EPAM Systems, Inc.EPAM
EPAM Systems, Inc. Income Taxes Disclosure
INCOME TAXES
Income Before Provision for Income Taxes
Income before provision for income taxes based on geographic location is disclosed in the table below:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Income before provision for income taxes: | ||||||||||||||||||||
| United States | $ | 144,183 | $ | 193,031 | $ | 210,875 | ||||||||||||||
| Foreign | 361,441 | 391,381 | 325,710 | |||||||||||||||||
Total | $ | 505,624 | $ | 584,412 | $ | 536,585 | ||||||||||||||
Provision for Income Taxes
The provision for income taxes consists of the following:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | 71,512 | $ | 82,920 | $ | 54,763 | ||||||||||||||
| State | 12,759 | 13,652 | 15,922 | |||||||||||||||||
| Foreign | 102,972 | 97,502 | 86,012 | |||||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | (35,682) | (54,772) | (20,519) | |||||||||||||||||
| State | (1,948) | (3,176) | (5,206) | |||||||||||||||||
| Foreign | (21,667) | (6,247) | (11,470) | |||||||||||||||||
Total | $ | 127,946 | $ | 129,879 | $ | 119,502 | ||||||||||||||
As part of the Tax Cuts and Jobs Act (“U.S. Tax Act”), as determined as of December 31, 2017, the Company was required to make annual installment payments for the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8.0% on the remaining earnings. As of December 31, 2025, all installment payments have been made, and there is no remaining unpaid balance.
As of December 31, 2025, the Company had approximately $930.7 million of accumulated undistributed foreign earnings that are expected to be indefinitely reinvested. These accumulated foreign earnings are not expected to be subject to U.S. federal income tax if repatriated but could be subject to state and foreign income and withholding taxes. The Company does not consider undistributed foreign earnings that are not expected to be subject to any taxes to be indefinitely reinvested.
Effective Tax Rate Reconciliation
The Company adopted ASU 2023-09 on a prospective basis beginning with the year ending December 31, 2025. The following table presents the required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to the actual global effective amount and rate for the year ended December 31, 2025:
| Year Ended December 31, 2025 | |||||||||||
| Amount | Percent | ||||||||||
| U.S. federal statutory income tax rate | $ | 106,181 | 21.0 | % | |||||||
| Domestic federal | |||||||||||
| Effect of cross-border tax laws | |||||||||||
| Effect of foreign disregarded entities | 10,050 | 2.0 | % | ||||||||
| Effect of other cross-border tax laws | 997 | 0.2 | % | ||||||||
| Nontaxable or nondeductible items | 6,947 | 1.4 | % | ||||||||
| Tax credits | (2,503) | (0.5) | % | ||||||||
| Other | 88 | 0.0 | % | ||||||||
Domestic state/local income taxes, net of federal benefit(a) | 10,472 | 2.1 | % | ||||||||
| Foreign | |||||||||||
| Poland | |||||||||||
| R&D incentive | (11,919) | (2.4) | % | ||||||||
| Other | 1,944 | 0.4 | % | ||||||||
| Other jurisdictions | 4,688 | 0.9 | % | ||||||||
| Changes in unrecognized tax benefits | 1,001 | 0.2 | % | ||||||||
| Provision for income taxes | $ | 127,946 | 25.3 | % | |||||||
(a) State taxes in California, Pennsylvania, New York, Illinois and New Jersey make up the majority of the tax effect in this category.
The reconciliation of the provision for income taxes at the federal statutory income tax rate to the Company’s effective income tax rate for years prior to the adoption of ASU 2023-09 is as follows:
| For the Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Provision for income taxes at federal statutory rate | $ | 122,727 | $ | 112,690 | ||||||||||
| Increase (decrease) in taxes resulting from: | ||||||||||||||
| GILTI and BEAT U.S. taxes | 475 | 391 | ||||||||||||
| Excess tax benefits relating to stock-based compensation | (22,448) | (19,829) | ||||||||||||
| Foreign tax expense and tax rate differential | 17,290 | 5,208 | ||||||||||||
| Effect of permanent differences | (2,488) | 4,210 | ||||||||||||
| State taxes, net of federal benefit | 12,279 | 12,347 | ||||||||||||
| Stock-based compensation expense | 4,357 | 5,869 | ||||||||||||
| Impact of election to change entity classification | (873) | (2,109) | ||||||||||||
| Tax credits | (1,720) | (1,824) | ||||||||||||
| Other | 280 | 2,549 | ||||||||||||
Provision for income taxes | $ | 129,879 | $ | 119,502 | ||||||||||
The Company’s worldwide effective tax rate for the years ended December 31, 2025, 2024 and 2023 was 25.3%, 22.2% and 22.3%, respectively.
The Company recorded a tax shortfall upon vesting or exercise of stock awards of $1.9 million during the year ended December 31, 2025 and excess tax benefits upon vesting or exercise of stock awards of $22.4 million and $19.8 million during the years ended December 31, 2024 and 2023, respectively.
The Organization for Economic Co-operation and Development issued Pillar Two model rules for a global minimum tax of 15% effective January 1, 2024. Pillar Two did not have a significant impact on the Company’s 2025 or 2024 effective tax rate and is not currently expected to significantly impact the Company’s effective tax rate going forward.
