7.    INCOME TAXES

 

The following table presents the U.S. and non‑U.S. components of income (loss) before income tax expense:

 

 

The current and deferred components of the income tax provision for the years ended December 31, 2017, 2016, and 2015 are as follows:

 

 

The total provision for income taxes differs from the amount which would be computed by applying the appropriate statutory rate to income before income taxes as follows:

 

 

Deferred income taxes reflect the net effect of temporary differences between the tax basis of an asset or liability and its reported amount in the Company’s consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. The significant components of deferred tax assets and liabilities included on the Company’s consolidated statements of financial condition are as follows:

 

 

The Company recorded an increase in the net deferred tax asset of $66,209 for the year ended December 31, 2017, which was primarily attributable to the step-up in tax basis in Group LP assets resulting principally from the redemption of Class A partnership units in connection with the follow-on offerings in January and July 2017 and an increase in deferred compensation, partially offset by the amortization of tax basis in the Group LP assets, the vesting and delivery of equity-based compensation awards in 2017, and the re-measurement of the Company’s net deferred tax assets primarily in connection with the Tax Cuts and Jobs Act, which is described in greater detail below. The estimated impact of such re-measurement is $181,023, which includes adjustments to deferred assets primarily relating to the step-up in tax basis in Group LP assets related to the prior partnership unit exchanges and offerings, and deferred compensation. After the re-measurement, approximately $195,516 of the deferred tax asset related to step-up in tax basis in Group LP assets is attributable to exchanges by certain partners of Group LP who are party to the tax receivable agreement. Pursuant to this agreement, 85% (or $166,189) of the estimated tax benefits associated with this portion of the deferred tax asset are payable to such exchanging partners over the next 15 years and recorded as amount due pursuant to tax receivable agreement in the consolidated statements of financial condition. This amount, together with approximately $10,959 of estimated payments due within the twelve months, comprises our total tax receivable agreement obligation of $177,148 at the end of 2017. The remaining tax benefit is retained by the Company.

 

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

 

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act.  SAB 118 provides a measurement period that should not extend beyond one year from the tax legislation enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete or a reasonable estimate if such accounting is incomplete.

 

In connection with the Company’s initial analysis of the impact of the Tax Act, which reduced the U.S. federal corporate tax rate for future years, the Company re-measured its deferred tax assets and liabilities to the lower enacted tax rate and recorded a provisional net decrease in its deferred tax assets described above, with a corresponding net adjustment to the deferred income tax expense for the year ended December 31, 2017. The liability pursuant to the Company’s tax receivable agreement was also re-measured, which resulted in an estimated reduction of liability of $134,721, which was recorded as a component of other income. See the section in Note 2 regarding the Deferred Tax Asset and Amount Due Pursuant to Tax Receivable Agreement for more detail. The impact of the Tax Act may differ from the estimated amounts recorded due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made in conjunction with the release of additional regulatory guidance that may be issued, and actions the Company may take as a result of Tax Act.

 

As of December 31, 2017, the Company had accumulated net foreign operating loss carryforwards related to its international operations of approximately $29,871 for which it has recorded a deferred tax asset of $7,685. Approximately $26,915 of the operating losses (or $6,725 of the deferred tax asset) has an indefinite life and $2,956 of the operating losses (or $960 of the deferred tax asset) will expire on dates between 2019 and 2026. At December 31, 2017, the Company’s management concluded that a valuation allowance should be established with regard to the tax benefits associated with most foreign net operating losses, as it is more likely than not that these losses will not be fully utilized in future years.

 

Foreign withholding taxes are not provided for on the undistributed earnings of foreign subsidiaries that are essentially permanent in nature. There were no significant untaxed foreign earnings at December 31, 2017, 2016 and 2015.

 

Prior to the Company’s reorganization and IPO of Moelis & Company, the Company had been primarily subject to the New York City unincorporated business tax (“UBT”) and certain other foreign, state and local taxes. The Company’s operations are comprised of entities that are organized as limited liability companies and limited partnerships. For U.S. federal income tax purposes, taxes related to income earned by these entities represent obligations of their interest holders, which are primarily made up of individual partners and members and have historically not been reflected in the consolidated statements of financial condition. In connection with the Company’s reorganization and IPO, the Company became subject to U.S. corporate federal, state and local income tax on its allocable share of results of operations from Group LP.

 

The Company is subject to taxation in certain U.S., state, local, and foreign jurisdictions. As of December 31, 2017, the Company’s tax years for 2016, 2015, and 2014 are generally subject to examination by the tax authorities. As of December 31, 2017, the Company does not expect any material changes in its tax provision related to any outstanding current examinations. Developments with respect to such examinations are monitored on an ongoing basis and adjustments to tax liabilities are made as appropriate.

 

The Company has no unrecognized tax benefits for the periods ended December 31, 2017, 2016 and 2015.