SOTHEBYS

Income Taxes

For the years ended December 31, 2017, 2016, and 2015, the significant components of income tax expense consisted of the following (in thousands of dollars):



	2017			2016			2015
Income before taxes:
Domestic	$	3,636		$	(38,567	)	$	11,414
Foreign	138,050			135,301			157,885
Total	$	141,686		$	96,734		$	169,299
Income tax expense—current:
Domestic	$	24,427		$	18,443		$	10,455
State and local	1,492			1,766			5,958
Foreign	27,481			29,904			33,043
Sub-total	53,400			50,113			49,456
Income tax (benefit) expense—deferred:
Domestic	(34,501		)	(19,114		)	69,835
State and local	1,285			(1,034		)	6,378
Foreign	5,231			(4,008		)	5,476
Sub-total	(27,985		)	(24,156		)	81,689
Total	$	25,415		$	25,957		$	131,145

As of December 31, 2017 and 2016, the components of Deferred Tax Assets and Deferred Tax Liabilities consisted of the following (in thousands of dollars):



December 31,	2017			2016
Deferred tax assets:
Asset provisions and liabilities	$	4,832		$	11,512
Inventory writedowns	3,408			10,874
Tax loss and credit carryforwards	3,908			3,708
Difference between book and tax basis of depreciable and amortizable assets	20,218			30,855
Share-based payments and deferred compensation	15,130			26,267
Sub-total	47,496			83,216
Valuation allowance	(3,194		)	(2,819		)
Total deferred tax assets	44,302			80,397
Deferred tax liabilities:
Difference between book and tax basis of other assets and liabilities	859			1,612
Pension obligations	16,280			9,689
Basis differences in equity method investments	1,269			3,423
Undistributed earnings of foreign subsidiaries	2,571			68,201
Bond redemption costs	2,812			—
Total deferred tax liabilities	23,791			82,925
Total net deferred tax assets (liabilities)	$	20,511		$	(2,528	)

As of December 31, 2017, we had deferred tax assets related to various foreign and state loss and tax credit carryforwards totaling $3.9 million that begin to expire in 2020.

As of December 31, 2017 and 2016, we provided valuation allowances of $3.2 million and $2.8 million, respectively, relating to net operating loss carryforwards. The increase in the valuation allowance in 2017 is due primarily to a change in foreign exchange rates.

For the years ended December 31, 2017, 2016, and 2015, our effective income tax rate varied from the U.S. statutory tax rate that was in effect during the periods as follows:



	2017		2016		2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	0.8	%	0.5	%	2.3	%
Foreign taxes at rates different from U.S. rates	(13.5	%)	(25.0	%)	(14.9	%)
U.S. taxes on foreign earnings	1.2	%	9.9	%	50.5	%
Valuation allowance	0.0	%	0.5	%	0.3	%
Effect of enacted tax legislation	0.8	%	(0.1	%)	2.5	%
Changes in tax reserves	(4.5	%)	1.6	%	0.0	%
Other	(1.9	%)	4.4	%	1.8	%
Effective income tax rate	17.9	%	26.8	%	77.5	%

Our effective income tax rate is 17.9% for the year ended December 31, 2017, compared to 26.8% in the prior year. The decrease in our effective income tax rate is primarily due to a decrease in U.S. taxes owed on foreign earnings and the reversal in 2017 of a liability for a previously uncertain tax position for which the statute of limitations has expired. These factors are partially offset by a change in the jurisdictional mix of pre-tax earnings, which resulted in a lower portion of our income coming from jurisdictions with a statutory tax rate that is lower than the 35% rate that was in effect in the U.S. during those periods. To a lesser extent, the change in our effective income tax rate between 2017 and 2016 is impacted by provisional net income tax expense of $1.2 million recorded in the fourth quarter of 2017 related to the U.S. Tax Cuts and Jobs Act, as discussed in more detail below. (See Note 17 for additional information on Uncertain Tax Positions.)

