Income Taxes

Income Tax Provision

The components of our provision for income taxes attributable to continuing operations for the periods presented are as follows (in thousands):



	Years Ended December 31,
	2016			2015			2014
Federal
Current	$	6,412		$	10,551		$	19,545
Deferred	(1,608		)	1,901			(7,609		)
	4,804			12,452			11,936
State and Local
Current	7,014			9,075			13,422
Deferred	(2,026		)	1,158			(4,693		)
	4,988			10,233			8,729
Foreign
Current	10,727			16,656			6,869
Deferred	(17,231		)	(1,720		)	(9,925		)
	(6,504		)	14,936			(3,056		)
Total Provision	$	3,288		$	37,621		$	17,609

A reconciliation of effective income tax for the periods presented is as follows (in thousands):



	Years Ended December 31,
	2016			2015
Pre-tax (loss) income attributable to taxable subsidiaries ^(a)	$	(15,374	)	$	72,343

Federal (benefit) provision at statutory tax rate (35%)	$	(5,380	)	$	25,244
Change in valuation allowance	6,477			9,074
Non-taxable income	(5,399		)	(5,475		)
Non-deductible expense	3,111			6,982
State and local taxes, net of federal benefit	2,749			6,151
Rate differential	892			(10,589		)
Other	838			6,234
Total provision	$	3,288		$	37,621



	Year Ended December 31,
	2014
Pre-tax income attributable to taxable subsidiaries	$	21,131

Federal provision at statutory tax rate (35%)	$	7,396
Recognition of taxable income as a result of the CPA^®:16 Merger^(b)	4,833
State and local taxes, net of federal benefit	2,296
Interest	2,111
Dividend income from Managed REITs	939
Other	893
Tax provision — taxable subsidiaries	18,468
Deferred foreign tax benefit ^(c)	(9,925		)
Current foreign taxes	6,869
Other state and local taxes	2,197
Total provision	$	17,609

__________


(a)	Pre-tax loss attributable to taxable subsidiaries for 2016 was primarily driven by the impairment charges we recognized on international properties during the year (Note 9).


(b)	Represents income tax expense due to a permanent difference from the recognition of deferred revenue as a result of the accelerated vesting of shares previously issued by CPA^®:16 – Global for asset management and performance fees and the payment of deferred acquisition fees in connection with the CPA^®:16 Merger.


(c)	Represents deferred tax benefit associated with basis differences on certain foreign properties acquired.

Deferred Income Taxes

Deferred income taxes at December 31, 2016 and 2015 consist of the following (in thousands):



	At December 31,
	2016			2015
Deferred Tax Assets
Unearned and deferred compensation	$	33,100		$	35,525
Net operating loss and other tax credit carryforwards	31,381			19,553
Basis differences — foreign investments	28,324			6,975
Other	5,560			3,788
Total deferred tax assets	98,365			65,841
Valuation allowance	(27,350		)	(29,746		)
Net deferred tax assets	71,015			36,095
Deferred Tax Liabilities
Basis differences — foreign investments	(123,269		)	(81,058		)
Basis differences — equity investees	(17,282		)	(19,925		)
Deferred revenue	(7,318		)	(8,654		)
Total deferred tax liabilities	(147,869		)	(109,637		)
Net Deferred Tax Liability	$	(76,854	)	$	(73,542	)

Our deferred tax assets and liabilities are primarily the result of temporary differences related to the following:

•

Basis differences between tax and U.S. GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, we assume the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the U.S. GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets;


•	Timing differences generated by differences in the U.S. GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs, straight-line rent, prepaid rents, and intangible assets, as well as unearned and deferred compensation;


•	Basis differences in equity investments represents fees earned in shares recognized under U.S. GAAP into income and deferred for U.S. taxes based upon a share vesting schedule; and


•	Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions, that may be realized in future periods if the respective subsidiary generates sufficient taxable income.

During the second quarter of 2016, we identified and recorded out-of-period adjustments related to adjustments to prior period income tax returns. This adjustment is reflected as a $3.0 million increase in our Provision for income taxes in the consolidated statements of income for the year ended December 31, 2016 (Note 2), and is included in current income tax expense for the year ended December 31, 2016.

As of December 31, 2016 and 2015, our taxable subsidiaries have recorded gross deferred tax assets of $31.4 million and $19.6 million, respectively, in connection with U.S. federal, state and local, and foreign net operating loss and other tax credit carryforwards. The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. If not utilized, our federal and state and local net operating losses will begin to expire in 2034 and our foreign net operating losses will begin to expire in 2017. As of December 31, 2016 and 2015, we recorded a valuation allowance of $27.4 million and $29.7 million, respectively, related to these net operating loss carryforwards and basis difference in U.S. and foreign jurisdictions.

The net deferred tax liability in the table above is comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of $14.0 million and $12.6 million at December 31, 2016 and 2015, respectively, which are included in Other assets, net in the consolidated balance sheets, and other deferred tax liability balances of $90.8 million and $86.1 million at December 31, 2016 and 2015, respectively, which are included in Deferred income taxes in the consolidated balance sheets.

Our taxable subsidiaries recognize 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 following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):



	Years Ended December 31,
	2016			2015
Beginning balance	$	4,304		$	2,055
Addition based on tax positions related to prior years	1,264			1,447
Addition based on tax positions related to the current year	137			1,510
Decrease due to lapse in statute of limitations	(97		)	(572		)
Foreign currency translation adjustments	(22		)	(136		)
Ending balance	$	5,586		$	4,304

At December 31, 2016 and 2015, we had unrecognized tax benefits as presented in the table above that, if recognized, would have a favorable impact on our effective income tax rate in future periods. We recognize interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2016, we had approximately $1.1 million of accrued interest related to uncertain tax positions.

Income Taxes Paid

Income taxes paid were $19.3 million, $49.2 million, and $25.2 million for the years ended December 31, 2016, 2015, and 2014, respectively. Income taxes that would have been paid before the windfall tax benefit associated with stock-based compensation awards were $26.0 million, $61.7 million, and $30.9 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Owned Real Estate Operations

Effective February 15, 2012, we elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT. As a REIT, we expect to derive most of our REIT income from our real estate operations under our Owned Real Estate segment.

Investment Management Operations

We conduct our investment management services in our Investment Management segment through TRSs. A TRS is a subsidiary of a REIT that is subject to corporate federal, state, local, and foreign taxes, as applicable. Our use of TRSs enables us to engage in certain businesses while complying with the REIT qualification requirements and also allows us to retain income generated by these businesses for reinvestment without the requirement to distribute those earnings. We conduct business in North America, Europe, Australia, and Asia, and as a result, we or one or more of our subsidiaries file income tax returns in the United States federal jurisdiction and various state and certain foreign jurisdictions. Certain of our inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Periodically, shares in the Managed REITs that are payable to our TRSs in consideration of services rendered are distributed from TRSs to us.

Tax authorities in the relevant jurisdictions may select our tax returns for audit and propose adjustments before the expiration of the statute of limitations. Our tax returns filed for tax years 2012 through 2016 remain open to adjustment in the major tax jurisdictions.