Income Taxes

Effects of the Tax Cuts and Jobs Act

On December 22, 2017, the President of the United States (“U.S.”) signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (the “Tax Reform”). Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform lowers the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company computed income tax expense for the year ended September 30, 2018 using a U.S. statutory tax rate of 24.5%. The 21% U.S. statutory tax rate will apply to fiscal years ending September 30, 2019 and thereafter. The Tax Reform also imposes a one-time mandatory repatriation transition tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Reform enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740 - Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform is incomplete but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 based on the tax laws that were in effect immediately before the enactment of the Tax Reform.

The accounting for certain elements of the Tax Reform is incomplete. However, as of September 30, 2018, the accounting for the remeasurement of the deferred tax assets and liabilities is complete. The remeasurement of the deferred tax assets and liabilities resulted in $8.6 million of income tax expense, which increased the effective tax rate by 8.5% during the year ended September 30, 2018.

To determine the amount of the mandatory repatriation transition tax, the Company must determine, in addition to other factors, the amount of post 1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company made a reasonable estimate of the mandatory repatriation transition tax and recorded a provisional transition tax obligation of $11.2 million, which increased the effective tax rate by 11% during the year ended September 30, 2018. While the Company can make reasonable estimates for the deemed repatriation transition tax, the final tax impact may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by taxing authorities, and actions the Company may take.

The Tax Reform also establishes new tax laws that will affect the fiscal year ending September 30, 2019, including, but not limited to, (1) elimination of the corporate alternative minimum tax, (2) a new provision designed to tax global intangible low-taxed income (GILTI), (3) limitations on the utilization of net operating losses incurred in tax years beginning after September 30, 2018 to 80% of taxable income per tax year, (4) the creation of the base erosion anti-abuse tax (BEAT), (5) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, and (6) limitations on the deductibility of interest expense and certain executive compensation. The Company has not yet determined the potential tax impact of provisions that are not yet effective, such as GILTI, BEAT, and the elimination of U.S. tax on dividends of future foreign earnings. The Company expects to make the policy election to treat GILTI as a period expense in the first quarter of fiscal year 2019.

Income tax expense (benefit) for the years ended September 30, 2018, 2017, and 2016 was allocated as follows:



	Year Ended September 30,
(in millions)	2018		2017		2016
Income tax expense attributable to income from operations	$	46.0	$	8.8	$	18.0
Taxes allocated to stockholders’ equity, related to pension liabilities	0.1		1.0		0.2
Taxes allocated to additional paid-in capital, related to share-based compensation	—		0.1		(0.8		)
Total income tax expense	$	46.1	$	9.9	$	17.4

The components of income tax expense (benefit) attributable to income from operations were as follows:



	Year Ended September 30,
(in millions)	2018		2017			2016
Current taxes:
U.S. federal	$	0.8	$	0.7		$	1.3
U.S. State and local	0.5		1.2			0.8
International	22.4		16.7			16.8
Total current taxes	23.7		18.6			18.9
Deferred taxes	22.3		(9.8		)	(0.8		)
Income tax benefit attributable to interest income	—		—			(0.1		)
Income tax expense	$	46.0	$	8.8		$	18.0

U.S. and international components of (loss) income from operations, before tax, was as follows:



	Year Ended September 30,
(in millions)	2018		2017			2016
U.S.	$	9.9	$	(13.9	)	$	4.8
International	91.6		29.1			67.9
Income from operations, before tax	$	101.5	$	15.2		$	72.7

Items accounting for the difference between income taxes computed at the federal statutory rate and income tax expense were as follows:



	Year Ended September 30,
	2018		2017		2016
Federal statutory rate effect of:	24.5	%	35.0	%	35.0	%
U.S. State and local income taxes	0.8	%	(2.6	)%	1.3	%
Foreign earnings and losses taxed at lower rates	(0.8	)%	11.5	%	(11.0	)%
Change in foreign valuation allowance	(0.8	)%	(1.4	)%	(0.3	)%
Change in state valuation allowance	—	%	4.1	%	—	%
U.S. permanent items	(0.2	)%	3.6	%	0.8	%
Foreign permanent items	2.1	%	8.1	%	1.9	%
U.S. bargain purchase gain	—	%	—	%	(3.0	)%
Remeasurement of deferred tax	8.5	%	—	%	—	%
Repatriation Transition tax	11.0	%	—	%	—	%
Other reconciling items	0.2	%	(0.6	)%	0.3	%
Effective rate	45.3	%	57.7	%	25.0	%

The components of deferred income tax assets and liabilities were as follows:



(in millions)	September 30, 2018			September 30, 2017
Deferred tax assets:
Share-based compensation	$	2.8		$	3.7
Pension liability	—			0.1
Deferred compensation	1.4			2.0
Foreign net operating loss carryforwards	4.2			5.6
U.S. State and local net operating loss carryforwards	8.7			6.6
U.S. federal net operating loss carryforwards	—			21.9
Intangible assets	1.8			6.1
Bad debt reserve	1.5			1.4
Tax credit carryforwards	—			1.6
Foreign tax credit carryforwards	6.5			—
Other compensation	3.4			3.6
Other	0.9			1.9
Total gross deferred tax assets	31.2			54.5
Less valuation allowance	(3.5		)	(4.0		)
Deferred tax assets	27.7			50.5
Deferred income tax liabilities:
Unrealized gain on securities	2.6			3.2
Prepaid expenses	1.8			2.5
Property and equipment	3.1			2.2
Pension liability	0.4			—
Deferred income tax liabilities	7.9			7.9
Deferred income taxes, net	$	19.8		$	42.6

