Palo Alto Networks IncPANW
Palo Alto Networks Inc Income Taxes Disclosure
Income Taxes
The following table presents the components of income before income taxes (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| United States | $ | 1,124.9 | $ | 669.2 | $ | 374.3 | |||||||||||
| Foreign | 470.8 | 319.1 | 192.0 | ||||||||||||||
| Total | $ | 1,595.7 | $ | 988.3 | $ | 566.3 | |||||||||||
The following table summarizes our provision for (benefit from) income taxes (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal: | |||||||||||||||||
| Current | $ | 517.3 | $ | 213.4 | $ | 26.1 | |||||||||||
| Deferred | (300.2) | 311.7 | 19.3 | ||||||||||||||
| State: | |||||||||||||||||
| Current | 108.2 | 101.5 | 44.0 | ||||||||||||||
| Deferred | (44.5) | (172.8) | 0.4 | ||||||||||||||
| Foreign: | |||||||||||||||||
| Current | 186.0 | 129.6 | 44.0 | ||||||||||||||
| Deferred | (5.0) | (2,172.7) | (7.2) | ||||||||||||||
| Total | $ | 461.8 | $ | (1,589.3) | $ | 126.6 | |||||||||||
For the year ended July 31, 2025, our provision for income taxes was $461.8 million, which included a deferred tax provision of $218.5 million arising from the remeasurement of our basis difference associated with the U.S. tax effects of foreign deferred tax assets. Our remeasurement is a result of the One Big Beautiful Bill Act ("OBBB") enacted on July 4, 2025 which provides for significant tax law changes and modifications including changes to the U.S. effective tax rates on certain foreign earnings. Although these specific provisions are not effective until our fiscal 2027, our policy to account for basis differences relating to our global intangible low-taxed income requires us to account for these changes in the period of enactment.
For the year ended July 31, 2024, our benefit from income taxes was $1.6 billion, primarily due to the release of our valuation allowance on U.S. federal, U.S. states other than California, and United Kingdom (“U.K.”) deferred tax assets, partially offset by the deferred tax provision in our U.S. federal tax provision to recognize the indirect effect on basis differences relating to our global intangible low-taxed income in connection with the release of our valuation allowance in the U.K.
The following table presents the items accounting for the difference between income taxes computed at the federal statutory income tax rate and our provision for (benefit from) income taxes:
| Year Ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Effect of: | |||||||||||||||||
| State taxes, net of federal tax benefit | 3.8 | 3.1 | 2.8 | ||||||||||||||
Non-U.S. operations | 2.2 | 9.5 | 9.7 | ||||||||||||||
| Change in valuation allowance | 1.1 | (341.9) | 15.5 | ||||||||||||||
U.S. effect of foreign deferred tax assets | 11.2 | 175.8 | — | ||||||||||||||
| Share-based compensation | (5.5) | (16.9) | (12.6) | ||||||||||||||
| Tax credits | (6.2) | (13.4) | (15.6) | ||||||||||||||
| Non-deductible expenses | 1.2 | 1.5 | 2.3 | ||||||||||||||
| Other, net | 0.1 | 0.5 | (0.7) | ||||||||||||||
| Total | 28.9 | % | (160.8) | % | 22.4 | % | |||||||||||
The following table presents the components of our deferred tax assets and liabilities as of July 31, 2025 and 2024 (in millions):
| July 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Accruals and reserves | $ | 132.1 | $ | 109.7 | |||||||
| Operating lease liabilities | 126.5 | 132.6 | |||||||||
| Deferred revenue | 1,266.1 | 1,004.9 | |||||||||
| Net operating loss carryforwards | 620.0 | 585.2 | |||||||||
| Tax credits | 222.3 | 175.3 | |||||||||
| Capitalized research expenditures | 895.4 | 626.6 | |||||||||
| Share-based compensation | 105.6 | 75.6 | |||||||||
| Fixed assets and intangible assets | 1,561.4 | 1,631.7 | |||||||||
| Gross deferred tax assets | 4,929.4 | 4,341.6 | |||||||||
| Valuation allowance | (278.1) | (243.4) | |||||||||
| Total deferred tax assets | 4,651.3 | 4,098.2 | |||||||||
| Deferred tax liabilities: | |||||||||||
U.S. effect of foreign deferred tax assets | (1,921.6) | (1,728.5) | |||||||||
| Operating lease right-of-use assets | (108.2) | (115.8) | |||||||||
| Deferred contract costs | (212.5) | (199.1) | |||||||||
| Other deferred tax liabilities | (74.1) | (43.5) | |||||||||
| Total deferred tax liabilities | (2,316.4) | (2,086.9) | |||||||||
| Net deferred tax assets (liabilities) | $ | 2,334.9 | $ | 2,011.3 | |||||||
We regularly assess the need for a valuation allowance on our deferred tax assets. In making this assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all the deferred tax assets will not be realized. The assessment requires significant judgment and is performed for each of the applicable jurisdictions. Based on our analysis of all positive and negative evidence during the year ended July 31, 2025, we continue to maintain a valuation allowance for our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criterion. We expect future research and development tax credit generation in California to exceed our ability to use the existing tax credits.
