Taxation

The Company's Irish operations, including the parent company XL Group plc, are subject to income and capital gains tax in Ireland under applicable Irish law.

The Company’s Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. In the event that there is a change such that these taxes are imposed, the Bermuda subsidiaries would be exempted from any such tax until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and the Exempted Undertakings Tax Protection Amendment Act 2011.

The Company’s U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the IRS Code and Regulations thereunder.

The Company has operations in subsidiary and branch form in various other jurisdictions around the world, including but not limited to the U.K., Switzerland, Ireland, Germany, France, Canada, Brazil and various other countries in Latin America and Asia that are subject to relevant taxes in those jurisdictions.

Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding taxation in the jurisdiction of the paying entity. The Company does not assert that all earnings arising in the U.S. will be permanently reinvested in that jurisdiction and, accordingly, a provision for withholding taxes arising in respect of current period U.S. earnings has been made. No withholding taxes are accrued with respect to the earnings of the Company’s subsidiaries arising outside the U.S., as it is the intention that all such earnings, which would be subject to withholding tax, will remain reinvested indefinitely.

The Company’s current corporate structure is such that distribution of earnings from subsidiaries located outside of the U.S. would not be subject to significant incremental taxation. It is not practicable to estimate the amount of additional withholding taxes that might be payable on such earnings due to a variety of factors, including the timing, extent and nature of any repatriation.

The following table details the years that are the subject of open examinations, by major tax jurisdiction. While the Company cannot estimate with certainty the outcome of these examinations, the Company does not believe that adjustments from open tax years will result in a significant change to the Company's results from operations.



Jurisdiction	Tax Years
U.S.	2013
Ireland	2006 - 2009
U.K.	2007 - 2010
Germany	2006 - 2009
Switzerland	2009 - 2010

The following table details open tax years that are open to assessment by local tax authorities, in the following major tax jurisdictions.



Jurisdiction	Tax Years
U.S.	2011 - 2014
Ireland	2006 - 2014
U.K.	2007 - 2010, 2012 - 2014
Germany	2007 - 2014
Switzerland	2009 - 2014
France	2012 - 2014

The Company’s income (loss) before income tax and non-controlling interests was distributed between U.S. and non-U.S. for the years ended December 31, 2014, 2013 and 2012 as follows:



Income (loss) before income tax: (U.S. dollars in thousands)	2014		2013		2012
U.S.	$	228,708	$	188,503	$	50,439
Non U.S.	137,027		1,025,649		713,972
Total	$	365,735	$	1,214,152	$	764,411

The income tax provisions for the years ended December 31, 2014, 2013 and 2012 were as follows:



(U.S. dollars in thousands)	2014			2013			2012
Current expense:
U.S.	$	45,598		$	49,566		$	11,966
Non U.S.	81,371			41,921			45,614
Total current expense	$	126,969		$	91,487		$	57,580
Deferred expense (benefit):
U.S.	$	8,572		$	700		$	(56,602	)
Non U.S.	(38,644		)	(14,682		)	33,050
Total deferred expense (benefit)	$	(30,072	)	$	(13,982	)	$	(23,552	)
Total tax expense	$	96,897		$	77,505		$	34,028

The applicable statutory tax rates of the most significant jurisdictions contributing to the overall taxation of the Company are:



Jurisdiction	Applicable Statutory Taxation Rates
Ireland (1)	12.50	%
Ireland (1)	25.00	%
Bermuda	—	%
U.S.	35.00	%
U.K.	21.50	%
Switzerland (2)	7.83	%
Switzerland (2)	21.20	%
Germany	15.00	%
France	38.00	%

____________


(1)	The different applicable statutory taxation rates in Ireland relate to entities classified as trading or non-trading companies.


(2)	The different applicable statutory taxation rates in Switzerland relate to entities classified as trading or holding companies.

The weighted average expected tax provision has been calculated using the pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years ended December 31, 2014, 2013 and 2012 is provided below:



(U.S. dollars in thousands)	2014			2013			2012
Expected tax (benefit) provision at weighted average rate	$	132,775		$	43,092		$	53,358
Permanent differences:
Non-taxable (income) loss	(19,870		)	(50,745		)	(42,428		)
Prior year adjustments	5,990			6,067			(622		)
Prior year adjustments on completion of IRS examinations	—			—			(19,192		)
State, local and foreign taxes	47,078			12,225			18,312
Valuation allowance	(181		)	5,754			(16,644		)
Net allocated investment income	3,399			5,949			41,727
Stock options	411			1,501			4,749
Non-deductible expenses	22,556			23,662			16,145
Net realized capital loss carry-forward valuation allowance reduction	(2,916		)	—			(24,473		)
Adjustments related to Life Retro Arrangements	(99,535		)	—			—
Non-taxable reserve release	—			—			3,096
Uncertain tax positions	7,190			30,000			—
Total tax expense	$	96,897		$	77,505		$	34,028

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows:



