20.

Income Taxes

The Company’s consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners (see Note 3—“Limited Partnership Interests in BGC Holdings” for discussion of partnership interests) rather than the partnership entity.

The provision for income taxes consisted of the following (in thousands):


	Year Ended December 31,
	2013			2012			2011
Current:
U.S. federal	$	120,806		$	11,316		$	1,292
U.S. state and local		41,635			2,970			1,319
Foreign		1,089			17,849			9,853
UBT		10,625			(361	)		1,572

		174,155			31,774			14,036
Deferred:
U.S. federal		(35,248	)		(6,741	)		2,766
U.S. state and local		(17,344	)		(1,918	)		(645	)
Foreign		(29,532	)		(2,352	)		(294	)
UBT		135			(539	)		136

		(81,989	)		(11,550	)		1,963

Provision for income taxes	$	92,166		$	20,224		$	15,999

The Company recorded tax benefits to contributed capital of approximately $4.7 million related to equity based compensation.

The Company had pre-tax loss from foreign operations of $199.2 million for the year ended December 31, 2013 (primarily related to the Global Partnership Restructuring Program), and pre-tax income from foreign operations of $62.6 million and $41.1 million for the years ended December 31, 2012 and 2011, respectively. The Company had pre-tax income from domestic operations of $464.9 million for the year ended December 31, 2013 (primarily related to the sale of eSpeed), a pre-tax loss from domestic operations of $6.9 million for the year ended December 31, 2012, and pre-tax income from domestic operations of $13.3 million for the year ended December 31, 2011.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse.

Differences between the Company’s actual income tax expense and the amount calculated utilizing the U.S. federal statutory rates were as follows (in thousands):


	Year Ended December 31,
	2013			2012			2011
Federal income tax expense at 35% statutory rate	$	92,970		$	19,508		$	19,025
Non-controlling interest		(87,312	)		2,258			(3,488	)
Incremental impact of foreign taxes compared to federal tax rate		22,093			(7,020	)		(2,446	)
Permanent differences		34,802			6,003			1,801
State and local taxes		16,340			684			438
New York City UBT		10,386			(752	)		1,385
Federal/state tax benefit of research and development credit		(500	)		(500	)		(423	)
UK enacted rate change		3,529			—			—
Other		(142	)		43			(293	)

Provision for income taxes	$	92,166		$	20,224		$	15,999

Significant components of the Company’s deferred tax asset and liability consisted of the following (in thousands):


	Year Ended December 31,
	2013			2012
Deferred tax asset
Fixed assets	$	7,236		$	6,133
Basis difference of investments		12,266			8,772
Deferred compensation		53,987			13,380
Other deferred and accrued expenses		21,393			2,884
Net operating loss and credit carry-forwards		47,210			29,058

Total deferred tax asset (1)		142,092			60,227
Valuation allowance		(20,403	)		(24,288	)

Deferred tax asset, net of valuation allowance		121,689			35,939

Deferred tax liability
Software capitalization		8,374			4,435
Depreciation of fixed assets / Gain on replacements of assets		732			572
Other		394			731

Total deferred tax liability (1)		9,500			5,738

Net deferred tax asset	$	112,189		$	30,201

(1)	Before netting within tax jurisdictions.

The Company has net operating losses in various jurisdictions that will begin to expire in 2014. The Company’s U.S. federal research and development credit carryforward will begin to expire in 2023. The Company’s deferred tax asset and liability are included in the Company’s consolidated statements of financial condition as components of “Other assets” and “Accounts payable, accrued and other liabilities,” respectively.

A reconciliation of the beginning to the ending amount of gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2013 and 2012 is as follows (in thousands):


	2013		2012
Balance, January 1 (excluding interest and penalties of $0.5 million)	$	3,250	$	3,250
Increases for prior year tax positions		—		—
Decreases for prior year tax positions		—		—
Increases for current year tax positions		—		—
Settlements		—		—
Lapse of statute of limitations		—		—

Balance, December 31 (excluding interest and penalties of $0.6 million)	$	3,250	$	3,250

The Company anticipates that the total amount of unrecognized benefits (excluding penalties and interest) will remain unchanged over the next twelve months.

Income taxes are accounted for using the asset and liability method, as prescribed in FASB guidance on Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. As of December 31, 2013, the Company did not have any undistributed foreign pre-tax earnings. It is not practical to determine the amount of additional tax that may be payable in the event these earnings are repatriated. Pursuant to FASB guidance on Accounting for Uncertainty in Income Taxes, the Company provides for uncertain tax positions as a component of income tax expense based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

As of December 31, 2013, the Company had $3.3 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to income tax matters in “Interest expense” and “Other expenses,” respectively, in the Company’s consolidated statements of operations. As of December 31, 2013, the Company had approximately $0.6 million of accrued interest related to uncertain tax positions. During the year ended December 31, 2013, the Company had $70 thousand in charges with respect to interest and penalties.