INCOME TAXES

The components of income before income taxes and non-controlling interests consist of the following for the years ended December 31:



(in thousands)	2018			2017		2016

Domestic - Luxembourg	$	(22,513	)	$	9,123	$	8,498
Foreign - U.S.	8,398			7,967		16,655
Foreign - non-U.S.	15,514			18,285		19,168

Total	$	1,399		$	35,375	$	44,321

The income tax provision (benefit) consists of the following for the years ended December 31:



(in thousands)	2018			2017			2016

Current:
Domestic - Luxembourg	$	275		$	737		$	160
Foreign - U.S. federal	1,838			2,405			9,556
Foreign - U.S. state	336			364			258
Foreign - non-U.S.	7,440			17,574			5,558

	$	9,889		$	21,080		$	15,532
Deferred:
Domestic - Luxembourg	$	(4,927	)	$	(295,318	)	$	432
Foreign - U.S. federal	(291		)	(111		)	(3,065		)
Foreign - U.S. state	134			(210		)	(100		)
Foreign - non-U.S.	(707		)	(1,697		)	136

	$	(5,791	)	$	(297,336	)	$	(2,597	)

Income tax provision (benefit)	$	4,098		$	(276,256	)	$	12,935

In June 2010, the Company received a tax ruling regarding the treatment of certain intangibles that existed for determining the Company’s taxable income, which was scheduled to expire in 2019 unless extended, renewed or terminated by the Company. On December 27, 2017, two of the Company’s wholly-owned subsidiaries, Altisource Solutions S.à r.l. and Altisource Holdings S.à r.l., merged, with Altisource Holdings S.à r.l. as the surviving entity. Altisource Holdings S.à r.l. was subsequently renamed Altisource S.à r.l. The merger is part of a larger subsidiary restructuring plan designed to simplify the Company’s corporate structure, allow it to operate more efficiently and reduce administrative costs. For Luxembourg tax purposes, the merger was recognized at fair value and generated a net operating loss (“NOL”) of $1.3 billion, with a 17 year life, and generated a deferred tax asset of $342.6 million as of December 31, 2017, before a valuation allowance of $41.6 million. This deferred tax asset was partially offset by the impact of other changes in U.S. and Luxembourg income tax rates of $6.3 million and an increase in certain foreign income tax reserves (and related interest) of $10.5 million for the year ended December 31, 2017. The Company’s June 2010 tax ruling was terminated in connection with the merger of the Company’s Luxembourg subsidiaries.

We operate under tax holidays in certain geographies in India, the Philippines and Uruguay. The India tax holidays are effective through 2020. The Philippines tax holiday has been extended through June 2019. We operate in a Uruguay free trade zone that provides an indefinite future tax benefit. The tax holidays are conditioned upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by $0.7 million ($0.04 per diluted share), $0.9 million ($0.05 per diluted share) and $0.9 million ($0.04 per diluted share) for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company accounts for certain income and expense items differently for financial reporting purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences.

A summary of the tax effects of the temporary differences is as follows for the years ended December 31:



(in thousands)	2018			2017

Non-current deferred tax assets:
Net operating loss carryforwards	$	353,209		$	349,154
U.S. federal and state tax credits	314			407
Other non-U.S. deferred tax assets	6,161			5,724
Share-based compensation	1,586			1,496
Accrued expenses	5,242			6,494
Unrealized losses	3,131			—
Non-current deferred tax liabilities:
Intangible assets	(9,855		)	(8,015		)
Depreciation	(1,225		)	(3,318		)
Other non-U.S. deferred tax liability	(1,769		)	(1,692		)
Other	(954		)	(260		)
	355,840			349,990

Valuation allowance	(46,751		)	(46,283		)

Non-current deferred tax assets, net	$	309,089		$	303,707

A valuation allowance is provided when it is deemed more likely than not that some portion or all of a deferred tax asset will not be realized. In determining whether a valuation allowance is needed, the Company considered estimates of future taxable income, future reversals of temporary differences, the tax character of gains and losses and the impact of tax planning strategies that can be implemented, if warranted. The net increase in valuation allowance of $0.5 million during 2018 is primarily related to the portion of the Luxembourg NOL that we project will not be used prior to expiration.

