10. INCOME TAXES
The provision for income taxes (benefits) by taxing jurisdiction consisted of:
|
|
|
Years Ended |
|
|||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
133,250 |
|
|
$ |
93,071 |
|
|
$ |
85,540 |
|
|
U.S. state and local |
|
|
16,312 |
|
|
|
16,363 |
|
|
|
22,108 |
|
|
Non U.S. |
|
|
32,267 |
|
|
|
32,616 |
|
|
|
22,156 |
|
|
|
|
|
181,829 |
|
|
|
142,050 |
|
|
|
129,804 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(12,502 |
) |
|
|
(13,010 |
) |
|
|
(10,546 |
) |
|
U.S. state and local |
|
|
(2,119 |
) |
|
|
(2,235 |
) |
|
|
1,460 |
|
|
Non U.S. |
|
|
(4,281 |
) |
|
|
(1,722 |
) |
|
|
(1,202 |
) |
|
|
|
|
(18,902 |
) |
|
|
(16,967 |
) |
|
|
(10,288 |
) |
|
Provision for income taxes from continuing operations |
|
$ |
162,927 |
|
|
$ |
125,083 |
|
|
$ |
119,516 |
|
|
Provision for income taxes from discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,390 |
|
The following table reconciles the provision to the U.S. federal statutory income tax rate for income from continuing operations:
|
|
|
Years Ended |
|
|||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal statutory income tax rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
U.S. state and local income taxes, net of U.S. federal income tax benefits |
|
|
1.84 |
% |
|
|
2.38 |
% |
|
|
4.44 |
% |
|
Change in tax rates applicable to non-U.S. earnings |
|
|
(7.60 |
%) |
|
|
(3.73 |
%) |
|
|
(2.73 |
%) |
|
Domestic tax credits and incentives |
|
|
(0.24 |
%) |
|
|
(0.26 |
%) |
|
|
(2.62 |
%) |
|
Net tax charge related to Tax Reform |
|
|
7.40 |
% |
|
|
— |
% |
|
|
— |
% |
|
Excess Stock Based Compensation |
|
|
(1.25 |
%) |
|
|
— |
% |
|
|
— |
% |
|
Other |
|
|
(0.25 |
%) |
|
|
(0.98 |
%) |
|
|
0.10 |
% |
|
Effective income tax rate |
|
|
34.90 |
% |
|
|
32.41 |
% |
|
|
34.19 |
% |
On December 22, 2017 the U.S. government enacted Tax Reform. Tax Reform significantly revises the U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time tax on deemed repatriation of historic earnings and profits (“E&P”) of foreign subsidiaries (the “Toll Charge”). The provisions of Tax Reform will impact the Company for the annual reporting periods, including interim periods within those periods, beginning after December 31, 2017 as well as during the three months ended December 31, 2017. The U.S. federal income tax rate reduction was effective as of January 1, 2018.
Pursuant to SAB 118 and given the amount and complexity of the changes in tax law resulting from Tax Reform, the Company has not finalized the accounting for the income tax effects of Tax Reform. This includes the provisional amounts recorded related to the Toll Charge, the remeasurement of deferred taxes and the change in the Company’s indefinite reinvestment assertion. The impact of Tax Reform may differ from this estimate, possibly materially, during the one-year measurement period due to, among other things, further refinement of the Company’s calculations as it completes its tax returns for the fiscal year ended December 31, 2017, changes in interpretations and assumptions the Company has made and ongoing guidance and accounting interpretations that may be issued as a result of Tax Reform.
The Company’s provisional accounting for the effects of Tax Reform resulted in a net charge of $34.5 million in the provision for income taxes for MSCI that primarily included an estimated tax charge of approximately $47.5 million related to the Toll Charge and an estimated tax charge of approximately $16.0 million related to a change in assertion that those profits were permanently reinvested overseas as of December 31, 2017, partially offset by an estimated tax benefit of approximately $29.0 million related to the revaluation of deferred taxes at the now lower statutory corporate rate.
The Toll Charge is based on the Company’s E&P of foreign subsidiaries for which the Company had not previously recognized U.S. income taxes. The total estimated Toll Charge of $47.5 million was recognized discretely in the year ended December 31, 2017. As of December 31, 2017, $43.6 million of the Toll Charge was held in “Other non-current liabilities” on the Consolidated Statement of Financial Condition as the amounts are not payable until after December 31, 2018. The Company has not yet finalized its calculation of the total E&P for its foreign subsidiaries.
As of December 31, 2017, the Company no longer considers available cash balances to be indefinitely reinvested and recorded an estimated tax charge of $16.0 million related to foreign withholding taxes during the year ended December 31, 2017. However, the Company is continuing to assess its intentions related to its indefinite reinvestment assertion for future periods.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016, were as follows:
|
|
|
As of |
|
|||||
|
|
|
December 31, |
|
|
December 31, |
|
||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Employee compensation and benefit plans |
|
$ |
19,646 |
|
|
$ |
27,914 |
|
|
Deferred rent |
|
|
5,308 |
|
|
|
7,869 |
|
|
Pension |
|
|
1,520 |
|
|
|
1,965 |
|
|
Unearned revenue |
|
|
853 |
|
|
|
1,322 |
|
|
Loss carryforwards - non-current |
|
|
18,105 |
|
|
|
27,616 |
|
|
Other |
|
|
1,435 |
|
|
|
558 |
|
|
Subtotal |
|
|
46,867 |
|
|
|
67,244 |
|
|
Less: valuation allowance |
|
|
(11,575 |
) |
|
|
(17,807 |
) |
|
Total deferred tax assets |
|
$ |
35,292 |
|
|
$ |
49,437 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
$ |
(73,634 |
) |
|
$ |
(121,900 |
) |
|
Investment in foreign subsidiaries |
|
|
(16,108 |
) |
|
|
— |
|
|
Property, equipment and leasehold improvements, net |
|
|
(11,564 |
) |
|
|
(12,073 |
) |
|
Total deferred tax liabilities |
|
$ |
(101,306 |
) |
|
$ |
(133,973 |
) |
|
Net deferred tax liabilities |
|
$ |
(66,014 |
) |
|
$ |
(84,536 |
) |
As presented in the table above, the Company has certain loss carryforward items. The tax value of the capital loss carryforward is $10.6 million which is set to expire in 2019. There is a full valuation allowance against this item. The tax value of the United States portion of the net operating loss carryforwards is $6.3 million which is subject to an annual limitation on utilization and will begin to expire in 2020. There is a valuation allowance against state tax losses of $0.4 million. As of December 31, 2017, the tax value of foreign net operating loss carryforwards was $1.3 million with a related valuation allowance of $0.6 million.
