|
25. |
Income Taxes |
The Company’s consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners (see Note 2—“Limited Partnership Interests in BGC Holdings and Newmark Holdings” for discussion of partnership interests) rather than the partnership entity.
The provision for income taxes consisted of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
42,492 |
|
|
$ |
62,746 |
|
|
$ |
27,299 |
|
|
U.S. state and local |
|
|
3,730 |
|
|
|
736 |
|
|
|
8,114 |
|
|
Foreign |
|
|
35,477 |
|
|
|
26,644 |
|
|
|
22,249 |
|
|
UBT |
|
|
4,309 |
|
|
|
3,451 |
|
|
|
2,942 |
|
|
|
|
|
86,008 |
|
|
|
93,577 |
|
|
|
60,604 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
76,225 |
|
|
|
(44,562 |
) |
|
|
76,539 |
|
|
U.S. state and local |
|
|
(12,242 |
) |
|
|
8,097 |
|
|
|
(25,118 |
) |
|
Foreign |
|
|
(353 |
) |
|
|
4,694 |
|
|
|
10,549 |
|
|
UBT |
|
|
630 |
|
|
|
(1,474 |
) |
|
|
(1,955 |
) |
|
|
|
|
64,260 |
|
|
|
(33,245 |
) |
|
|
60,015 |
|
|
Provision for income taxes |
|
$ |
150,268 |
|
|
$ |
60,332 |
|
|
$ |
120,619 |
|
The Company had pre-tax income of $232.0 million, $314.2 million and $438.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. The pre-tax income for the year ended December 31, 2015 was primarily related to the sale of Trayport.
The Company had pre-tax income (loss) from domestic operations of $73.7 million, $139.6 million and $(70.0) million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s pre-tax loss from domestic operations in the year ended December 31, 2015 was primarily related to the charges taken concurrently with the sale of Trayport. The Company had pre-tax income (loss) from foreign operations of $158.3 million, $174.6 million and $508.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Differences between the Company’s actual income tax expense and the amount calculated utilizing the U.S. federal statutory rates were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income tax expense at 35% statutory rate |
|
$ |
81,200 |
|
|
$ |
109,970 |
|
|
$ |
153,580 |
|
|
Non-controlling interest |
|
|
(3,857 |
) |
|
|
(8,958 |
) |
|
|
15,660 |
|
|
Incremental impact of foreign taxes compared to federal tax rate |
|
|
(20,886 |
) |
|
|
(19,851 |
) |
|
|
(5,037 |
) |
|
Income from recast periods |
|
|
(34,224 |
) |
|
|
(50,243 |
) |
|
|
(184,295 |
) |
|
Other permanent differences |
|
|
11,069 |
|
|
|
7,018 |
|
|
|
7,665 |
|
|
U.S. state and local taxes, net of U.S. federal benefit |
|
|
2,075 |
|
|
|
14,051 |
|
|
|
(3,870 |
) |
|
New York City UBT |
|
|
828 |
|
|
|
1,646 |
|
|
|
(1,081 |
) |
|
One-time transition tax related to tax reform |
|
|
36,566 |
|
|
|
— |
|
|
|
— |
|
|
Other rate changes |
|
|
(9,964 |
) |
|
|
1,912 |
|
|
|
3,511 |
|
|
Revaluation of deferred taxes related to tax reform |
|
|
84,340 |
|
|
|
— |
|
|
|
— |
|
|
Uncertain tax positions |
|
|
4,858 |
|
|
|
1,520 |
|
|
|
(6,425 |
) |
|
U.S. tax on foreign earnings, net of tax credits |
|
|
— |
|
|
|
— |
|
|
|
137,122 |
|
|
U.S. valuation allowance |
|
|
— |
|
|
|
(1,269 |
) |
|
|
(12,856 |
) |
|
Other |
|
|
(1,737 |
) |
|
|
4,536 |
|
|
|
16,645 |
|
|
Provision for income taxes |
|
$ |
150,268 |
|
|
$ |
60,332 |
|
|
$ |
120,619 |
|
The Tax Cut and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, as described below, it has made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items, it was able to determine a reasonable estimate for which it recognized a provisional amount of $120.9 million, which is included as a component of income tax expense from continuing operations. The Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as additional guidance is released and better information becomes available.
