Income Taxes

Income before provision for income taxes for the years ended December 31, 2018, 2017, and 2016 consisted of the following (in thousands):



	Year Ended December 31,
	2018		2017		2016
US	$	61,972	$	71,794	$	112,483
Foreign	94,516		59,432		(55,108		)
Total income before provision for income taxes	$	156,488	$	131,226	$	57,375

The provision for income taxes was $46.8 million, $52.0 million, and $38.2 million, for the years ended December 31, 2018, 2017, and 2016, respectively.

The income tax provision for continuing operations consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current expense (benefit):
Federal	$	23,254		$	9,969		$	58,816
State	2,983			(794		)	1,173
Foreign	29,532			15,690			10,364
	55,769			24,865			70,353
Deferred expense (benefit):
Federal	(10,447		)	16,563			(22,951		)
State	(2,169		)	784			25
Foreign	3,599			9,837			(9,222		)
	(9,017		)	27,184			(32,148		)
Provision for income taxes	$	46,752		$	52,049		$	38,205

Enacted on December 22, 2017, the Tax Reform Act introduced significant changes to U.S. income tax law. Effective 2018, the Tax Reform Act reduced the U.S. statutory tax rate from 35% to 21% and, among other changes, created new taxes on certain foreign-sourced earnings. Due to the timing of the enactment and complexity involved in applying the provision of the Tax Reform Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements as of December 31, 2017. As the Company collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies, adjustments to the provisional amounts have been made during the year ended December 31, 2018. The Tax Reform Act subjects U.S. shareholders to a tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The Company has elected to treat taxes due on future U.S. inclusions in taxable income as a current period expense. The accounting for the tax effects of the Tax Reform Act has been completed and the Company recorded immaterial adjustments as of December 22, 2018.

The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows:



	Year Ended December 31,
	2018		2017		2016
Federal provision	21.0	%	35.0	%	35.0	%
State provision	0.1	%	0.5	%	2.3	%
Foreign rate differential⁽¹⁾	(11.7	)%	(20.0	)%	(3.6	)%
Transaction costs⁽²⁾	1.0	%	5.0	%	0.0	%
Permanent items⁽³⁾	1.1	%	10.2	%	14.7	%
Change in valuation allowance⁽⁴⁾	17.7	%	8.2	%	20.7	%
Other	0.7	%	0.8	%	(2.5	)%
Effective rate	29.9	%	39.7	%	66.6	%

________________________


(1)	Relates primarily to the lower tax rates on the income or loss attributable to international operations.


(2)	In 2018, relates primarily to transaction costs incurred in connection with the Cabot Transaction. In 2017, relates primarily to certain costs related to the withdrawn IPO costs that are disallowed for U.K. tax purposes.


(3)	Represents a provision for nondeductible items, including nondeductible interest in a foreign subsidiary and certain foreign income taxable in the U.S. under Internal Revenue Code Section 951 (Subpart F) in 2017, and an overall foreign loss in 2016.


(4)	Valuation allowance recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.

The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the year ended December 31, 2018 was immaterial.

The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2018, was approximately $154.0 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exception. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable due to the complexities of a hypothetical calculation.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):



	December 31, 2018			December 31, 2017
Deferred tax assets:
Net operating losses	$	42,013		$	46,615
Accrued expenses	17,715			14,708
Differences in income recognition related to receivable portfolios	13,857			20,612
Other	4,825			522
Difference in basis of bond and loan costs	3,728			7,878
Prepaid expenses	2,949			—
Stock-based compensation expense	2,796			4,777
State taxes	174			—
Total deferred tax assets	88,057			95,112
Valuation allowance	(46,516		)	(34,642		)
Total deferred tax assets net of valuation allowance	41,541			60,470
Deferred tax liabilities:
Deferred court costs	(23,484		)	(20,207		)
Other	(3,403		)	(9,144		)
Difference in basis of depreciable and amortizable assets	(1,937		)	(20,632		)
State taxes	—			(1,237		)
Total deferred tax liabilities	(28,824		)	(51,220		)
Net deferred tax asset⁽¹⁾	$	12,717		$	9,250

________________________


(1)	The Company operates in multiple jurisdictions. In accordance with authoritative guidance relating to income taxes, deferred tax assets and liabilities are netted for each tax-paying component of the Company within a particular tax jurisdiction and presented as a single amount in the statement of financial condition.

