Income Taxes

12 Months Ended

Dec. 31, 2019

Note 11: Income Taxes

Income before provision for income taxes consisted of the following (in thousands):


	Year Ended December 31,
	2019		2018		2017
US	$	144,495	$	61,972	$	71,794
Foreign	56,747		94,516		59,432
Total income before provision for income taxes	$	201,242	$	156,488	$	131,226

The income tax provision on earnings from continuing operations consisted of the following (in thousands):


	Year Ended December 31,
	2019		2018		2017
Current expense (benefit):
Federal	$	(2,917)	$	23,254	$	9,969
State	(6,464)		2,983		(794)
Foreign	21,008		29,532		15,690
	11,627		55,769		24,865
Deferred expense (benefit):
Federal	27,640		(10,447)		16,563
State	5,535		(2,169)		784
Foreign	(12,469)		3,599		9,837
	20,706		(9,017)		27,184
Provision for income taxes	$	32,333	$	46,752	$	52,049

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


	Year Ended December 31,
	2019		2018		2017
Federal provision	21.0	%	21.0	%	35.0	%
State provision	0.2	%	0.1	%	0.5	%
Foreign rate differential⁽¹⁾	(2.2)	%	(11.7)	%	(20.0)	%
Transaction costs⁽²⁾	0.0	%	1.0	%	5.0	%

Permanent items⁽³⁾	0.0	%	1.1	%	10.2	%

Change in valuation allowance⁽⁴⁾	(0.5)	%	17.7	%	8.2	%
IRS settlement⁽⁵⁾	(2.4)	%	—	%	—	%
Other	0.0	%	0.7	%	0.8 %
Effective rate	16.1	%	29.9	%	39.7	%

________________________

(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 In 2017, relates primarily to certain withdrawn IPO costs disallowed for U.K. tax purposes.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.

(4)Net decrease in valuation allowance during 2019 is attributable to disposition of certain foreign subsidiaries with cumulative operating losses for tax purposes. In 2017 and 2018, valuation allowance net increase recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.

(5)In 2019, includes tax benefit resulting from tax accounting method change.

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, 2019 was immaterial.

The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2019, was approximately $151.3 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide for deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States, for which the Company does not consider under the indefinite reversal exemption, have no material undistributed earnings or outside basis differences, and therefore, no U.S. taxes have been provided.

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


	December 31, 2019		December 31, 2018
Deferred tax assets:
Net operating losses	$	36,236	$	42,013
Financing obligation	18,023		—
Accrued expenses	10,050		17,715
Difference in basis of bond and loan costs	4,194		3,728
Stock-based compensation	2,882		2,796
State taxes	1		174
Differences in income recognition related to receivable portfolios	—		13,857
Prepaid expenses	—		2,949
Other	1,821		4,825
Total deferred tax assets	73,207		88,057
Valuation allowance	(36,422)		(46,516)
Total deferred tax assets net of valuation allowance	36,785		41,541
Deferred tax liabilities:
Deferred court costs	(23,682)		(23,484)
Right-of-use asset	(14,422)		—
Difference in basis of depreciable and amortizable assets	(3,680)		(1,937)
Prepaid expenses	(628)		—
Other	(4,616)		(3,403)
Total deferred tax liabilities	(47,028)		(28,824)
Net deferred tax (liability) asset⁽¹⁾	$	(10,243)	$	12,717

________________________

(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, 2019, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of approximately $238.2 million, which will begin to expire in 2024. Certain of the Company's domestic subsidiaries have state net operating losses of approximately $2.2 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, 2019, valuation allowances decreased to $36.4 million, as compared to $46.5 million as of December 31, 2018. The decrease was primarily related to the disposition of certain foreign entities with cumulative operating losses for tax purposes during the year ended December 31, 2019.

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


	Amount





Balance at December 31, 2016	$	18,945
Increases related to current year tax positions	5,902
Decreases related to current year tax positions	(4,599)
Decreases related to settlements with taxing authorities	(228)
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
Decreases related to prior year tax positions	(10,673)
Increases related to current year tax positions	4,442
Decrease related to expiration of statute of limitations	(2,493)
Decreases related to settlements with taxing authorities	(1,920)
Balance at December 31, 2019	$	7,908

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $8.2 million, $19.9 million and $22.2 million at December 31, 2019, 2018, and 2017 respectively. At December 31, 2019, 2018 and 2017, there was $7.6 million, $13.0 million and $9.9 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2019, the decrease in the Company’s gross unrecognized tax benefit was primarily related to decreases in prior year tax positions resulting from exam resolutions. 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.

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 as a component of tax expense. The Company recognized a benefit of approximately $2.7 million, and expense of $0.6 million and $0.8 million in interest and penalties during the years ended December 31, 2019, 2018 and 2017, respectively. Interest and penalties accrued as of December 31, 2019 and 2018 were $0.3 million and $1.4 million, respectively.

The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The Internal Revenue Service has completed examinations of the Company’s U.S. federal income tax returns for tax years 2012 through 2017, and the Company is no longer subject to federal tax examinations for years prior to 2018. For U.S. state 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 various taxing 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.