16. TAXATION

Effective January 1, 2014, the Company accounts for income taxes using the estimated annual effective tax rate. The Company makes the best estimate of the annual effective tax rate expected to be applicable for the full fiscal year and applies the rate to the year-to-date income. Discrete tax adjustments are recorded in the quarter in which the event occurs.

Earnings before income taxes includes the following components:


	Three Months Ended March 31,
	2014		2013
Domestic (Bermuda)	$	7,010	$	9,934
Foreign		33,678		10,895

Total	$	40,688	$	20,829

Tax expense (benefit) for income taxes is comprised of:


	Three Months Ended March 31,
	2014			2013
Current:
Domestic (Bermuda)	$	—		$	—
Foreign		10,267			14,279

		10,267			14,279

Deferred:
Domestic (Bermuda)		—			—
Foreign		(2,991	)		(6,435	)

		(2,991	)		(6,435	)

Total tax expense	$	7,276		$	7,844

Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.

The Company has operating subsidiaries and branch operations in the United Kingdom, Australia, the United States and Europe and is subject to federal, foreign, state and local taxes in those jurisdictions. In addition, certain distributions from some foreign sources may be subject to withholding taxes.

The expected income tax provision for the foreign operations computed on pre-tax income at the weighted-average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.

The actual income tax rate differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:


	2014			2013
Earnings before income tax	$	40,688		$	20,829

Expected tax rate		0.0	%		0.0	%
Foreign taxes at local expected rates		17.3	%		33.5	%
Change in uncertain tax positions		(5.5	)%		(11.4	)%
Change in valuation allowance		5.7	%		15.3	%
Other		0.4	%		0.3	%

Effective tax rate		17.9	%		37.7	%

The Company has estimated future taxable income of its foreign subsidiaries and has provided a valuation allowance in respect of those loss carryforwards where it does not expect to realize a benefit. The Company has considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance.

The Company had unrecognized tax benefits of $nil million and $2.2 million relating to uncertain tax positions as of March 31, 2014 and December 31, 2013, respectively. During the three months ended March 31, 2014, there were certain reductions to unrecognized tax benefits of $2.2 million due to the expiration of statutes of limitation.

The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2010, 2010 and 2007, respectively.

Because the Company operates in many jurisdictions, its net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which it operates. The Company cannot predict what, if any, legislation, will actually be proposed or enacted, or what the effect of any such legislation might be on the Company’s financial condition and results of operations.