Effects of the Tax Cuts and Jobs Act

On December 22, 2017, the President of the United States 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 lowered the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company computed its income tax expense for the year ending September 30, 2019 using a U.S. statutory tax rate of 21%. The Company computed income tax expense for the year ended September 30, 2018 using a U.S. statutory tax rate of 24.5%. The Tax Reform imposed a mandatory repatriation transition tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries for the year ended September 30, 2018.

The Tax Reform also established new tax laws that affected the 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 made the policy election to treat GILTI as a current period expense when incurred. The estimated impact of GILTI is included in the effective tax rate and increases the effective income tax rate by approximately 2.2% for the year ended September 30, 2019.

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 provisional measurement period that should not extend beyond one year from the Tax Reform enactment date for companies to complete the accounting under ASC 740, Income Taxes. The Company’s income tax accounting provisional measurement period for the Tax Reform concluded during the three months ended December 31, 2018 with no adjustments to the provisional amounts recorded during the year ended September 30, 2018.

For the year ended September 30, 2018, the Company recorded income tax expense of $8.6 million related to the remeasurement of deferred tax assets and liabilities, which increased the effective tax rate by 8.5%.

The Tax Reform also included a mandatory repatriation transition tax on previously untaxed accumulated and current E&P of certain of the Company’s foreign subsidiaries. To determine the amount of the transition tax, the Company determined, 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 recorded a transition tax obligation of $11.2 million during the year ended September 30, 2018, which increased the effective tax rate by 11% during the year ended September 30, 2018.

Income tax expense (benefit) for the years ended September 30, 2019, 2018, and 2017 was allocated as follows:



	Year Ended September 30,
(in millions)	2019			2018		2017
Income tax expense attributable to income from operations	$	25.9		$	46.0	$	8.8
Taxes allocated to stockholders’ equity, related to pension liabilities	(0.2		)	0.1		1.0
Taxes allocated to additional paid-in capital, related to share-based compensation	—			—		0.1
Total income tax expense	$	25.7		$	46.1	$	9.9

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



	Year Ended September 30,
(in millions)	2019			2018		2017
Current taxes:
U.S. federal	$	(1.9	)	$	0.8	$	0.7
U.S. State and local	(0.8		)	0.5		1.2
International	24.9			22.4		16.7
Total current taxes	22.2			23.7		18.6
Deferred taxes	3.7			22.3		(9.8		)
Income tax expense	$	25.9		$	46.0	$	8.8

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



	Year Ended September 30,
(in millions)	2019			2018		2017
U.S.	$	(2.6	)	$	9.9	$	(13.9	)
International	113.6			91.6		29.1
Income from operations, before tax	$	111.0		$	101.5	$	15.2

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,
	2019		2018		2017
Federal statutory rate effect of:	21.0	%	24.5	%	35.0	%
U.S. State and local income taxes	(1.5	)%	0.8	%	(2.6	)%
Foreign earnings and losses taxed at different rates	0.7	%	(0.8	)%	11.5	%
Change in foreign valuation allowance	1.0	%	(0.8	)%	(1.4	)%
Change in state valuation allowance	0.5	%	—	%	4.1	%
U.S. permanent items	0.1	%	(0.2	)%	3.6	%
Foreign permanent items	0.7	%	2.1	%	8.1	%
U.S. bargain purchase gain	(1.0	)%	—	%	—	%
Remeasurement of deferred tax	—	%	8.5	%	—	%
Repatriation Transition tax	—	%	11.0	%	—	%
GILTI	2.2	%	—	%	—	%
Other reconciling items	(0.4	)%	0.2	%	(0.6	)%
Effective rate	23.3	%	45.3	%	57.7	%