Our U.S. federal and state deferred tax assets largely consist of capitalized research expenditures and accelerated recognition of deferred revenue for tax purposes. U.S. tax carryforwards (including net operating losses and tax credits) are expected to be fully utilized to the extent allowable by law. Our U.K. deferred tax assets largely consist of basis differences in intangible assets and related net operating losses expected to be utilized in the future.
As of July 31, 2025, we had federal, state, and foreign net operating loss carryforwards of approximately $129.1 million, $112.8 million, and $2.3 billion, respectively, as reported on our tax returns, available to reduce future taxable income, if any. If not utilized, our federal and state net operating loss carryforwards will expire in various amounts at various dates beginning in the years ending July 31, 2034 and July 31, 2030, respectively. Our foreign net operating loss will carry forward indefinitely.
As of July 31, 2025, we had federal and state research and development tax credit carryforwards of approximately $2.0 million and $340.2 million, respectively, as reported on our tax returns. If not utilized, the federal credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2040. The state credit carryforwards have no expiration.
As of July 31, 2025, we had foreign tax credit carryforwards of $1.7 million as reported on our tax returns. If not utilized, the foreign tax credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2029.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
As of July 31, 2025, we had $572.2 million of unrecognized tax benefits, $274.8 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in California and other assets. As of July 31, 2024, we had $454.4 million of unrecognized tax benefits, $200.1 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States and other assets. We do not expect the amount of unrecognized tax benefits as of July 31, 2025 to materially change over the next 12 months.
We file federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Generally, all years remain subject to adjustment due to our net operating loss and credit carryforwards. We currently have ongoing tax audits in various jurisdictions and at various times. The primary focus of these audits is, generally, profit allocation. The ultimate amount and timing of any future settlements cannot be predicted with reasonable certainty.
We recognize both interest and penalties associated with uncertain tax positions as a component of income tax expense. During the years ended July 31, 2025, 2024, and 2023, we recognized an income tax expense of $42.4 million, an income tax expense of $5.8 million, and a net income tax benefit of $4.8 million related to interest and penalties, respectively. We had accrued interest and penalties on our consolidated balance sheets related to unrecognized tax benefits of $53.3 million and $10.9 million as of July 31, 2025 and 2024, respectively.
The following table presents a reconciliation of the beginning and ending amount of our gross unrecognized tax benefits (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Unrecognized tax benefits at the beginning of the period | $ | 454.4 | $ | 360.0 | $ | 414.0 | |||||||||||
| Additions for tax positions taken in prior years | 10.4 | 1.9 | 7.8 | ||||||||||||||
| Reductions for tax positions taken in prior years | (11.1) | (19.8) | (99.8) | ||||||||||||||
| Additions for tax positions taken in the current year | 118.5 | 112.3 | 66.9 | ||||||||||||||
| Reduction relating to audit settlement | — | — | (28.9) | ||||||||||||||
| Unrecognized tax benefits at the end of the period | $ | 572.2 | $ | 454.4 | $ | 360.0 | |||||||||||
During the years ended July 31, 2025 and 2024, increases in uncertain tax positions were primarily due to our credits and incentives and intercompany transactions.
As of July 31, 2025, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S. investment in foreign subsidiaries. However, there could be local withholding taxes due to various foreign countries if certain lower tier earnings are distributed. Withholding taxes that would be payable upon remittance of these lower tier earnings are not material.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Aug 29, 2025 | Showing above |
| 2024 | Sep 6, 2024 | |
| 2023 | Sep 1, 2023 | |
| 2022 | Sep 6, 2022 | |
| 2021 | Sep 3, 2021 | |
| 2020 | Sep 4, 2020 | |
| 2019 | Sep 9, 2019 | |
| 2018 | Sep 13, 2018 | |
| 2017 | Sep 7, 2017 | |
| 2016 | Sep 8, 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.