Entity information:
INCOME TAXES:
Tax Reform Act
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates and creating a territorial tax system with a one-time mandatory deemed repatriation tax on previously deferred earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017 and recognized an incremental $1.6 million income tax expense in 2017.
We have an estimated $33 million of undistributed earnings and profits (“E&P”) in our foreign subsidiary, Westwood International Advisors, subject to the one-time mandatory deemed repatriation, for which we recognized an incremental $1.8 million income tax expense in 2017. After the utilization of existing tax credits, the Company expects to pay additional U.S. federal cash taxes of approximately $1.8 million on the mandatory deemed repatriation. Of this amount, $1.1 million is payable over eight years, of which $1.0 million is included in "Noncurrent income taxes payable" on our Consolidated Balance Sheets for the year ended December 31, 2017. The remaining$88,000 is netted in our "Prepaid income taxes" on our Consolidated Balance Sheets for the year ended December 31, 2017, as our U.S. federal tax balance is in a receivable position at year-end.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return any foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We expect to be subject to minimal U.S. tax liability on GILTI income beginning in 2018. We have elected to account for GILTI tax expense in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our Consolidated Financial Statements for the year ended December 31, 2017.
The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if the re-calculated taxable income under BEAT is greater than regular taxable income. We do not expect to be subject to this tax and therefore have not included any tax impacts of BEAT in our Consolidated Financial Statements for the year ended December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have provisionally recognized the incremental tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in our Consolidated Financial Statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued and actions we may take as a result of the Tax Reform Act. The accounting is expected to be complete when our 2017 U.S. corporate income tax return is filed in the third quarter of 2018.
Income Tax Provision
Income before income taxes by jurisdiction is as follows (in thousands):
 
 
Years ended December 31,
 
 
2017
 
2016
 
2015
United States
 
$
17,531

 
$
21,539

 
$
27,324

Canada
 
16,362

 
12,471

 
14,896

Total
 
$
33,893

 
$
34,010

 
$
42,220


Income tax expense differs from the amount that would otherwise have been calculated by applying the U.S. Federal corporate tax rate of 35% to income before income taxes.
The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in thousands):
 
 
Years ended December 31,
 
 
2017
 
2016
 
2015
Income tax provision computed at US federal statutory rate
 
$
11,859

 
35.0
 %
 
$
11,893

 
35.0
 %
 
$
14,777

 
35.0
 %
Canadian rate differential
 
(1,398
)
 
(4.1
)
 
(1,050
)
 
(3.1
)
 
(1,287
)
 
(3.0
)
Change in uncertain tax positions, net of federal benefit
 
(3
)
 
—

 
542

 
1.6

 
1,059

 
2.5

State and local income taxes, net of federal benefit
 
626

 
1.9

 
230

 
0.6

 
465

 
1.1

Rate changes
 
1,578

 
4.6

 
—

 
—

 
—

 
—

Tax on deemed repatriation
 
1,767

 
5.2

 
—

 
—

 
—

 
—

Other, net
 
(525
)
 
(1.6
)
 
(252
)
 
(0.7
)
 
101

 
0.2

Total income tax expense
 
$
13,904

 
41.0
 %
 
$
11,363

 
33.4
 %
 
$
15,115

 
35.8
 %
Effective income tax rate
 
41.0
%
 
 

 
33.4
%
 
 

 
35.8
%
 
 


We include penalties and interest on income-based taxes in the “General and administrative” line on our Consolidated Statements of Comprehensive Income. We recorded $181,000, $101,000 and $119,000 of penalties and interest in 2017, 2016 and 2015, respectively.
Income tax provision (benefit) as set forth in the Consolidated Statements of Comprehensive Income consisted of the following components (in thousands):
 
 
Years ended December 31,
 
 
2017
 
2016
 
2015
Current taxes:
 
 

 
 

 
 

US Federal
 
$
1,122

 
$
6,765

 
$
12,015

State and local
 
662

 
1,136

 
2,564

Foreign
 
4,578

 
3,313

 
3,821

Total current taxes
 
6,362

 
11,214

 
18,400

Deferred taxes:
 
 

 
 

 
 

US Federal
 
7,569

 
314

 
(3,331
)
State and local
 
22

 
36

 
(156
)
Foreign
 
(49
)
 
(201
)
 
202

Total deferred taxes
 
7,542

 
149

 
(3,285
)
Total income tax expense
 
$
13,904

 
$
11,363

 
$
15,115


Deferred Income Taxes
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below (in thousands):
 
 
As of December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 

 
 

Share-based compensation expense
 
$
3,851

 
$
6,325

Deferred rent
 
441

 
762

Compensation and benefits payable
 
719

 
4,907

Federal unrecognized tax benefit
 
46

 
942

Other
 
140

 
74

Total deferred tax assets
 
5,197

 
13,010

Deferred tax liabilities:
 
 

 
 

Property and equipment
 
(586
)
 
(1,013
)
Intangibles
 
(1,029
)
 
(1,023
)
Unrealized gains on investments
 
(175
)
 
(71
)
Total deferred tax liabilities
 
(1,790
)
 
(2,107
)
Net deferred tax assets
 
$
3,407

 
$
10,903


The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of December 31, 2017, the Company’s 2014, 2015 and 2016 tax years are open for examination by the Internal Revenue Service, and various state and foreign jurisdiction tax years remain open to examination. We are not currently under audit by any taxing jurisdiction.
We have not provided foreign withholding taxes on the undistributed earnings of our foreign subsidiary, Westwood International Advisors. If these funds were needed for our U.S. operations, we would be required to accrue and pay incremental foreign withholding taxes to repatriate a portion of these funds. Our current intent is to permanently reinvest the funds subject to withholding taxes outside of the U.S., and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. As of December 31, 2017, the cumulative amount of earnings upon which foreign withholding taxes have not been provided is approximately $20 million, and the unrecognized deferred tax liability related to these earnings is approximately $1.0 million.
As of December 31, 2017 and 2016, the Company's gross liability related to uncertain tax positions was $160,000 and $2.5 million, respectively. A number of years may elapse before an uncertain tax position is finally resolved. To the extent that the Company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations or other changes in circumstances, such liabilities, as well as the related interest and penalties, would be reversed as a reduction of income tax expense, net of federal tax effects, in the period such determination is made. A reconciliation of the change in recorded uncertain tax positions during the years ended December 31, 2017 and 2016 is as follows (in thousands):
Balance at January 1, 2016
 
$
1,629

   Additions for tax positions related to the current year
 
354

   Additions for tax positions related to prior years
 
580

     Reductions for tax positions related to prior years
 
(101
)
Balance at December 31, 2016
 
$
2,462

   Additions for tax positions related to the current year
 
67

   Reductions for tax positions related to prior years
 
(776
)
   Payments for tax positions related to prior years
 
(1,593
)
Balance at December 31, 2017
 
$
160


It is reasonably possible within the next twelve months that the liability for uncertain tax positions could decrease by as much as $160,000 as a result of settlements with certain taxing authorities that, if recognized, would decrease our provision for income taxes by $127,000.