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



(in millions)	September 30, 2019			September 30, 2018
Deferred tax assets:
Share-based compensation	$	3.3		$	2.8
Deferred compensation	3.6			1.4
Foreign net operating loss carryforwards	2.6			4.2
U.S. State and local net operating loss carryforwards	9.2			8.7
U.S. federal net operating loss carryforwards	1.1			—
Intangible assets	4.8			1.8
Bad debt reserve	1.3			1.5
Tax credit carryforwards	0.5			—
Foreign tax credit carryforwards	5.0			6.5
Other compensation	2.2			3.4
Other	1.1			0.9
Total gross deferred tax assets	34.7			31.2
Less valuation allowance	(8.5		)	(3.5		)
Deferred tax assets	26.2			27.7
Deferred income tax liabilities:
Unrealized gain on securities	3.2			2.6
Prepaid expenses	2.2			1.8
Property and equipment	2.6			3.1
Pension liability	0.2			0.4
Deferred income tax liabilities	8.2			7.9
Deferred income taxes, net	$	18.0		$	19.8

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, 2019 and 2018, the Company has net operating loss carryforwards for U.S. federal, state, local, and foreign income tax purposes of $7.1 million and $9.4 million, net of valuation allowances, respectively, which are available to offset future taxable income in these jurisdictions. During the year ended September 30, 2018, the Company utilized $21.9 million of U.S. federal net operating losses against the mandatory repatriation transition tax. The state and local net operating loss carryforwards of $5.6 million, net of valuation allowance, begin to expire after September 2020.

The Company also has $0.6 million, net of valuation allowances, of federal net operating loss carryforwards due to the acquisition of GMP Securities LLC, as discussed in Note 20. These federal net operating loss carryforwards consist of a portion that will expire in tax years ending 2032 through 2037. The remaining portion of the federal net operating loss carryforwards do not expire, but cannot be utilized until after 2038 and are limited by Internal Revenue Code (“IRC”) Section 382. As of September 30, 2019 and 2018, INTL Asia Pte. Ltd. has a net operating loss carryforward of $0.2 million and $2.9 million, respectively. 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 was reclassified to income taxes receivable during the year ended September 30, 2018. The Company can continue to utilize AMT credits to offset regular income tax liability in fiscal years 2020 through 2021. Any remaining amount is fully refundable by fiscal year 2022. During the year ended September 30, 2018, the Company generated $5.1 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, 2019 was $8.5 million. The net change in the total valuation allowance for the year ended September 30, 2019 was an increase of $5.0 million. Of this amount, $3.3 million is related to federal net operating losses and net unrealized built-in losses acquired through the GMP Securities, LLC acquisition, which are limited by the provisions of IRC Section 382, as further discussed in Note 20. The remaining increase is related to foreign and state net operating loss carryforwards. The valuation allowances as of September 30, 2019 and 2018 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 total amount of undistributed earnings in the Company’s foreign subsidiaries, for income tax purposes, was $383.5 million and $354.7 million as of September 30, 2019 and 2018, respectively. The Company recognized the mandatory repatriation tax related to these undistributed earnings as part of Tax Reform during the year ended September 30, 2018 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 and state taxes in the relevant jurisdictions. The Company does not intend to distribute earnings in a taxable manner, and therefore intends to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received deduction provided for in the Tax Reform, and earnings that would not result in any significant foreign taxes. During the year ended September 30, 2019, the Company repatriated $13.0 million of earnings previously taxed in the U.S. resulting in no significant incremental taxes upon repatriation. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.

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



	Year Ended September 30,
(in millions)	2019			2018		2017
Balance, beginning of year	$	0.1		$	0.1	$	0.1
Gross decreases for tax positions of prior years	(0.1		)	—		—
Balance, end of year	$	—		$	0.1	$	0.1

The Company has a minimal balance of unrecognized tax benefits as of September 30, 2019, that, if recognized, would affect the effective tax rate.

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, 2019 and 2018.

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, 2019, 2018, and 2017.

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, 2012 through September 30, 2019 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, 2019. In Brazil, the Company has open tax years ranging from December 31, 2014 through December 31, 2018. In Argentina, the Company has open tax years ranging from September 30, 2012 to September 30, 2019. In Singapore, the Company has open tax years ranging from September 30, 2015 to September 30, 2019.