Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

The Company’s income before income taxes is comprised of the following for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	For the year ended December 31,
	2023			2022			2021
Domestic	$	(97,962	)	$	(45,701	)	$	(80,658	)
Foreign		258,053			154,023			143,015
Total	$	160,091		$	108,322		$	62,357

Income tax expense (benefit) is comprised of the following for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	For the year ended December 31,
	2023			2022			2021
Current
Domestic	$	932		$	1,322		$	2,281
Foreign		35,636			24,749			19,853
Total current		36,568			26,071			22,134
Deferred
Domestic		(1,634	)		2,708			(27	)
Foreign		(1,687	)		(453	)		(939	)
Total deferred		(3,321	)		2,255			(966	)
Income tax expense	$	33,247		$	28,326		$	21,168

The provision for income taxes for the years ended December 31, 2023, 2022 and 2021 was $33.2 million, $28.3 million and $21.2 million, respectively. The increase was primarily attributable to the year-over-year change in the amount and geographical distribution of income.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rate is comprised of the following for the years ended years ended December 31, 2023, 2022 and 2021:

	For the year ended December 31,
	2023			2022			2021
Statutory rate applied to pre-tax income		21.0	%		21.0	%		21.0	%
Foreign rate differential		5.7	%		12.0	%		8.5	%
Domestic non-controlled interest/ domestic non-taxable income		(15.9	%)		(20.1	%)		(20.9	%)
Early extinguishment of lease liability		0.0	%		4.2	%		0.0	%
Permanent items		1.8	%		(4.0	%)		(2.2	%)
Withholding taxes		11.5	%		13.7	%		22.9	%
Uncertain tax positions		2.6	%		(1.6	%)		2.8	%
Audit settlement		0.0	%		0.0	%		2.4	%
Foreign tax credit		(5.1	%)		(2.8	%)		0.0	%
Gain on tax liquidation		0.0	%		1.7	%		0.0	%
Valuation allowance		1.5	%		0.3	%		(0.7	%)
Other		(2.3	%)		1.7	%		0.1	%
Effective tax rate		20.8	%		26.1	%		33.9	%

The effective tax rate for the years ended December 31, 2023, 2022 and 2021 was 20.8%, 26.1% and 33.9%, respectively. The decrease was primarily driven by the geographical distribution of income and the varying tax regimes of jurisdictions.

The tax effect of each type of temporary difference and carryforward that gives rise to a significant deferred tax asset or liability as of December 31, 2023 and 2022 are as follows (in thousands):

	As of December 31,
	2023			2022
Deferred tax assets
Fixed assets	$	1,121		$	15
Net operating losses		770			218
Lease liabilities		42			21,315
Foreign tax credit carryforward		1,645			429
Amortizable transactions costs		590			1,231
Investment in partnership		44,714			44,556
Unrealized foreign exchange losses		4,543			88
Other		2,133			2,230
Deferred tax assets		55,558			70,082
Valuation allowances		(10,718	)		(8,335	)
Net deferred tax assets	$	44,840		$	61,747
Deferred tax liabilities
Right of use assets	$	101		$	21,415
Unrealized foreign exchange gains		1,791			465
Net deferred tax liabilities	$	1,892		$	21,880
Net deferred tax assets	$	42,948		$	39,867

The Company has foreign and U.S. corporate subsidiaries for which it records deferred taxes. The Company has $2.7 million of net operating loss carryforwards as of December 31, 2023. Of these, $2.1 million will expire between 2024 and 2029. The remaining net operating loss carryforwards have an unlimited carryforward period.

The Company recorded a valuation allowance to reflect the estimated amount of certain deferred tax assets that, more likely than not, will not be realized. In making such a determination, the Company evaluates a variety of factors, including the Company's operating history, accumulated deficit, and the existence of taxable or deductible temporary differences and reversal periods. Total valuation allowances increased by $2.4 million during the year ended December 31, 2023, primarily due to the generation of net operating losses in foreign jurisdictions, which the Company believes, more likely than not, will not be realized. Total valuation allowances increased

by $7.8 million during the year ended December 31, 2022, primarily due to the U.S. federal deferred tax assets related to the investment in partnership and foreign tax credit carryforward.

The Company recognizes the tax benefit from an uncertain tax provision only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the tax position. The Company’s policy is to recognize accrued interest and penalties related to uncertain tax positions in income tax expense in the consolidated financial statements. For the years ended December 31, 2023 and 2022, the Company did not have any payments of interest and penalties associated with uncertain tax positions. The Company does not anticipate material changes in the total amount or composition of its unrecognized tax benefits within 12 months of the reporting date.

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

	2023		2022
Balance at January 1	$	—	$	1,388
Increases (decreases) related to prior year tax positions		4,171		(1,388	)
Balance at December 31	$	4,171	$	—

The Company and its subsidiaries file income tax returns in the U.S., various foreign, state and local jurisdictions. The Company is currently under income tax examination in Israel related to the 2020 and 2021 tax years. Tax years that remain subject to examination vary by legal entity but are generally open in the U.S. for the tax years ending after 2019 and outside the U.S. for the tax years ending after 2017.

Excelerate is a corporation for U.S. federal and state income tax purposes. Excelerate’s accounting predecessor, EELP, is treated as a pass-through entity for U.S. federal income tax purposes and, as such, has generally not been subject to U.S. federal income tax at the entity level. Accordingly, unless otherwise specified, our historical results of operations prior to the IPO do not include any provision for U.S. federal income tax for EELP.

The Company has international operations that are also subject to foreign income tax and U.S. corporate subsidiaries subject to U.S. federal tax. Therefore, its effective income tax rate is dependent on many factors, including the Company’s geographical distribution of income, a rate benefit attributable to the portion of the Company’s earnings not subject to corporate level taxes, and the impact of nondeductible items and foreign exchange impacts as well as varying tax regimes of jurisdictions. In one jurisdiction, the Company’s tax rate is significantly less than the applicable statutory rate as a result of a tax holiday that was granted. This tax holiday will expire in 2033 at the same time that our contract and revenue with our customer ends.

The Organization for Economic Co-operation and Development (OECD) has established the Pillar Two Framework, which generally provides for a minimum effective tax rate of 15%. The Pillar Two Framework has been supported by over 130 countries worldwide. The effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive. The Company is evaluating the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.