Provisional Amounts
The Company recorded a provisional amount of $84.3 million tax expense for the impact of the remeasurement of the Company’s deferred tax inventory. The Company remeasured the deferred tax balances based on the rates at which they are expected to reverse in the future, which is generally expected to be 21%. However, it is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The Company recorded a provisional amount for the one-time transition tax on deemed repatriated earnings of foreign subsidiaries net of foreign tax credits of $36.6 million of tax expense for the year ended December 31, 2017. The Company has not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The provisional amount may change when it finalizes the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets. As of December 31, 2017, except for the cash proceeds from the sale of Trayport, the Company’s intention to permanently reinvest these undistributed foreign pre-tax earnings in the Company’s foreign operations remains unchanged. However, this policy will be further re-evaluated and assessed based on the Company’s overall business needs and requirements.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized.
Significant components of the Company’s deferred tax asset and liability consisted of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax asset |
|
|
|
|
|
|
|
|
|
Basis difference of investments |
|
|
75,125 |
|
|
|
5,024 |
|
|
Deferred compensation |
|
|
153,869 |
|
|
|
140,252 |
|
|
Other deferred and accrued expenses |
|
|
16,244 |
|
|
|
40,863 |
|
|
Net operating loss and credit carry-forwards |
|
|
54,588 |
|
|
|
84,214 |
|
|
Total deferred tax asset1 |
|
|
299,826 |
|
|
|
270,353 |
|
|
Valuation allowance |
|
|
(35,381 |
) |
|
|
(38,553 |
) |
|
Deferred tax asset, net of valuation allowance |
|
|
264,445 |
|
|
|
231,800 |
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
32,976 |
|
|
|
6,925 |
|
|
U.S. tax on foreign earnings |
|
|
16,799 |
|
|
|
40,614 |
|
|
Other |
|
|
832 |
|
|
|
— |
|
|
Total deferred tax liability1 |
|
|
50,607 |
|
|
|
47,539 |
|
|
Net deferred tax asset |
|
$ |
213,838 |
|
|
$ |
184,261 |
|
|
1 |
Before netting within tax jurisdictions. |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the carrying amounts of existing assets and liabilities and their respective tax basis. Accordingly, a deferred tax asset of $108.6 million has been recorded against equity for the period ended December 31, 2017 for the basis difference between Berkeley Point’s net assets and its tax basis.
The Company has deferred tax assets associated with net operating losses in U.S. Federal, U.S. state and local, and non-U.S. jurisdictions of $3.2 million, $7.8 million and $40.3 million, respectively. These losses will begin to expire in 2019, 2025 and 2018, respectively. The Company’s deferred tax asset and liability are included in the Company’s consolidated statements of financial condition as components of “Other assets” and “Accounts payable, accrued and other liabilities,” respectively.
As a result of the adoption of ASU 2016-09, the Company recorded a deferred tax asset of $1.1 million with respect to U.S. Federal net operating losses related to previously unrecognized tax benefits outstanding as of January 1, 2017.
Pursuant to FASB guidance on Accounting for Uncertainty in Income Taxes, the Company provides for uncertain tax positions as a component of income tax expense based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.
A reconciliation of the beginning to the ending amounts of gross unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows (in thousands):
|
Balance, December 31, 2015 |
|
$ |
1,558 |
|
|
Increases for prior year tax positions |
|
|
1,503 |
|
|
Decreases for prior year tax positions |
|
|
— |
|
|
Increases for current year tax positions |
|
|
17 |
|
|
Decreases related to settlements with taxing authorities |
|
|
— |
|
|
Decreases related to a lapse of applicable statute of limitations |
|
|
— |
|
|
Balance, December 31, 2016 |
|
$ |
3,078 |
|
|
Increases for prior year tax positions |
|
|
3,855 |
|
|
Decreases for prior year tax positions |
|
|
— |
|
|
Increases for current year tax positions |
|
|
130 |
|
|
Decreases related to settlements with taxing authorities |
|
|
— |
|
|
Decreases related to a lapse of applicable statute of limitations |
|
|
— |
|
|
Balance, December 31, 2017 |
|
$ |
7,063 |
|
As of December 31, 2017, the Company’s unrecognized tax benefits, excluding related interest and penalties, were $7.1 million, of which $7.1 million, if recognized, would affect the effective tax rate. The Company is currently open to examination by tax authorities for tax years beginning 2008 in United States Federal, state and local jurisdictions and certain non-U.S. jurisdictions. The Company is currently under examination by tax authorities in the United States Federal and certain state and local jurisdictions. It is reasonably possible that over the next 12 months, the resolution of these examinations may decrease the balance of unrecognized tax benefits by as much as $3.0 million.
The Company recognizes interest and penalties related to unrecognized tax benefits in “Provision for income taxes”in the Company’s consolidated statements of operations. As of December 31, 2017, the Company accrued $2.7 million for income tax-related interest and penalties of which $2.4 million was accrued during 2017.