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 income are set forth below:



	For The Years Ended December 31,
	2013			2012			2011
	(in thousands)
Current taxes:
U.S. federal	$	19,782		$	34,752		$	13,419
State and local	1,709			4,747			2,848
Foreign	10,743			7,116			13,357
Total current tax expense	32,234			46,615			29,624
Deferred taxes:
U.S. federal	(8,711		)	(15,119		)	(7,501		)
State and local	(265		)	(796		)	(617		)
Foreign	1,266			(2,317		)	2,580
Total deferred tax (benefit) expense	(7,710		)	(18,232		)	(5,538		)
Total tax expense	$	24,524		$	28,383		$	24,086

The Company's non-U.S. subsidiary earnings are not considered to be permanently reinvested outside of the United States, and under the requirements of ASC 740, the Company provides residual U.S. deferred tax to these earnings to the extent they cannot be repatriated in a tax-free manner. In 2013 and 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,
	2013			2012
	(in thousands)
Deferred tax assets:
Compensation and benefits	$	39,991		$	38,445
Depreciation and amortization	3,077			2,883
Unrealized loss on investments	205			2,322
Cumulative translation adjustment	5,266			—
Operating loss carryforwards	3,447			4,310
Capital loss carryforwards	2,845			789
Foreign tax credit carryforwards	4,252			6,206
Other financial accruals	57			168
Valuation allowances	(4,938		)	(7,611		)
Total deferred tax assets	54,202			47,512
Deferred tax liabilities:
Unrealized gain on investments	—			4,302
Depreciation and amortization	—			125
Cumulative translation adjustment	—			3,726
Intangible asset acquired, net of amortization	—			199
Repatriation of foreign earnings	2,159			545
Other financial accruals	186			348
Total deferred tax liabilities	2,345			9,245
Net deferred tax asset	$	51,857		$	38,267

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 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, therefore, a valuation allowance has not been established for these deferred tax assets. At December 31, 2013, the Company had operating foreign loss carryforwards, which in aggregate totaled $7.8 million. Operating foreign loss carryforwards of $1.8 million may be carried forward for seven to eight years and the remaining $6.0 million may be carried forward for seventeen years and longer.

Due to the Company’s operating loss carryforward position, tax benefits related to share-based payments generally 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, 2013, 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.

In 2013, the Company's subsidiary in the United Kingdom sold its investment in Iridium and realized a capital loss. The Company did not have capital gains in the United Kingdom to offset this capital loss, so it will be carried forward and added to the 2012 capital loss realized from the sale of its interests in GCPE. Capital losses in the United Kingdom may be carried forward indefinitely, but it is more likely than not that the Company will not generate capital gains in this jurisdiction to offset these capital losses. As such, the Company established valuation allowances of $2.8 million and $1.9 million for the tax years ending December 31, 2013 and 2012, 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 $4.3 million and $6.2 million as of December 31, 2013 and 2012, respectively, which can be utilized against the repatriation of earnings from foreign jurisdictions. The repatriation of all foreign earnings as of December 31, 2013 would result in $2.2 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, 2013 and 2012, the Company has established valuation allowances of $2.1 million and $5.7 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 income taxes receivable of $1.5 million included in other receivables in the consolidated statements of financial condition as of December 31, 2013, and none as of December 31, 2012. Included in current income taxes payable in the consolidated statements of financial condition are current taxes payable of $15.3 million as of December 31, 2013 and $15.8 million as of December 31, 2012.

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, 2013, 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, 2013, and determined that there was no requirement to accrue any material 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,
	2013		2012		2011
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	1.3		3.6		2.1
Benefits and taxes related to foreign operations	(4.1	)	(1.4	)	(3.3	)
Valuation allowances	1.5		2.7		0.6
Sale of merchant banking business	(0.1	)	(0.1	)	(0.4	)
Other	0.8		0.5		1.1
Effective income tax rate	34.4	%	40.3	%	35.1	%