As of December 31, 2018, certain of the Company's foreign subsidiaries have net operating loss carry forwards of approximately $214.9 million, which will begin to expire in 2025. Certain of the Company's domestic subsidiaries have state net operating losses of approximately $9.6 million, which will generally begin to expire in 2020.

Valuation allowances are recognized on deferred tax assets if the Company believes that it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2018, valuation allowances increased to $46.5 million, as compared to $34.6 million as of December 31, 2017. The increase was primarily related to the recording of valuation allowance at certain of the Company’s foreign subsidiaries that have cumulative operating losses. At this time, the Company does not have enough positive evidence to support the fact that the net operating loss carryforwards at these jurisdictions can be realized, therefore, the Company has recorded valuation allowances against the current and previously established deferred tax assets.

A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands):



	Amount
Balance at December 31, 2015	$	47,949
Decreases related to prior year tax positions	(1,657		)
Increases related to prior year tax positions	2,505
Increases related to current year tax positions	1,259
Decreases related to settlements with taxing authorities	(31,111		)
Balance at December 31, 2016	18,945
Increases related to current year tax positions	5,902
Decreases related to settlements with taxing authorities	(228		)
Decreases related to current year tax positions	(4,599		)
Balance at December 31, 2017	20,020
Increases related to prior year tax positions	256
Increases related to current year tax positions	1,958
Decrease related to expiration of statute of limitations	(3,221		)
Decreases related to settlements with taxing authorities	(461		)
Balance at December 31, 2018	$	18,552

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $19.9 million, $22.2 million and $21.2 million at December 31, 2018, 2017, and 2016 respectively. At December 31, 2018, 2017 and 2016, there was $13.0 million, $9.9 million and $7.1 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2018, the decrease in the Company's gross unrecognized tax benefit was primarily related to expiration of state statute of limitations. During the year ended December 31, 2017, the increase in the Company's gross unrecognized tax benefit was primarily related to prepaid services to be performed within three and a half months of December 31, 2017. During the year ended December 31, 2016, the decrease in the Company's gross unrecognized tax benefit was primarily related to a settlement with tax authorities for unrecognized tax benefits associated with amortization of receivable portfolios. The uncertain tax benefit is recorded as “Other liabilities” in the Company's consolidated statements of financial condition.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, it is reasonably possible that certain changes may occur within the next 12 months, which could significantly increase or decrease the balance of the Company’s gross unrecognized tax benefits.

The Company recognizes interest and penalties related to unrecognized tax benefits in its tax expense. The Company recognized expense of approximately $0.6 million, $0.8 million and $0.5 million in interest and penalties during the years ended December 31, 2018, 2017 and 2016, respectively. Interest and penalties accrued as of December 31, 2018 and 2017 were $1.4 million and $2.2 million, respectively.

The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. For U.S. federal and state tax returns, the Company is no longer subject to tax examinations for years prior to 2014. For non-U.S. tax returns, the Company is generally not subject to tax examinations for years prior to 2012. The Company is subject to the examination of its income tax returns by the IRS and other tax authorities, and the timing of the resolution of income tax examinations cannot be predicted with certainty. The Company's management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

During the first quarter of 2019, the Company received approval from the IRS for a tax accounting method change related to revenue reporting. The revised tax accounting method will more closely align with the current book accounting method for revenue reporting. Upon completion of standard IRS audit procedures, the Company estimates the impact of the revised tax method may be material and expects to record a one-time tax provision benefit during 2019.