Deferred Income Taxes
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| As of December 31, 2025 | As of December 31, 2024 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Property and equipment | $ | 11,754 | $ | 10,622 | ||||||||||
| Accrued expenses | 151,926 | 99,459 | ||||||||||||
| Accrued sales discounts | 6,415 | 10,262 | ||||||||||||
Deferred revenue | 25,902 | 14,114 | ||||||||||||
| Stock-based compensation | 40,545 | 39,492 | ||||||||||||
| Operating lease liabilities | 37,692 | 39,240 | ||||||||||||
| R&D capitalization | 136,444 | 121,546 | ||||||||||||
| Deferred consideration | 8,565 | 11,278 | ||||||||||||
| Foreign currency exchange | 11,137 | 18,290 | ||||||||||||
| Net operating loss carryforward | 29,740 | 22,717 | ||||||||||||
| Other | 5,149 | 4,692 | ||||||||||||
| Deferred tax assets | $ | 465,269 | $ | 391,712 | ||||||||||
| Less: valuation allowance | (16,024) | (10,183) | ||||||||||||
| Total deferred tax assets | $ | 449,245 | $ | 381,529 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Property and equipment | $ | 8,300 | $ | 11,941 | ||||||||||
| Intangible assets | 137,141 | 126,443 | ||||||||||||
| Operating lease right-of-use assets | 37,696 | 39,132 | ||||||||||||
| R&D credit carryforward | 8,361 | 4,061 | ||||||||||||
Foreign currency exchange | 19,720 | 850 | ||||||||||||
| U.S. taxation of foreign subsidiaries | 9,335 | 17,158 | ||||||||||||
| Other | 10,546 | 4,507 | ||||||||||||
| Total deferred tax liabilities | $ | 231,099 | $ | 204,092 | ||||||||||
| Net deferred tax assets | $ | 218,146 | $ | 177,437 | ||||||||||
As of December 31, 2025 and 2024, the Company classified $77.0 million and $92.4 million, respectively, of deferred tax liabilities as Other noncurrent liabilities in the consolidated balance sheets.
As of December 31, 2025, the Company’s domestic and foreign net operating loss (“NOL”) carryforwards for income tax purposes were approximately $0.9 million and $117.2 million, respectively. If not utilized, a portion of the domestic NOL carryforwards will begin to expire in 2026. The foreign NOL carryforwards may be carried forward indefinitely, with the exception of $12.2 million that will begin to expire on various dates between 2026-2031 if not used. The Company maintains a valuation allowance primarily related to the net operating loss carryforwards in certain foreign jurisdictions that the Company believes are not likely to be realized, which totaled $70.7 million as of December 31, 2025.
Unrecognized Tax Benefits
As of December 31, 2025 and 2024, the total amount of gross unrecognized tax benefits was $12.4 million and $11.5 million, respectively. These amounts represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods and are included in Income taxes payable, noncurrent within the consolidated balance sheets.
The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of its provision for income taxes. As of December 31, 2025 and 2024, the Company accrued $2.5 million and $2.1 million respectively, of interest and penalties resulting from such unrecognized tax benefits.
A reconciliation of the beginning and ending balances of the gross unrecognized tax benefits for the years ended December 31, 2025, 2024 and 2023 are as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Beginning Balance | $ | 11,487 | $ | 11,471 | $ | 7,865 | ||||||||||||||
Increases for tax positions related to the current year | 1,004 | 1,407 | 3,307 | |||||||||||||||||
Increases for tax positions related to prior years | 3,064 | 1,043 | 716 | |||||||||||||||||
Decreases for tax positions related to prior years | (452) | (2,251) | (47) | |||||||||||||||||
Statute of limitations expirations | (2,548) | (86) | (438) | |||||||||||||||||
Settlement with tax authority | (65) | — | — | |||||||||||||||||
Effect of net foreign currency exchange rate changes | (68) | (97) | 68 | |||||||||||||||||
| Ending Balance | $ | 12,422 | $ | 11,487 | $ | 11,471 | ||||||||||||||
The Company is subject to taxation in the United States and various states and foreign jurisdictions including Canada, Colombia, Germany, India, Mexico, Netherlands, Poland, Switzerland, Ukraine, and the United Kingdom. With few exceptions, as of December 31, 2025, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2021.
Cash Taxes Paid
The amounts of cash income taxes paid (net of refunds) after the adoption of ASU 2023-09 were as follows:
| Year Ended December 31, 2025 | |||||
| Federal | $ | 77,295 | |||
| State and local | 18,644 | ||||
| Foreign | |||||
| India | 15,176 | ||||
| Mexico | 13,329 | ||||
| All other foreign | 59,986 | ||||
| Total cash income taxes paid, net of refunds | $ | 184,430 | |||
The amount of cash income taxes paid by the Company, net of refunds, during the years ended December 31, 2024 and 2023 was $196.4 million and $177.4 million, respectively.
On July 4, 2025, the U.S. federal government enacted tax reform legislation, commonly referred to as the One Big Beautiful Bill Act (“the OBBB Act”), which includes a broad range of tax reform provisions. The tax law changes included in the OBBB Act did not have a material impact on the Company’s effective tax rate for the year ended December 31, 2025; however, the Company expects an acceleration of certain deductions resulting in a $24.5 million reduction in cash tax payments associated with the 2025 tax year.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 28, 2025 | |
| 2023 | Feb 22, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2020 | Feb 25, 2021 | |
| 2019 | Mar 2, 2020 | |
| 2018 | Feb 26, 2019 | |
| 2017 | Feb 27, 2018 | |
| 2016 | Mar 1, 2017 | |
| 2015 | Feb 23, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.