Income Taxes

AB is a private partnership for federal income tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AB is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AB, which are subject to federal, state and local income taxes, generally are included in the filing of a consolidated federal income tax return with separate state and local income tax returns being filed. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located.

In order to preserve AB’s status as a private partnership for federal income tax purposes, AB Units must not be considered publicly traded. The AB Partnership Agreement provides that all transfers of AB Units must be approved by AXA Equitable Life Insurance Company (a subsidiary of EQH, “AXA Equitable”) and the General Partner; AXA Equitable and the General Partner approve only those transfers permitted pursuant to one or more of the safe harbors contained in the relevant Treasury regulations. If AB Units were considered readily tradable, AB’s net income would be subject to federal and state corporate income tax, significantly reducing its quarterly distributions to AB Holding. Furthermore, should AB enter into a substantial new line of business, AB Holding, by virtue of its ownership of AB, would lose its status as a “grandfathered” publicly-traded partnership and would become subject to corporate income tax, which would reduce materially AB Holding’s net income and its quarterly distributions to AB Holding Unitholders.

The 2017 Tax Act was enacted in the U.S. on December 22, 2017. The 2017 Tax Act reduced the U.S. federal corporate income tax rate to 21% from 35%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings. In 2017, we recorded provisional amounts for certain enactment-date effects of the 2017 Tax Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects. In 2018, we completed our assessment and recorded adjustments to our initial provisional amounts.

The provisions of the 2017 Tax Act that had a significant impact on our income tax balance sheet and income statement accounts are as follows:

•

We recorded an approximate $22.5 million charge to our 2017 income tax expense to account for deemed repatriation of foreign earnings. As a result of our completed analysis in 2018, we recorded an additional $1.1 million to our income tax expense. Management elected to pay the federal transition tax over a period of eight years as permitted by the 2017 Tax Act. During 2018, we paid $1.8 million of the $23.6 million transition tax. The remaining $21.8 million is recorded to income tax payable on our consolidated statement of financial condition and will be paid out over the next seven years.


•	We recorded an approximate $3.3 million charge to our 2017 income tax expense to reduce our net deferred tax assets due to the lower corporate income tax rate. We completed our analysis in 2018 and determined no adjustment was necessary.


•	We analyzed the impact of the tax on global intangible low-taxed income (“GILTI”) and elected to treat GILTI as a period cost. In 2018, management's estimate of tax on GILTI income was fully offset by available foreign tax credits. As a result of our completed analysis in 2018, there was no period cost required.


•	We analyzed the impact of the base erosion anti-abuse tax (“BEAT”), which taxes certain payments between a U.S. corporation and its foreign subsidiaries. Based on current guidance in 2018, it was determined that we will not be subject to BEAT.


•	We recorded a $2.3 million charge to our 2018 income tax expense as a result of our evaluation of the reversal of the indefinite reinvestments assertions for certain non-U.S. corporate subsidiaries.

Earnings before income taxes and income tax expense consist of:



	Years Ended December 31,
	2018			2017		2016
	(in thousands)
Earnings before income taxes:
United States	$	672,221		$	634,515	$	614,261
Foreign	153,093			139,395		108,904
Total	$	825,314		$	773,910	$	723,165
Income tax expense:
Partnership UBT	$	5,251		$	2,986	$	5,363
Corporate subsidiaries:
Federal	(4,030		)	18,079		291
State and local	2,888			803		1,064
Foreign	36,529			29,365		28,158
Current tax expense	40,638			51,233		34,876
Deferred tax (benefit)	5,178			1,877		(6,557		)
Income tax expense	$	45,816		$	53,110	$	28,319

The principal reasons for the difference between the effective tax rates and the UBT statutory tax rate of 4.0% are as follows:



	Years Ended December 31,
	2018					2017					2016
	(in thousands)
UBT statutory rate	$	33,012		4.0	%	$	30,956		4.0	%	$	28,927		4.0	%
Corporate subsidiaries' federal, state, and local	1,522			0.2		2,558			0.3		5,820			0.8
Foreign subsidiaries taxed at different rates	30,689			3.7		25,406			3.3		23,646			3.3
2017 Tax Act	1,155			0.1		25,846			3.3		—			—
FIN 48 release	(5,177		)	(0.6	)	(3,318		)	(0.4	)	—			—
UBT business allocation percentage rate change	2,657			0.3		—			—		—			—
Deferred tax and payable write-offs	2,932			0.4		(9,542		)	(1.2	)	(14,883		)	(2.1	)
Foreign outside basis difference	2,273			0.3		—			—		—			—
Effect of ASC 740 adjustments, miscellaneous taxes, and other	(2,521		)	(0.3	)	1,903			0.2		2,254			0.3
Income not taxable resulting from use of UBT business apportionment factors and effect of compensation charge	(20,726		)	(2.5	)	(20,699		)	(2.6	)	(17,445		)	(2.4	)
Income tax expense and effective tax rate	$	45,816		5.6		$	53,110		6.9		$	28,319		3.9

