Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income before provision for income taxes consisted of the following (dollars in thousands):

	Year Ended December 31,
	2022		2021		2020
Domestic	$	1,274,655	$	1,683,710	$	470,181
Foreign	383,535		725,711		499,788
Total	$	1,658,190	$	2,409,421	$	969,969

Our tax provision (benefit) consisted of the following (dollars in thousands):

	Year Ended December 31,
	2022		2021		2020
Current provision:
Federal	$	338,234	$	274,987	$	18,951
State	98,881		115,196		33,291
Foreign	207,890		238,273		88,994
Total current provision	645,005		628,456		141,236
Deferred provision:
Federal	(248,927)		34,607		61,034
State	(56,068)		(4,395)		3,872
Foreign	(105,780)		(91,162)		7,959
Total deferred provision	(410,775)		(60,950)		72,865
Total provision for income taxes	$	234,230	$	567,506	$	214,101

The following is a reconciliation stated as a percentage of pre-tax income of the U.S. statutory federal income tax rate to our effective tax rate:

	Year Ended December 31,
	2022		2021		2020
Federal statutory tax rate	21	%	21	%	21	%
Foreign rate differential	—		—		—
State taxes, net of federal benefit	3		4		3
Non-deductible expenses	2		—		1
Reserves for uncertain tax positions	1		1		—
Credits and exemptions	(2)		(1)		(2)
Outside basis differences recognized as a result of a legal entity restructuring	(10)		—		—
Other	(1)		(1)		(1)
Effective tax rate	14	%	24	%	22	%

In 2022, we recognized a net tax benefit of approximately $165.8 million attributable to outside basis differences recognized as a result of a legal entity restructuring. The recognition of the outside tax basis differences generated a capital loss that offset capital gains generated during 2022. The remaining capital loss will be carried forward and will be available to offset future capital gains. Based on our strong history of capital gains in the prior three years and the nature of our business we expect to generate sufficient capital gains in the five year carry forward period and therefore concluded that it is more likely than not that we will realize the full tax benefit from the capital loss carried forward. Accordingly, we have not provided any valuation allowance against the deferred tax asset for the capital loss carried forward.

Cumulative tax effects of temporary differences are shown below (dollars in thousands):

	December 31,
	2022		2021
Assets:
Tax losses and tax credits	$	368,790	$	307,507
Operating lease liabilities	315,651		269,960
Bonus and deferred compensation	372,136		381,408
Bad debt and other reserves	102,659		65,188
Pension obligation	809		5,007
All other	64,777		65,710
Deferred tax assets, before valuation allowance	$	1,224,822	$	1,094,781
Less: Valuation allowance	(254,721)		(273,256)
Deferred tax assets	$	970,101	$	821,525
Liabilities:
Property and equipment	(21,234)		(92,166)
Unconsolidated affiliates and partnerships	(92,756)		(128,170)
Capitalized costs and intangibles	(562,077)		(583,219)
Operating lease assets	(272,741)		(240,261)
All other	(37,812)		(25,935)
Deferred tax liabilities	$	(986,620)	$	(1,069,751)
Net deferred tax liabilities	$	(16,519)	$	(248,226)

As of December 31, 2022, there were deferred tax assets related to U.S. federal and state capital loss carryforward, net of reserves for uncertain tax position, of approximately $41 million which will expire after 2027. As of December 31, 2022, there were deferred tax assets before valuation allowances of approximately $327 million related to U.S. state and foreign net operating losses (NOLs). The majority of the NOLs are carried forward indefinitely and primarily related to the foreign jurisdictions. In certain foreign and state jurisdictions NOLs expire each year beginning in 2022 and 2027, respectively. The utilization of NOLs may be subject to certain limitations under U.S. federal, state and foreign laws. We have recorded a valuation allowance for deferred tax assets where we believe that it is more likely than not that the NOLs will not be utilized.

We determined that as of December 31, 2022, $254.7 million of deferred tax assets do not satisfy the realization criteria set forth in Topic 740. Accordingly, a valuation allowance has been recorded for this amount. If released, the entire amount would result in a benefit to continuing operations. During the year ended December 31, 2022, our valuation allowance decreased by approximately $18.5 million. The decrease was attributed to a reversal of the beginning of year valuation allowance of $9.2 million as certain foreign subsidiaries expect to utilize deferred tax assets before expiration as a result of current and forecasted earnings within the applicable jurisdiction, a reduction of $16.3 million due to foreign currency translation and tax rate changes, and an increase in valuation allowance of $7.0 million due to current year activities. We believe it is more likely than not that future operations will generate sufficient taxable income to realize the benefit of our deferred tax assets recorded as of December 31, 2022, net of valuation allowance.

At December 31, 2022, we have undistributed earnings of certain foreign subsidiaries of approximately $5.1 billion for which we have indefinitely reinvested and not recognized deferred taxes. Estimating the amount of the unrecognized deferred tax is not practicable due to the complexity and variety of assumptions necessary to estimate the tax. As of December 31, 2022, we have recorded $24.9 million of deferred tax liability relating to book over tax basis in Turner & Townsend undistributed earnings.

The total amount of gross unrecognized tax benefits was approximately $391.4 million and $191.9 million as of December 31, 2022 and 2021, respectively. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $267.7 million as of December 31, 2022. The increase of $199.4 million resulted from accrual of gross unrecognized tax benefits of $201.3 million primarily related to certain legal entity reorganizations and a release of $1.9 million of gross unrecognized tax benefits primarily related to the expiration of statute of limitations in various tax jurisdictions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):

	Year Ended December 31,
	2022		2021
Beginning balance, unrecognized tax benefits	$	(191,938)	$	(168,516)
Gross increases - tax positions in prior period	(42,175)		(4,478)
Gross decreases - tax positions in prior period	576		2,675
Gross increases - current-period tax positions	(166,445)		(25,619)
Decreases relating to settlements	518		390
Reductions as a result of lapse of statute of limitations	1,852		3,610
Foreign exchange movement	6,233		—
Ending balance, unrecognized tax benefits	$	(391,379)	$	(191,938)

Our continuing practice is to recognize accrued interest and/or penalties related to income tax matters within income tax expense. During the years ended December 31, 2022, 2021, and 2020, we (reversed)/accrued an additional $(0.5) million, $0.6 million and $0.4 million, respectively, in interest and penalties associated with uncertain tax positions. As of December 31, 2022 and 2021, we have recognized a liability for interest and penalties of $3.3 million and $3.8 million, respectively. We believe the amount of gross unrecognized tax benefits that will be settled during the next twelve months due to filing amended returns and settling ongoing exams cannot be reasonably estimated but will not be significant.

We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and in multiple state, local and foreign tax jurisdictions. Our U.S. federal income tax returns for years 2016 through 2019 are currently under audit by the Internal Revenue Service. We are under audit by various states including New York, California, Texas, and Michigan. We are also under audit by various foreign tax jurisdictions including France, Hungary, Mexico, and Spain. With limited exception, our significant foreign and state tax jurisdictions are no longer subject to audit by the various tax authorities for tax years prior to 2017 and 2012, respectively.

On August 16, 2022, the Inflation Reduction Act (IRA), a budget reconciliation package that contained legislation targeting energy security and climate changes, healthcare and taxes, was signed into law. With respect to corporate-level taxes, the IRA included a 1% excise tax on stock buybacks and a 15% corporate alternative minimum tax (CAMT) based on financial statement income of certain U.S. companies that meet the $1 billion profitability threshold criteria, effective after December 31, 2022. We continue to evaluate the impact of the legislation and forthcoming administrative guidance and regulations to our financial statements and results of operations.