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

As of September 30, 2018 and 2017, the Company has net operating loss carryforwards for U.S. federal, state, local, and foreign income tax purposes of $9.4 million and $30.1 million, net of valuation allowances, respectively, which are available to offset future taxable income in these jurisdictions. The Company utilized the $21.9 million U.S. federal net operating loss in the current year against the mandatory repatriation transition tax. The state and local net operating loss carryforwards of $5.7 million, net of valuation allowance, begin to expire after September 2020. INTL Asia Pte. Ltd. has a net operating loss carryforward of $2.9 million. This Singapore net operating loss has an indefinite carryforward and, in the judgment of management, is more likely than not to be realized. As a result of Tax Reform, the AMT credit carryforward deferred tax asset has been reclassified to income taxes receivable. The Company can continue to utilize AMT credits to offset regular income tax liability in fiscal years 2019 through 2021. Any remaining amount is fully refundable by fiscal year 2022. In the current year, the Company generated $6.5 million in foreign tax credit carryforwards as part of the mandatory repatriation transition tax. These credits expire in fiscal year 2028. In the judgment of management, the Company believes that sufficient taxable income will be earned to utilize the foreign tax credit carryforwards within 10 years.

The valuation allowance for deferred tax assets as of September 30, 2018 was $3.5 million. The net change in the total valuation allowance for the year ended September 30, 2018 was a decrease of $0.5 million. The valuation allowances as of September 30, 2018 and 2017 were primarily related to U.S. state and local and foreign net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized.

The Company incurred U.S. federal, state, and local taxable losses for the years ended September 30, 2018 (excluding the taxable income associated with the mandatory repatriation transition tax), 2017, and 2016 of $(3.7) million, $(20.5) million, and $(9.7) million, respectively. The differences between actual levels of past taxable losses and pre-tax book income (losses) are primarily attributable to temporary differences in these jurisdictions, such as tax deductible amortization and bonus depreciation. When evaluating if U.S. federal, state, and local deferred taxes are realizable, the Company considered deferred tax liabilities of $5.0 million that are scheduled to reverse from 2019 to 2021 and $2.5 million of deferred tax liabilities associated with unrealized gains in securities which the Company could sell, if necessary. Furthermore, the Company considered its ability to implement business and tax planning strategies that would allow the remaining U.S. federal, state, and local deferred tax assets, net of valuation allowances, to be realized in less than 5 years. Based on the tax planning strategies that can be implemented, management believes that it is more likely than not that the Company will realize the tax benefit of the deferred tax assets, net of the existing valuation allowance, in the future.

The total amount of undistributed earnings in the Company’s foreign subsidiaries, for income tax purposes, was $354.7 million as of September 30, 2018. The Company recognized the mandatory repatriation tax related to these undistributed earnings as part of Tax Reform and, as a result, repatriation of these amounts would not be subject to additional U.S. federal income tax but may be subject to applicable withholding taxes in the relevant jurisdictions. The Company’s intent is to permanently reinvest these funds outside of the United States, with the exception of $13.0 million that will be distributed in fiscal year 2019. Foreign withholding tax is not applicable to this distribution.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended September 30,
(in millions)	2018		2017		2016
Balance, beginning of year	$	0.1	$	0.1	$	—
Gross increases for tax positions related to prior years	—		—		0.1
Balance, end of year	$	0.1	$	0.1	$	0.1

The Company has a minimal balance of unrecognized tax benefits as of September 30, 2018, that, if recognized, would affect the effective tax rate. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect this change to have a material impact on the results of operations or the financial position of the Company.

Accrued interest and penalties are included in the related tax liability line in the consolidated balance sheets. The Company had no accrued interest and penalties included in the consolidated balance sheets as of September 30, 2018 and 2017.

The Company recognizes accrued interest and penalties related to income taxes as a component of income tax expense. The Company had no amount of interest, net of federal benefit, and penalties recognized as a component of income tax expense during the years ended September 30, 2018, 2017, and 2016.

The Company and its subsidiaries file income tax returns with the U.S. federal jurisdiction and various U.S. state and local and foreign jurisdictions. The Company has open tax years ranging from September 30, 2010 through September 30, 2018 with U.S. federal and state and local taxing authorities. In the U.K., the Company has open tax years ending September 30, 2017 to September 30, 2018. In Brazil, the Company has open tax years ranging from December 31, 2013 through December 31, 2017. In Argentina, the Company has open tax years ranging from September 30, 2011 to September 30, 2018. In Singapore, the Company has open tax years ranging from September 30, 2014 to September 30, 2018.