We recognize the effects of a tax position in the financial statements only if, as of the reporting date, it is “more likely than not” to be sustained based on its technical merits and their applicability to the facts and circumstances of the tax position. In making this assessment, we assume that the taxing authority will examine the tax position and have full knowledge of all relevant information.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Years Ended December 31,
	2018			2017			2016
	(in thousands)
Balance as of beginning of period	$	8,478		$	12,596		$	12,004
Additions for prior year tax positions	—			—			—
Reductions for prior year tax positions	—			(1,849		)	—
Additions for current year tax positions	—			—			592
Reductions for current year tax positions	—			—			—
Reductions related to closed years/settlements with tax authorities	(4,585		)	(2,269		)	—
Balance as of end of period	$	3,893		$	8,478		$	12,596

The amount of unrecognized tax benefits as of December 31, 2018, 2017 and 2016, when recognized, is recorded as a reduction to income tax expense and reduces the company’s effective tax rate.

Interest and penalties, if any, relating to tax positions are recorded in income tax expense on the consolidated statements of income. The total amount of interest expense (credit) recorded in income tax expense during 2018, 2017 and 2016 was $0.1 million, $0.3 million and $0.7 million, respectively. The total amount of accrued interest recorded on the consolidated statements of financial condition as of December 31, 2018, 2017 and 2016 is $0.3 million, $0.7 million and $1.7 million, respectively. There were no accrued penalties as of December 31, 2018, 2017 or 2016.

Generally, the company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for any year prior to 2014, except as set forth below.

During the third quarter of 2018, the City of New York notified us of an examination of AB's UBT returns for the years 2013 through 2016. The examination is ongoing.

As a result of the expiration of the statute of limitations on an acquisition goodwill reserve, the full gross unrecognized tax benefit of approximately $4.6 million was released. The company also released the full accrued interest amount of $0.6 million.

Currently, there are no income tax examinations at our significant non-U.S. subsidiaries. Years that remain open and may be subject to examination vary under local law, and range from one to seven years.

At December 31, 2018, it is not reasonably possible that any of our unrecognized tax benefits will change within the next twelve months due to completion of tax authority exams.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of significant items comprising the net deferred tax asset (liability) is as follows:



	December 31,
	2018			2017
	(in thousands)
Deferred tax asset:
Differences between book and tax basis:
Benefits from net operating loss carryforwards	$	2,518		$	3,405
Long-term incentive compensation plans	22,342			21,204
Investment basis differences	3,606			5,967
Depreciation and amortization	1,248			2,214
Other, primarily accrued expenses deductible when paid	3,903			3,601
	33,617			36,391
Less: valuation allowance	(490		)	(497		)
Deferred tax asset	33,127			35,894
Deferred tax liability:
Differences between book and tax basis:
Intangible assets	6,852			6,286
Investment in foreign subsidiaries	1,653			—
Other	1,758			1,007
Deferred tax liability	10,263			7,293
Net deferred tax asset	$	22,864		$	28,601

Valuation allowances of $0.5 million were established as of both December 31, 2018 and 2017, primarily due to realizing certain deferred compensation awards and the uncertainty of net operating loss ("NOL") carryforwards given the future losses expected to be incurred by the applicable subsidiaries. We had NOL carryforwards at December 31, 2018 and December 31, 2017 of approximately $32.4 million and $38.7 million, respectively, in certain foreign locations with an indefinite expiration.

The net deferred tax asset is included in other assets on the consolidated statement of financial condition. Management has determined that realization of the net deferred tax asset is more likely than not based on anticipated future taxable income.

The company provides income taxes on the unremitted earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are indefinitely reinvested outside the United States. As of December 31, 2018, $28.6 million of undistributed earnings of non-U.S. corporate subsidiaries were permanently invested outside the U.S. At existing applicable income tax rates, additional taxes of approximately $6.0 million would need to be provided if such earnings are remitted.