Income Taxes

The Company is subject to U.S. federal, foreign, state and local corporate income taxes.

The components of the provision for income taxes reflected on the consolidated statements of earnings are set forth below:



	For The Years Ended December 31,
	2012			2011			2010
	(in thousands)
Current taxes:
U.S. federal	$	34,752		$	13,419		$	15,803
State and local	4,747			2,848			(83		)
Foreign	7,116			13,357			6,795
Total current tax expense	46,615			29,624			22,515
Deferred taxes:
U.S. federal	(15,119		)	(7,501		)	(1,226		)
State and local	(796		)	(617		)	941
Foreign	(2,317		)	2,580			(2,700		)
Total deferred tax (benefit) expense	(18,232		)	(5,538		)	(2,985		)
Total tax expense	$	28,383		$	24,086		$	19,530

The Company provides tax on its foreign earnings at the U.S. federal tax rate to the extent such rate exceeded the respective foreign rate and does not plan to permanently reinvest its eligible earnings from its foreign affiliates. In 2012, the Company did not incur any additional tax liabilities, net of credits for foreign taxes paid on such earnings, related to this policy.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities as well as operating loss carryforwards. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's net deferred tax assets and liabilities are set forth below:



	As of December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Compensation and benefits	$	38,445		$	38,131
Depreciation and amortization	2,883			2,937
Unrealized loss on investments	2,322			2,168
Operating loss carryforwards	4,310			4,647
Capital loss carryforwards	789			748
Foreign tax credit carryforwards	6,206			4,102
Other financial accruals	168			93
Valuation allowances	(7,611		)	(4,519		)
Total deferred tax assets	47,512			48,307
Deferred tax liabilities:
Unrealized gain on investments	4,302			16,994
Depreciation and amortization	125			190
Cumulative translation adjustment	3,726			1,759
Intangible asset acquired, net of amortization	199			1,042
Repatriation of foreign earnings	545			—
Other financial accruals	348			383
Total deferred tax liabilities	9,245			20,368
Net deferred tax asset	$	38,267		$	27,939

Based on the Company's historical taxable income and its expectation for taxable income in the future, management expects that its largest deferred tax asset, which relates principally to compensation expense deducted for book purposes but not yet deducted for tax purposes, will be realized as offsets to (i) the realization of its deferred tax liabilities and (ii) future taxable income.

The Company’s deferred taxes for operating loss carryforwards relate principally to losses incurred in foreign jurisdictions, which either were profitable in prior years or were profitable in the current year. When assessing the need for a valuation allowance, management evaluates each foreign jurisdiction separately and considers items such as estimated future taxable income, cost bases, and other various factors. Based on all available information, the Company has determined that it is more likely than not that it will realize the benefit of these operating loss carryforwards in future periods, so a valuation allowance has not been established for these deferred tax assets. At December 31, 2012, the Company had operating foreign loss carryforwards, which in aggregate totaled $11.4 million. The losses may be carried forward for twenty years and longer.

Due to the Company’s operating loss carryforward position, tax benefits normally booked through equity accounts may not be recorded until such time as the benefit is realized as a reduction in the Company’s actual taxes paid. As of December 31, 2012, the current taxes payable would have been decreased by $0.8 million if the Company had been able to realize these benefits in its filed tax returns.

The Company utilized all of its U.S. capital loss carryforwards by December 31, 2012. The Company realized additional capital losses in the United Kingdom related to the sale of all of its interests in GCP Europe in December 2012. Also, based on the current value of its investment in Iridium by its subsidiary in the United Kingdom, it is more likely than not the Company will realize a capital loss on this investment when it is sold as part of its planned disposal. (See "Note 4 - Investments - Other Investments"). Similar to the tax rules in the U.S., capital losses in the United Kingdom may only be utilized by netting against realized capital gains in the same jurisdiction. Capital losses in the United Kingdom may be carried forward indefinitely. However, since the Company no longer has any current or expected future investments in the United Kingdom that are likely to generate capital gains, the Company has established valuation allowances of $1.9 million and $0.4 million for the tax years ending December 31, 2012 and 2011, respectively, against the deferred tax asset related to its capital losses in the United Kingdom until such time as it determines it is more likely than not that the tax benefit of this deferred tax asset will be realized.

The Company has U.S. foreign tax credit carryforwards of $6.2 million as of December 31, 2012 that can be utilized against the repatriation of earnings from foreign jurisdictions. The repatriation of all foreign earnings as of December 31, 2012 would result in $0.5 million of additional federal tax. Although the Company expects to repatriate foreign earnings in the future, it is not practicable to estimate the U.S. tax effect of future repatriations of its foreign earnings. As such, as of December 31, 2012 and 2011, the Company has established valuation allowances of $5.7 million and $4.1 million, respectively, against the portion of its U.S. foreign tax credit carryforward which may not be utilized until it can determine it is more likely than not that the tax benefit of this deferred tax asset will be realized. These foreign tax credit carryforwards will expire in various years through 2022 if not utilized.

Any gain or loss resulting from the translation of deferred taxes for foreign affiliates is included in the foreign currency translation adjustment incorporated as a component of other comprehensive income, net of tax, in the consolidated statements of changes in equity. There are no income taxes receivable included in other receivables in the consolidated statements of financial condition as of December 31, 2012 or December 31, 2011. Included in accounts payable and accrued expenses in the consolidated statements of financial condition are current taxes payable of $15.8 million as of December 31, 2012 and $7.9 million as of December 31, 2011.

The Company is subject to the income tax laws of the United States, its states and municipalities, and those of the foreign jurisdictions in which the Company operates. These laws are complex, and the manner which they apply to the taxpayer's facts is sometimes open to interpretation. Management must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. In the normal course of business, the Company may be under audit in one or more of its jurisdictions in an open tax year for that particular jurisdiction. As of December 31, 2012, the Company does not expect any material changes in its tax provision related to any outstanding current or future audits.

The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. The Company performed a tax analysis as of December 31, 2012, and determined that there was no requirement to accrue any additional liabilities. Also, when present as part of the tax provision calculation, interest and penalties are reported as interest expense and other operating expenses in the consolidated statements of income.

A reconciliation of the statutory U.S. federal income tax rate of 35.0% to the Company’s effective income tax rate is set forth below:



	For the Years Ended December 31,
	2012		2011		2010
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%
Increase related to state and local taxes, net of U.S. income tax benefit	3.6		2.1		1.0
Benefits and taxes related to foreign operations	(1.4	)	(3.3	)	1.4
Valuation allowances	2.7		0.6		—
Sale of merchant banking business	(0.1	)	(0.4	)	(0.7	)
Other	0.5		1.1		(0.6	)
Effective income tax rate before noncontrolling interests	40.3		35.1		36.1
Noncontrolling interests	—		—		(3.0	)
Effective income tax rate after noncontrolling interests	40.3	%	35.1	%	33.1	%