We will continue to evaluate the impact of these tax law changes on future reporting periods.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state, and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. There are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various foreign, federal, state, or local tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

We recognize interest and penalty expense associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements. In addition to the $0.7 million, $1.1 million, and $1.9 million of liability for unrecognized tax benefits as of December 31, 2025, 2024, and 2023, we had $1.7 million, $1.3 million, and $0.9 million, respectively, of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $0.7 million of unrecognized tax benefits as of December 31, 2025, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., India, and Australia are the primary taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. During the fourth quarter of 2025, the Company was notified by the Internal Revenue Service that its 2023 federal income tax return had been selected for audit. The audit is in its initial stages, and no adjustments have been proposed.