U.S. Tax Reform—The U.S. Tax Cuts and Jobs Act was enacted into law on December 22, 2017. The Act includes significant changes to the U.S. corporate income tax system that are effective on January 1, 2018, including, among other things, (i) a reduction of the U.S. corporate income tax rate from 35% to 21%, (ii) the transition to a modified territorial tax system from a worldwide tax system, (iii) limitations on the deductibility of interest expense and executive compensation, (iv) the imposition of the Base Erosion Anti-Abuse Tax (“BEAT”), a new minimum tax on international payments meant to reduce the ability of multinational companies to erode the U.S. tax base through deductible payments to related parties, and (v) the creation of two new categories of income: (a) foreign-derived intangible income (“FDII”), which is income derived from the sale of property or services to a foreign person which may be taxed at a rate lower than 21%, and (b) global intangible low taxed income (“GILTI”), which is certain income earned by foreign subsidiaries that must be included in the income of the U.S. shareholder. In addition, the Act imposes a one-time transition tax in the current year on the mandatory redeemed repatriation of certain unremitted foreign earnings as of December 31, 2017.

Soon after the Act was enacted into law, the SEC issued SAB 118, which allows companies to record the income tax effects of the Act as a provisional amount based on reasonable estimates for those tax effects. The provisional amount is subject to adjustment as companies complete their analysis of the Act, and collect and prepare the necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, IRS, the FASB, and other standard-setting and regulatory bodies. Any such adjustments may be made within a subsequent measurement period, which should not extend beyond one year from the enactment date.

As of December 31, 2017, we have not completed our accounting for the income tax effects of the Act. However, in accordance with SAB 118, we recorded a provisional net income tax expense of approximately $1.2 million in the fourth quarter of 2017 based on reasonable estimates for those tax effects, consisting of the following:


•	Non-cash income tax expense of $19.8 million due to a reduction in the value of our net deferred tax assets, primarily due to the change in the U.S. corporate tax rate from 35% to 21% and the potential limitation of certain future business deductions;


•	Income tax expense of $40.4 million to record a liability for the one-time mandatory transition tax on certain unremitted and untaxed earnings of our foreign subsidiaries; and


•	A non-cash income tax benefit of $59 million to reverse previously recognized deferred tax liabilities related to the earnings of our foreign subsidiaries that were not deemed to be indefinitely reinvested.

At December 31, 2017, our Consolidated Balance Sheets reflect a provisional income tax payable of $34.6 million (net of foreign tax credits) primarily for the one-time mandatory transition tax on certain unremitted foreign earnings discussed above. We intend to elect to settle this liability in installments over eight years, as allowed by the Act. Accordingly, we have included approximately $32 million of the liability within long-term liabilities on our Consolidated Balance Sheets as of December 31, 2017.

We are still evaluating the effects that BEAT, FDII, GILTI, and other provisions of the Act will have on our Consolidated Financial Statements in future periods. As we complete our analysis of the Act, collect and prepare the necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, the FASB, and other standard-setting and regulatory bodies, we may make adjustments to the provisional amounts recorded in the fourth quarter of 2017. These adjustments may impact our provision for income taxes and effective income tax rate in the period in which the adjustments are determined. Our accounting for the income tax effects of the Act will be completed during the measurement period, which should not extend beyond one year from the enactment date.

Repatriation of Foreign Earnings—As discussed above, as a result of the Act, in the fourth quarter of 2017, we recorded a provisional tax liability of $40.4 million related to the one-time mandatory transition tax on approximately $460 million of foreign earnings that we have not yet repatriated. In 2018, we expect to repatriate approximately $325 million of these foreign earnings to the U.S., and, as a result, have recorded the related foreign withholding taxes of approximately $3.5 million.

Income Tax Payments—Total net income tax payments during 2017, 2016, and 2015 were $52.3 million, $32.4 million, and $53.9 million, respectively.