13. Income Taxes

Income before income taxes and noncontrolling interest is as follows for the years ended December 31, 2017, 2016 and 2015:


	December 31,
	2017		2016		2015
(in thousands)
U.S. operations	$	70,484	$	138,950	$	154,947
Non-U.S. operations		42,680		40,641		60,982
	$	113,164	$	179,591	$	215,929

The provision for income taxes consists of the following for the years ended December 31, 2017, 2016 and 2015.


	For the years ended
	December 31,
(in thousands)	2017		2016		2015
Current provision (benefit)
Federal	$	(9,991)	$	2,690	$	7,584
State and Local		65		38		108
Foreign		1,219		5,210		6,762
Deferred provision (benefit)
Federal		106,415		13,547		3,345
State and Local		(3,380)		194		48
Foreign		(62)		(428)		592
Provision for income taxes	$	94,266	$	21,251	$	18,439

The Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, and eliminating certain deductions. The Company has not completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals. However, the Company has reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. The Company recorded a provisional deferred tax expense for the impact of the 2017 Tax Act of approximately $90.6 million, which is primarily composed of the remeasurement of federal net deferred tax assets as a result of the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. The Company expects to complete its analysis of the 2017 Tax Act by the third quarter of 2018, which is within the one-year measurement period prescribed by SEC Staff Accounting Bulletin No. 118. As the Company completes its analysis, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made.

As discussed in Note 6 “Tax Receivable Agreements” the Company revalued its tax receivable agreement obligation as a result of this decrease in the U.S. corporate income tax rate and recorded a gain of $86.6 million, which is reported in Other, net on the consolidated statements of operations for the year ended December 31, 2017. This gain does not impact the Company’s provision for income taxes.

The reconciliation of the tax provision at the U.S. Federal Statutory Rate to the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 is as follows:


	December 31,
	2017		2016		2015
(in thousands, except percentages)
Tax provision at the U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Less: rate attributable to noncontrolling interest	(19.1)		(24.4)		(27.8)
State and local taxes, net of federal benefit	(1.9)		1.3		1.4
Impact of 2017 Tax Act on deferred tax assets	80.1		—		—
Impact of 2017 Tax Act on tax receivable agreement obligation	(12.9)		—		—
Non-deductible expenses, net	1.9		—		—
Other, net	0.2		—		—
Provision for income taxes	83.3	%	11.9	%	8.6	%

The components of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:


	December 31,
(in thousands)	2017		2016
Deferred income tax assets
Tax Receivable Agreement	$	101,594	$	185,677
Share-based compensation		5,213		5,664
Intangibles		14,547		—
Fixed assets and other		13,425		2,518
Tax credits and net operating loss carryforwards		50,867		—
Less: Valuation allowance on net operating loss carryforwards and tax credits		(43,544)		—
Total deferred income tax assets	$	142,102	$	193,859

Deferred income tax liabilities
Intangibles		16,342		—
Fixed assets		—		84
Total deferred income tax liabilities	$	16,342	$	84

Subsequent to consummation of the Reorganization Transactions and the IPO, the Company is subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, for years ended December 31, 2017, 2016 and 2015, the income attributable to these noncontrolling interests is reported in the consolidated statements of comprehensive income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as it is the obligation of the individual partners. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.

Included in other assets on the consolidated statements of financial condition at December 31, 2017 and 2016 are current income tax receivables of $115.2 million and $5.8 million, respectively. The balance at December 31, 2017 primarily comprises the income tax benefit of KCG net operating losses that were generated prior to the Acquisition of KCG and that are eligible to be carried back by the Company.

Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the IPO (Note 6 “Tax Receivable Agreements” and Note 15 “Capital Structure”) and the Acquisition of KCG (Note 3 “Acquisition of KCG Holdings, Inc”), differences in the valuation of financial assets and liabilities, and in connection with other temporary differences arising from the deductibility of compensation and depreciation expenses in different time periods for book and income tax return purposes.

There are no expiration dates on the deferred tax assets. The Company’s deferred tax asset at December 31, 2017 includes an alternative minimum tax credit carryforward of $0.6 million, which can be either be refunded or applied against future income tax liability pursuant to the 2017 Tax Act. The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. As a result of the Acquisition of KCG, the Company has non-U.S. net operating losses of $231.8 million at December 31, 2017 and has recorded a related deferred tax asset of $43.5 million. A full valuation allowance was also recorded against this deferred tax asset at December 31, 2017 as it is more likely than not that this deferred tax asset will not be realized. No valuation allowance against the remaining deferred taxes was recorded as of December 31, 2017 and 2016 because it is more likely than not that these deferred tax assets will be fully realized.

The Company is subject to taxation in U.S. federal, state, local and foreign jurisdictions. As of December 31, 2017, the Company’s tax years for 2013 through 2016 and 2010 through 2017 are subject to examination by U.S. and non-U.S. tax authorities, respectively. As a result of the Acquisition of KCG, the Company has assumed any KCG tax exposures. KCG is currently subject to U.S. Federal income tax examinations for 2013 through 2017, and to non-U.S. income tax examinations for the tax years 2007 through 2016. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2016. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the financial condition, results of operations and cash flows.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income or loss before income taxes and noncontrolling interest. Penalties, if any, are recorded in operations and administrative expense and interest received or paid is recorded in other, net or operations and administrative expense in the consolidated statement of comprehensive income

The Company had $7.3 million of unrecognized tax benefits as of December 31, 2017, all of which would affect the Company’s effective tax rate if recognized. The Company has determined that there are no uncertain tax positions that would have a material impact on the Company’s financial position as of December 31, 2016.

The following table reconciles the beginning and ending amount of unrecognized tax benefits:


	December 31,
(in thousands)	2017
Balance at December 31, 2016	$	—
Increase from Acquisition of KCG		7,232
Decreases based on tax positions related to prior period		—
Increase based on tax positions related to current period		68
Balance at December 31, 2017	$	7,300