(U.S. dollars in thousands)	2014		2013
Deferred tax asset:
Net unpaid loss reserve discount	$	90,262	$	105,511
Net unearned premiums	72,752		69,811
Compensation liabilities	77,578		62,710
Net operating losses	49,834		89,233
Investment adjustments	13,022		12,573
Pension	8,114		5,695
Bad debt reserve	6,626		7,337
Amortizable goodwill	6,694		7,976
Net unrealized depreciation on investments	1,484		9,984
Stock options	11,985		12,171
Depreciation	7,599		3,501
Net realized capital losses	97,189		140,993
Deferred intercompany capital losses	57,427		69,500
Untaxed Lloyd's result	7,254		2,533
Deferred acquisition costs	11,386		—
Other	2,282		9,638
Deferred tax asset, gross of valuation allowance	$	521,488	$	609,166
Valuation allowance	207,062		261,924
Deferred tax asset, net of valuation allowance	$	314,426	$	347,242
Deferred tax liability:
Net unrealized appreciation on investments	$	63,642	$	28,843
Unremitted earnings	$	5,125	$	6,717
Deferred acquisition costs	2,737		7,057
Currency translation adjustments	3,969		7,195
Regulatory reserves	65,965		131,750
Investment adjustment	12,061		6,112
Untaxed Lloyd’s result	11,422		—
Other	11,260		8,014
Deferred tax liability	$	176,181	$	195,688
Net Deferred Tax Asset	$	138,245	$	151,554

The deferred tax asset and liability balances presented above represent the gross deferred tax asset and liability balances across each tax jurisdiction. The deferred tax asset balances of $204.5 million and $237.9 million at December 31, 2014 and 2013, respectively, and deferred tax liability balances of $66.2 million and $86.3 million at December 31, 2014 and 2013, respectively, disclosed on the consolidated balance sheets include netting of certain deferred tax assets and liabilities within a tax jurisdiction to the extent such netting is consistent with the regulations of the tax authorities in those jurisdictions.

At December 31, 2014 and 2013, the valuation allowance of $207.1 million and $261.9 million, respectively, related primarily to net operating loss carry forwards and realized capital loss carry forwards in the following jurisdictions:



Jurisdiction (U.S. dollars in thousands)	2014		2013
Switzerland	$	1,459	$	11,457
Ireland	72,363		60,133
U.S.	123,695		175,372
Other	9,545		14,962
Valuation Allowance Total	$	207,062	$	261,924

The reduction in the valuation allowance in 2014 of $54.9 million was primarily due to the release of certain valuation allowances held against capital loss carry-forwards in the U.S.

At December 31, 2014, the Company had U.S. realized capital loss carry forwards of approximately $174.6 million ($61.1 million tax effected). The five year limitation for the utilization of realized capital losses applies to this balance. Losses of $75.6 million will expire at the end of 2015 with another $99.0 million of realized capital losses expiring in future years through 2018. A valuation allowance ($61.1 million) has been established in respect of all of these realized capital losses. At December 31, 2014, the Company also had $164.1 million of U.S. capital losses arising from the sale of investments to an international affiliate ($57.4 million tax effected), against which a valuation allowance of $57.4 million has been established. These losses cannot be utilized to offset any future U.S. realized capital gains, and will not begin to expire, until the underlying assets have been sold to unrelated parties.

At December 31, 2014, net operating loss carry forwards in the U.K. were approximately $84.5 million ($1.9 million tax effected, including a $15.0 million uncertain tax position offset, $16.9 million tax effected excluding the offset) and have no expiration. At December 31, 2014, the Company also had $8.1 million of U.K. capital losses ($1.6 million tax effected), against which a valuation allowance of $1.6 million has been established.

At December 31, 2014, net operating loss carry forwards in Switzerland were approximately $12.1 million. A valuation allowance of $0.8 million has been established in respect of $11.7 million of the Swiss net operating losses.

At December 31, 2014, net operating loss carry forwards in Ireland were approximately $280.8 million, with a further $153.5 million of capital losses carried forward. Although these Irish losses may be carried forward indefinitely, a valuation allowance ($69.6 million) has been established in respect of all of these Irish losses due to the uncertainty surrounding any future loss utilization.

Management has reviewed historical taxable income and future taxable income projections for its U.K. group and has determined that in its judgment substantially all of the U.K. net operating losses ($84.5 million) will more likely than not be realized as reductions to future taxable income within a reasonable period. Management will continue to evaluate income generated in future periods by the U.K. group in determining the reasonableness of its position. If management determines that future income generated by the U.K. group is insufficient to cause the realization of the net operating losses within a reasonable period, a valuation allowance would be required for the U.K. portion of the deferred tax asset balance related to net operating losses in the amount of $1.9 million.

Management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized.

Shareholders’ equity at December 31, 2014 and 2013 reflected tax benefits of $4.0 million and $1.8 million, respectively, related to the excess of tax deductions over book compensation expense for stock awards exercised/vested by the Company's U.S. subsidiaries.

At December 31, 2014 and 2013, the Company had unrecognized tax benefits of $37.2 million and $30.0 million, respectively. If recognized, the full amount of these unrecognized tax benefits would decrease the annual effective tax rate. The Company does not currently anticipate any significant change in unrealized tax benefits during 2015.

The following table presents a reconciliation of the Company’s unrecognized tax benefits:



(U.S. dollars in thousands)	2014			2013
Unrecognized tax benefits, beginning of the year	$	30,000		$	—
Increases for tax positions taken during the year	12,182			9,591
Increases for tax positions taken in prior years	15,304			20,409
Decreases for tax positions taken during the year	—			—
Decreases for tax positions taken in prior years	(20,296		)	—
Decreases for settlement with taxing authorities	—			—
Decreases for lapse of the applicable statute of limitations	—			—
Unrecognized tax benefits, end of year	$	37,190		$	30,000

The Company’s policy is to recognize any interest and penalties accrued related to unrecognized tax benefits in the tax charge. At December 31, 2014 and 2013, the Company had accrued interest and penalties of $0.4 million and $1.0 million, respectively.