We have not recognized Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as we have chosen to indefinitely reinvest these earnings. The earnings reinvested as of December 31, 2018 were approximately $82.9 million, which if distributed would result in additional tax due totaling approximately $15.0 million.

The Company had a deferred tax asset of $353.2 million as of December 31, 2018 relating to Luxembourg, U.S. federal, state and foreign net operating losses compared to $349.2 million as of December 31, 2017. As of December 31, 2018 and 2017, a valuation allowance of $45.0 million and $44.4 million, respectively, has been established related to Luxembourg NOLs, and a valuation allowance of $1.5 million and $1.7 million, respectively, has been established related to state NOLs. The gross amount of net operating losses available for carryover to future years is approximately $1,355.5 million as of December 31, 2018 and approximately $1,339.6 million as of December 31, 2017. These losses are scheduled to expire between the years 2023 and 2038. As of December 31, 2018 and 2017, $7.4 million and $8.9 million, respectively, of our NOLs are subject to Section 382 of the Internal Revenue Code which limits the application of these NOLs against federal taxable income to approximately $1.3 million per year.

On December 22, 2017, the Jobs Act was enacted, which reforms corporate tax legislation in the United States and related laws. One of the provisions of the new tax law reduces the U.S. federal corporate tax rate from 35% to 21%. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. As of December 31, 2018 and 2017, the amount recorded related to the remeasurement of our deferred tax balance was $(0.2) million and $2.9 million, respectively.

In addition, the Company had a deferred tax asset of $0.3 million and $0.4 million as of December 31, 2018 and 2017, respectively, relating to the U.S. federal and state tax credits. The U.S. federal credit carryforward was fully utilized in 2018. The state tax credit carryforwards are scheduled to expire with the filing of state income tax returns for the tax years 2018 through 2028.

Income tax computed by applying the Luxembourg statutory rate differs from income tax computed at the effective tax rate primarily from differences between the Luxembourg statutory and foreign statutory tax rates applied to entities in different jurisdictions, shown in the tax rate reconciliation table below as tax rate differences on foreign earnings, increases in uncertain tax positions, state taxes, remeasurement of deferred taxes related to tax rate changes, recognition of net operating losses created by the December 27, 2017 legal entity merger (see above), an increase in unrecognized tax benefits and a valuation allowance against deferred tax assets the Company believes it is more likely than not will not be realized.

The following table reconciles the Luxembourg statutory tax rate to our effective tax rate for the years ended December 31:



	2018		2017		2016

Statutory tax rate	26.01	%	27.08	%	29.22	%
Change in valuation allowance	43.08		119.20		(0.08	)
State tax expense	28.58		0.50		2.30
Tax credits	—		(2.13	)	(1.81	)
Uncertain tax positions	114.18		30.16		(3.65	)
Unrecognized tax loss	—		(1,008.20	)	—
Income tax rate change	—		57.36		—
Tax rate differences on foreign earnings	73.11		—		—
Other	7.96		(4.91	)	3.20

Effective tax rate	292.92	%	(780.94	)%	29.18	%

The Company follows ASC Topic 740 which clarifies the accounting and disclosure for uncertainty in tax positions. We analyzed our tax filing positions in all of the domestic and foreign tax jurisdictions where we are required to file income tax returns as well as for all open tax years subject to audit in these jurisdictions. The Company has open tax years in the United States (2015 through 2017), India (2011 through 2018) and Luxembourg (2012 through 2016).

The following table summarizes changes in unrecognized tax benefits during the years ended December 31:



(in thousands)	2018			2017

Amount of unrecognized tax benefits as of the beginning of the year	$	8,892		$	758
Decreases as a result of tax positions taken in a prior period	(956		)	(78		)
Increases as a result of tax positions taken in a prior period	1			53
Increases as a result of tax positions taken in the current period	1,750			8,159

Amount of unrecognized tax benefits as of the end of the year	$	9,687		$	8,892

The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate is $13.0 million and $11.5 million as of December 31, 2018 and 2017, respectively. The Company recognizes interest, if any, related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2018 and 2017, the Company had recorded accrued interest and penalties related to unrecognized tax benefits of $3.3 million and $2.6 million, respectively.