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)	2019			2018			2017

Domestic - Luxembourg	$	8,919		$	(22,513	)	$	9,123
Foreign - U.S.	(12,602		)	8,398			7,967
Foreign - non-U.S.	16,122			15,514			18,285

Total	$	12,439		$	1,399		$	35,375

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



(in thousands)	2019			2018			2017

Current:
Domestic - Luxembourg	$	—		$	(275	)	$	(737	)
Foreign - U.S. federal	187			(1,838		)	(2,405		)
Foreign - U.S. state	(174		)	(336		)	(364		)
Foreign - non-U.S.	(10,970		)	(7,440		)	(17,574		)

	$	(10,957	)	$	(9,889	)	$	(21,080	)
Deferred:
Domestic - Luxembourg	$	(308,657	)	$	4,927		$	295,318
Foreign - U.S. federal	329			291			111
Foreign - U.S. state	341			(134		)	210
Foreign - non-U.S.	648			707			1,697

	$	(307,339	)	$	5,791		$	297,336

Income tax (provision) benefit	$	(318,296	)	$	(4,098	)	$	276,256

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.

In determining whether a valuation allowance is needed on a deferred tax asset, extensive analysis is required, including an assessment of the likelihood of sufficient future taxable income. When there is a cumulative pretax loss for financial reporting for the current and two preceding years (i.e., a three year cumulative loss), this is a significant element of negative evidence that would be difficult to overcome on a more likely than not or any other basis, based on the guidance in ASC Topic 740. The Company’s Luxembourg entities recognized a cumulative loss before income taxes for the three year period ended December 31, 2019. Consequently, the Company recognized a full valuation allowance of $291.5 million and an increase in the income tax provision related to the Luxembourg net deferred assets. In addition, Luxembourg reduced its corporate tax rate from 26.01% to 24.94% during 2019, resulting in a reduction in the Luxembourg net deferred tax assets and an increase in the Company’s income tax provision of $14.0 million.

We operate under tax holidays in certain geographies in India and Uruguay. The Philippines tax holiday expired on June 30, 2019. The India tax holidays are effective through March 2020. 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 $0.3 million ($0.02 per diluted share), $0.7 million ($0.04 per diluted share) and $0.9 million ($0.05 per diluted share) for the years ended December 31, 2019, 2018 and 2017, 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)	2019			2018

Non-current deferred tax assets:
Net operating loss carryforwards	$	338,403		$	353,209
U.S. federal and state tax credits	189			314
Other non-U.S. deferred tax assets	13,980			6,161
Share-based compensation	2,010			1,586
Accrued expenses	2,691			5,242
Unrealized losses	9,011			3,131
Other	526			—
Non-current deferred tax liabilities:
Intangible assets	(8,325		)	(9,855		)
Depreciation	(302		)	(1,225		)
Other non-U.S. deferred tax liability	(998		)	(1,769		)
Other	—			(954		)
	357,185			355,840

Valuation allowance	(355,559		)	(46,751		)

Non-current deferred tax assets, net	$	1,626		$	309,089

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 requires an extensive analysis of positive and negative evidence regarding realization of the deferred tax assets and, inherent in that, an assessment of the likelihood of sufficient future taxable income. When there is a cumulative pretax loss for financial reporting for the current and two preceding years (i.e., a three year cumulative loss), this is a significant element of negative evidence that would be difficult to overcome on a more likely than not or any other basis. Therefore, the net increase in valuation allowance of $308.8 million during 2019 is primarily related to the portion of the Luxembourg NOL that we project will not be utilized prior to expiration.

We have not recognized deferred taxes on cumulative earnings of non-Luxembourg affiliates as we have chosen to indefinitely reinvest these earnings, except for the Philippines. Taxes of $0.9 million were provided on the Philippines earnings. The other non-Luxembourg earnings reinvested as of December 31, 2019 were approximately $81.0 million, which if distributed would result in additional tax due totaling approximately $15.9 million.

The Company had a deferred tax asset of $338.4 million as of December 31, 2019 relating to Luxembourg, U.S. federal, state and foreign net operating losses compared to $353.2 million as of December 31, 2018. As of December 31, 2019 and 2018, a valuation allowance of $337.7 million and $45.0 million, respectively, has been established related to Luxembourg NOLs and a valuation allowance of $0.6 million and $1.5 million, respectively, has been established related to state NOLs. The gross amount of net operating losses available for carryover to future years is approximately $1,355.4 million as of December 31, 2019 and approximately $1,355.5 million as of December 31, 2018. These losses are scheduled to expire between the years 2023 and 2039. As of December 31, 2018, $7.4 million 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. The remaining NOLs subject to the Section 382 limitation were included in the sale of the Financial Services Business on July 1, 2019.

As part of the sale of the Financial Services Business, a capital loss deferred tax assets of $9.6 million was created in the U.S. Because it is not more likely than not the Company will have sufficient taxable income of the appropriate character (a capital gain) in the carryforward period, a full valuation allowance has been established related to the capital loss.

On April 25, 2019, the Luxembourg Parliament voted to approve the 2019 Budget Law. The new legislation reduced the overall effective corporate income tax rate from 26.01% to 24.94% for accounting periods beginning on or after January 1, 2019. 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 24.94%. As of December 31, 2019, the amount recorded related to remeasurement of our deferred tax balance was $14.0 million.

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 35.0% to 21.0%. 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 21.0%. As of December 31, 2018, the amount recorded related to the remeasurement of our deferred tax balance was $(0.2) million.

In addition, the Company had a deferred tax asset of $0.2 million and $0.3 million as of December 31, 2019 and 2018, respectively, relating to state tax credits. The state tax credit carryforward is scheduled to expire with the filing of state income tax returns for the tax years 2019 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:



	2019		2018		2017

Statutory tax rate	24.94	%	26.01	%	27.08	%
Change in valuation allowance	2,526.53		43.08		119.20
State tax expense	(1.63	)	28.58		0.50
Tax credits	—		—		(2.13	)
Uncertain tax positions	39.60		114.18		30.16
Unrecognized tax loss	(67.18	)	—		(1,008.20	)
Income tax rate change	—		—		57.36
Tax rate differences on foreign earnings	28.75		73.11		—
Other	7.85		7.96		(4.91	)

Effective tax rate	2,558.86	%	292.92	%	(780.94	)%

The Company follows ASC Topic 740 which clarifies the accounting and disclosure for uncertainty in tax positions. We analyzed our tax filing positions in 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 (2016 through 2018), India (2011 through 2019) and Luxembourg (2014 through 2018).

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



(in thousands)	2019			2018

Amount of unrecognized tax benefits as of the beginning of the year	$	9,687		$	8,892
Decreases as a result of tax positions taken in a prior period	(192		)	(956		)
Increases as a result of tax positions taken in a prior period	22			1
Increases as a result of tax positions taken in the current period	250			1,750

Amount of unrecognized tax benefits as of the end of the year	$	9,767		$	9,687

The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate is $13.5 million and $13.0 million as of December 31, 2019 and 2018, respectively. The Company recognizes interest, if any, related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2019 and 2018, the Company had recorded accrued interest and penalties related to unrecognized tax benefits of $3.7 million and $3.3 million, respectively.