Income Taxes

6 Months Ended

Jun. 30, 2019

Income taxes have been provided based on the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes

relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland and the United States.

The sources of income from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and six months ended June 30, 2019 and 2018 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. operations	$	1,959	$	788	$	3,875	$	1,471
Non-U.S. operations	32,658		50,666		69,006		104,904
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments	$	34,617	$	51,454	$	72,881	$	106,375

Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.

We have a U.S. based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.

The consolidated income tax expense for the three and six months ended June 30, 2019 and 2018 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2019 and 2018, respectively.

The Company’s effective tax rate (“ETR”) for the three and six months ended June 30, 2019 was 17.3% and 12.5%, respectively, compared to 6.1% and 2.2%, respectively, for the three and six months ended June 30, 2018. The second quarter of 2019 included a non-cash tax expense of $2,845 related to a fair value adjustment on an intercompany asset transfer, which was treated as a discrete item. The first quarter of 2018 included a $2,779 tax benefit related to the Singapore rate reduction from 10% to 8%, which was treated as a discrete item. Excluding these discrete items, the ETR for the three and six months ended June 30, 2019 would have been 9.1% and 8.6%, respectively, compared to 6.1% and 4.8%, respectively, for the three and six months ended June 30, 2018. Movements in the ETR are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions. During the three and six months ended June 30, 2019, we reported a significant decrease in Bermuda income primarily relating to Avianca Brazil and an increase in Ireland income primarily related to Jet Airways.

Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income from continuing operations consisted of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Notional U.S. federal income tax expense at the statutory rate	$	7,270		$	10,806		$	15,305		$	22,339
U.S. state and local income tax, net	181			55			390			103
Non-U.S. operations:
Bermuda	(2,910		)	(6,112		)	(8,048		)	(14,395		)
Ireland	2,093			(811		)	2,602			(1,128		)
Singapore	(2		)	—			(4		)	(2,824		)
Other low tax jurisdictions	(872		)	(835		)	(1,724		)	(1,643		)
Non-deductible expenses in the U.S.	232			29			569			(164		)
Income tax provision	$	5,992		$	3,132		$	9,090		$	2,288