Income Taxes

In 2014, 2013, and 2012, the significant components of income tax expense consisted of the following (in thousands of dollars):



	2014			2013			2012
Income before taxes:
Domestic	$	21,976		$	45,093		$	36,060
Foreign	171,045			140,600			123,376
Total	$	193,021		$	185,693		$	159,436
Income tax expense—current:
Domestic	$	22,220		$	8,131		$	21,536
State and local	6,946			8,301			1,020
Foreign	37,762			29,602			29,775
Sub-total	66,928			46,034			52,331
Income tax expense (benefit)—deferred:
Domestic	5,406			2,543			800
State and local	6,314			(241		)	(2,016		)
Foreign	(2,887		)	7,366			280
Sub-total	8,833			9,668			(936		)
Total	$	75,761		$	55,702		$	51,395

In 2014, 2013, and 2012, income tax expense related to equity in earnings of investees was approximately $0.6 million, $0.01 million, and $0.1 million, respectively.

As of December 31, 2014 and 2013, the components of Deferred Tax Assets and Deferred Tax Liabilities consisted of the following (in thousands of dollars):



December 31	2014			2013
Deferred Tax Assets:
Asset provisions and liabilities	$	10,452		$	13,658
Inventory writedowns	8,756			6,235
Tax loss and credit carryforwards	2,748			19,215
Difference between book and tax basis of depreciable and amortizable assets	18,737			21,093
Share-based payments and deferred compensation	36,494			37,737
Sub-total	77,187			97,938
Valuation allowance	(2,224		)	(3,227		)
Total deferred tax assets	74,963			94,711
Deferred Tax Liabilities:
Difference between book and tax basis of other assets and liabilities	3,323			6,664
Pension obligations	3,921			4,391
Basis differences in equity method investments	3,884			4,745
Undistributed earnings of foreign subsidiaries	16,432			26,462
Total deferred tax liabilities	27,560			42,262
Total	$	47,403		$	52,449

The presentation of certain prior year amounts in the table above has been updated to conform to the current year presentation.

As of December 31, 2014, Sotheby’s had deferred tax assets related to various foreign and state loss and tax credit carryforwards totaling $2.7 million that begin to expire in 2016.

As of December 31, 2014 and 2013, Sotheby’s had provided valuation allowances of $2.2 million and $3.2 million, respectively, for foreign loss carryforwards. During 2014, the valuation allowance decreased by approximately $0.6 million related to the utilization of certain deferred tax assets of Sotheby’s foreign subsidiaries that were not expected to be realized and by $0.4 million due to the change in foreign exchange rates on the existing valuation allowance balances of the same foreign subsidiaries.

In 2014, 2013, and 2012, the effective income tax rate varied from the statutory tax rate as follows:



	2014		2013		2012
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	2.5	%	2.8	%	(0.1	%)
Foreign taxes at rates different from U.S. rates	(13.5	%)	(11.1	%)	(9.7	%)
Tax effect of undistributed earnings of foreign subsidiaries	9.6	%	11.0	%	0.0	%
Deemed income from foreign subsidiaries, net	3.0	%	2.2	%	2.8	%
Valuation allowance	(0.2	%)	(4.5	%)	2.6	%
Effect of enacted tax legislation	2.0	%	0.1	%	0.0	%
Worthless stock deduction	0.0	%	(3.7	%)	0.0	%
Other	0.8	%	(1.8	%)	1.6	%
Effective income tax rate	39.2	%	30.0	%	32.2	%

The presentation of certain prior year percentages in the table above have been updated to conform to the current year presentation.

The comparison of the effective income tax rate between periods is significantly influenced by the level and mix of earnings and losses by taxing jurisdiction, foreign tax rate differentials, the relative impact of permanent book to tax differences (e.g., non-deductible expenses) on pre-tax results by taxing jurisdiction, new tax legislation, and changes in valuation allowances and tax reserves.

Sotheby's effective income tax rate was approximately 39.2% in 2014, compared to 30% in 2013. The increase in the 2014 effective income tax rate over the prior year was caused by two income tax benefits that were recognized in 2013 for which there were no comparable benefits in 2014. In the fourth quarter of 2013, a $10 million income tax benefit was recorded related to the reversal of a valuation allowance recorded against foreign tax credits which management determined were more likely than not to be realized as a result of a repatriation of earnings from Sotheby’s foreign subsidiaries, as discussed in the following paragraph. In the second quarter of 2013, a $6.8 million income tax benefit was recorded, net of a related liability recognized for uncertain tax benefits, for a worthless stock deduction Sotheby’s claimed on its 2013 U.S. federal income tax return related to the tax basis of a foreign subsidiary. Also adversely impacting the comparison to the prior year is $3.9 million of income tax expense that was recognized in 2014 to reduce the value of certain deferred tax assets to an amount that will be recognized in the future as a result of the enactment of the New York State 2014-2015 Budget Act.

In both 2014 and 2013, Sotheby’s effective income tax rate was increased as the result of deferred tax liabilities recorded for incremental income taxes on the undistributed earnings of foreign subsidiaries. Beginning in 2014, based on its projections and planned uses of foreign cash balances, management determined that the current earnings of Sotheby's foreign subsidiaries would not be indefinitely reinvested outside of the U.S., and a net deferred tax liability of $16.4 million has been recorded on those earnings. The $16.4 million net liability consists of $18.6 million of income tax expense that was charged against net income and a $2.2 million income tax benefit recorded in other comprehensive income. In 2013, net income tax expense of $8.7 million was recorded as a result of management’s decision to repatriate $250 million of accumulated earnings from certain of Sotheby’s foreign subsidiaries to help fund a $300 million special dividend that was paid to shareholders in March 2014. This decision was based on the conclusions reached in January 2014 as a result of the Capital Allocation and Financial Policy Review (see Note 13). The income tax expense that was recognized in the fourth quarter of 2013 as a result of this planned repatriation of foreign earnings was recorded net of the reversal of a valuation allowance against certain foreign tax credits which management determined were more likely than not to be realized as a result of the planned repatriation.

Sotheby’s has generally considered the unremitted earnings of its foreign subsidiaries to be indefinitely reinvested and does not intend to change this position with respect to historical earnings through December 31, 2013, with the exception of the $250 million repatriation that occurred in the first quarter of 2014. As discussed above, a net tax liability of $16.4 million has been recorded on Sotheby’s 2014 foreign earnings as these earnings are not considered to be indefinitely reinvested. As of December 31, 2014, income taxes have not been provided on approximately $500 million of foreign earnings, which represents the balance of undistributed earnings that are intended to be indefinitely reinvested outside of the U.S. A determination of the amount of unrecognized deferred income tax liabilities on these earnings is subject to many variables, such as the amount of foreign tax credits that may be available, if any, and is dependent on circumstances existing if and when remittance occurs. If these earnings were not indefinitely reinvested outside of the U.S., and assuming no use of foreign tax credits in the U.S., a deferred tax liability of approximately $175 million would be recognized for U.S. federal income taxes.

Total net income tax payments during 2014, 2013, and 2012 were $60.3 million, $36.2 million, and $61.4 million, respectively.