The following table presents changes in the Company’s deferred tax asset valuation allowance for the periods indicated:
|
|
|
Years Ended |
|
|||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Beginning balance |
|
$ |
17,807 |
|
|
$ |
21,052 |
|
|
$ |
21,232 |
|
|
Additions charged to cost and expenses |
|
|
324 |
|
|
|
1,862 |
|
|
|
— |
|
|
Additions charged to other accounts |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deductions |
|
|
(6,556 |
) |
|
|
(5,107 |
) |
|
|
(180 |
) |
|
Ending balance |
|
$ |
11,575 |
|
|
$ |
17,807 |
|
|
$ |
21,052 |
|
The following table presents the components of income before provision for income taxes generated by domestic or foreign operations for the periods indicated:
|
|
|
Years Ended |
|
|||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Domestic |
|
$ |
283,779 |
|
|
$ |
263,536 |
|
|
$ |
282,764 |
|
|
Foreign (1) |
|
|
183,120 |
|
|
|
122,402 |
|
|
|
66,790 |
|
|
Total income before provision for income taxes |
|
$ |
466,899 |
|
|
$ |
385,938 |
|
|
$ |
349,554 |
|
|
(1) |
Foreign income before provision for income taxes is defined as income generated from operations located outside the U.S., which includes income from foreign branches of U.S. companies. |
Cumulative earnings attributable to foreign subsidiaries were $450.7 million, $341.6 million and $224.8 million for the years ended December 31, 2017, 2016, and 2015, respectively. The Company has recorded a $16.0 million charge to provision for income taxes related to foreign withholding taxes that would be payable upon repatriation.
The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it files income tax returns. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. As part of the Company’s periodic review of unrecognized tax benefits and based on new information regarding the status of federal and state examinations, the Company’s unrecognized tax benefits are remeasured. It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the effective tax rate over the next 12 months.
The Company believes the resolution of tax matters will not have a material effect on the Consolidated Statement of Financial Condition of the Company, although a resolution could have a material impact on the Company’s Consolidated Statement of Income for a particular future period and on the Company’s effective tax rate for any period in which such resolution occurs.
The following table presents a reconciliation of the beginning and ending amount of the gross unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2017, 2016 and 2015:
|
|
|
Years Ended |
|
|||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|||
|
Gross unrecognized tax benefits |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
7,936 |
|
|
$ |
8,692 |
|
|
$ |
6,525 |
|
|
Increases based on tax positions related to the current period |
|
|
3,389 |
|
|
|
575 |
|
|
|
536 |
|
|
Increases based on tax positions related to prior periods |
|
|
519 |
|
|
|
135 |
|
|
|
2,131 |
|
|
Decreases based on tax positions related to prior periods |
|
|
(6 |
) |
|
|
(3 |
) |
|
|
(500 |
) |
|
Decreases related to settlements with taxing authorities |
|
|
(1,152 |
) |
|
|
(1,463 |
) |
|
|
— |
|
|
Decreases related to a lapse of applicable statute of limitations |
|
|
(664 |
) |
|
|
— |
|
|
|
— |
|
|
Ending balance |
|
$ |
10,022 |
|
|
$ |
7,936 |
|
|
$ |
8,692 |
|
The total amount of unrecognized tax benefits was $9.4 million, net of federal benefit of state issues, competent authority and foreign tax credit offsets, as of December 31, 2017, which, if recognized, would favorably affect the effective tax rate in future periods. The Company recognizes the accrual of interest and penalties related to unrecognized tax benefits in the “Provision for income taxes” in the Consolidated Statement of Income. For the year ended December 31, 2017, the Company recognized $0.2 million of interest in the Consolidated Statement of Income with respect to unrecognized tax benefits. No significant penalties were recognized in the Consolidated Statement of Income for the year ended December 31, 2017. The amount of accrued interest, which includes interest related to uncertain tax positions and accrued income tax expense, recorded on the Consolidated Statement of Financial Condition as of December 31, 2017 was $0.9 million.
The Company is under examination by the IRS and other tax authorities in certain jurisdictions, including foreign jurisdictions, such as India, and states in which the Company has significant operations, such as New York. The tax years currently under examination vary by jurisdiction but include years ranging from 2006 through 2016. As a result of having previously been a member of the Morgan Stanley consolidated group, the Company may have future settlements with Morgan Stanley related to the ultimate disposition of their New York State and New York City examination relating to the tax years 2007 and 2008 and their IRS examination relating to the tax years 2006 through 2008. The Company does not believe it has any material exposure to the New York State and New York City examinations. Additionally, the Company believes it has adequate reserves for any tax issues that may arise out of the IRS examination relating to the tax years 2006 through 2008 and therefore does not believe any related settlement with Morgan Stanley will have a material impact.