Income Taxes

12 Months Ended

Dec. 31, 2019

Note 15 — Income Taxes

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

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


	For the Years Ended December 31,
	2019		2018		2017
	(in thousands)
Current taxes:
U.S. federal	$	2,868	$	1,868	$	8,792
State and local	410		1,937		1,181
Foreign	4,982		9,968		1,786
Total current tax expense	8,260		13,773		11,759
Deferred taxes:
U.S. federal	293		202		14,626
State and local	(534)		50		795
Foreign	(574)		5,183		(827)
Total deferred tax (benefit) expense	(815)		5,435		14,594
Total tax expense	$	7,445	$	19,208	$	26,353

The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for financial accounting and reporting for income taxes. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. These deferred taxes are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Changes in tax laws and accounting pronouncements enacted in the year ended December 31, 2017 significantly affected the Company’s income tax provision in subsequent years.

Effective in 2017, the Company was subject to a new accounting pronouncement which required it to record a charge or benefit in its income tax provision for the tax effect of the difference between the grant price fair value of RSUs and the fair value of such awards at the time of vesting in addition to the income tax benefit for the tax effect of dividend payments on restricted stock units.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted making significant changes to U.S. corporate income tax laws by, among other things, lowering the corporate income tax rate from 35% to 21% beginning in 2018, imposing a one-time repatriation tax in the current year for the deemed repatriation of earnings of foreign subsidiaries previously tax deferred before the effective date of the legislation, and implementing a territorial-type tax system with a minimum tax for certain foreign earnings starting in 2018. Although the reduction in the corporate income tax rate was not effective until after the year ended December 31, 2017, the legislation required the Company to revalue its deferred tax assets and liabilities and charge to deferred tax expense the future impact of the lower corporate tax rate as of the effective date of the legislation. In accordance with ASC 740, this revaluation adjustment included the tax effect related to the change in corporate tax rates for foreign currency translation adjustments that had previously been accounted for as a tax adjustment in other comprehensive income in the consolidated statements of changes in stockholders’ equity. The effect of the revaluation of the Company’s deferred tax assets and liabilities resulted in a net charge of $15.4 million for the year ended December 31, 2017. Despite having significant tax deferred foreign earnings at the effective date of the legislation, the one-time repatriation tax charge for previously deferred earnings of foreign subsidiaries did not result in a charge in the tax provision for the year ended December 31, 2017, because the calculation of the deemed repatriation allows the offset of cumulative foreign earning by jurisdiction against cumulative foreign losses of other jurisdictions. The impact of the implementation of this territorial-type tax system did not have a significant impact in the income tax provisions for the tax years ended December 31, 2019 and is not expected to have a material impact in future years. As such, in order to better align its structure and operations with these new tax laws, the Company no longer intends to indefinitely reinvest its non-U.S. subsidiary earnings outside of the United States. In addition, the TCJA eliminated the performance award exception related to executive compensation, making certain compensation paid to covered employees non-deductible in current and future periods.

Effective in 2019, the Company adopted ASU No. 2016-02, Leases, requiring the recognition of lease assets and liabilities for operating leases. As part of the adoption of this new accounting standard, temporary differences are recognized for tax purposes and reflected separately in the balance sheet as deferred lease assets and lease liabilities.

Significant components of the Company’s net deferred tax assets and liabilities are set forth below:


	As of December 31,
	2019		2018
	(in thousands)
Deferred tax assets:
Compensation and benefits	$	21,706	$	19,353
Depreciation and amortization	1,816		1,539

Cumulative translation adjustment	12,235		12,624
Operating loss carryforwards	4,644		5,256
Capital loss carryforwards	1,874		1,909
Lease asset	7,652		—
Other financial accruals	3,760		5,488
Valuation allowances	(2,409)		(2,463)
Total deferred tax assets	51,278		43,706
Deferred tax liabilities:





Lease liability	6,959		—
Other financial accruals	5,045		3,990
Total deferred tax liabilities	12,004		3,990
Net deferred tax asset	$	39,274	$	39,716

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 future taxable income.

The Company’s deferred taxes for operating loss carryforwards relate to losses incurred in foreign jurisdictions. These jurisdictions had been profitable in prior years and the Company believes it is more likely than not they will be profitable in future years. However, management has carefully considered the need for a valuation allowance by evaluating each foreign jurisdiction separately and considering items such as historical and 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 full benefit of these operating loss carryforwards and other deferred tax assets in the majority of its foreign jurisdictions notwithstanding a nominal reserve of $0.5 million due to local tax rules. At December 31, 2019, the Company had foreign operating loss carryforwards, which in aggregate totaled $14.7 million, including the reserved amount. These operating loss carryforwards may be carried forward for six years and longer.

In addition to the valuation allowances against certain foreign operating loss carryforwards, the Company has previously recorded a valuation allowance against a deferred tax asset related to a capital loss carryforward in the United Kingdom. This capital loss was realized from the sale of an investment in the United Kingdom and can be carried forward indefinitely but can only be utilized against capital gain in the same jurisdiction. Since the Company has nominal remaining investments in the United Kingdom and considers it more likely than not that the Company will not generate a capital gain in the United Kingdom, the Company had previously established a full valuation allowance against this related deferred tax asset. As of December 31, 2019, the amount of the deferred tax asset and corresponding valuation allowance for the capital loss carryforward in the United Kingdom remained unchanged from the prior year and is $1.9 million.

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 in 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, 2019, the Company does not expect any material changes in its tax provision related to any current or future audits.

The Company recognizes tax positions in the financial statements only when management believes 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 an analysis of its tax positions as of December 31, 2019, 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 have been reported as other operating expenses in the consolidated statements of operations.

A reconciliation of the statutory U.S. federal income tax rate of 21% in 2019 and 2018 and of 35% in 2017 to the Company’s effective income tax rates is set forth below:


	For the Years Ended December 31,
	2019		2018		2017
U.S. statutory tax rate	21.0	%	21.0	%	35.0	%
Increase related to state and local taxes, net of U.S. income tax benefit	(0.5)		2.6		(499.9)
Benefits and taxes related to foreign operations	8.8		(1.5)		(2,796.3)
Charge related to Global Intangible Low-Taxed Income	2.0		1.3		—
RSU vesting and dividend discrete accounting charge or benefit	6.3		8.0		(486.2)
Charge related to non-deductible compensation	3.3		1.8		(38.7)
Rate change to deferred items related to Tax Cuts and Jobs Act	—		—		(5,193.7)
Other	(0.5)		(0.3)		127.9
Effective income tax rate	40.4	%	32.9	%	(8,851.9)	%

For the year ended December 31, 2017, the rate reconciliation is not meaningful principally as result of the application of various material adjustments related to the TCJA on nominal pre-tax loss for the period.