WESTWOOD HOLDINGS GROUP INCWHG
WESTWOOD HOLDINGS GROUP INC Income Taxes Disclosure
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 had 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. Of this amount, we originally expected $1.1 million to be payable over eight years, of which $1.0 million was included in “Noncurrent income taxes payable” on our Consolidated Balance Sheets for the year ended December 31, 2017. The remaining $88,000 was 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 was in a receivable position. In the second quarter of 2018, additional guidance on the Tax Reform Act required any 2017 federal tax overpayments be applied to mandatory repatriation liabilities before applying to 2018 estimated tax payments. Accordingly, the Company utilized the overpayment of federal estimated taxes to pay the additional U.S. federal cash taxes of $1.8 million during the year ended December 31, 2018.
We completed the accounting for our 2017 U.S. corporate income tax return in the third quarter of 2018 and made no significant changes to the amounts provisionally recognized.
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 had no U.S. tax liability on GILTI for the year ended December 31, 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 years ended December 31, 2018 and 2017.
The BEAT provisions in the Tax Reform Act eliminate 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 years ended December 31, 2018 and 2017.
Income Tax Provision
Income before income taxes by jurisdiction is as follows (in thousands):
Years ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
United States | $ | 21,250 | $ | 17,531 | $ | 21,539 | ||||||
Canada | 15,212 | 16,362 | 12,471 | |||||||||
Total | $ | 36,462 | $ | 33,893 | $ | 34,010 | ||||||
Income tax expense differs from the amount that would otherwise have been calculated by applying the U.S. Federal corporate tax rate of 21% to income before income taxes for the year ended December 31, 2018 and 35% to income before income taxes for the years ended December 31, 2017 and 2016.
The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in thousands):
Years ended December 31, | |||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||
Income tax provision computed at US federal statutory rate | $ | 7,657 | 21.0 | % | $ | 11,859 | 35.0 | % | $ | 11,893 | 35.0 | % | |||||||||
Canadian rate differential | 895 | 2.4 | (1,398 | ) | (4.1 | ) | (1,050 | ) | (3.1 | ) | |||||||||||
Change in uncertain tax positions, net of federal income taxes | 19 | 0.1 | (3 | ) | — | 542 | 1.6 | ||||||||||||||
Global Intangible Low Taxed Income, net deductions | 1,573 | 4.3 | — | — | — | — | |||||||||||||||
US Tax Credits | (1,528 | ) | (4.2 | ) | — | — | — | — | |||||||||||||
State and local income taxes, net of federal income taxes | 916 | 2.5 | 626 | 1.9 | 230 | 0.6 | |||||||||||||||
Rate changes | — | — | 1,578 | 4.6 | — | — | |||||||||||||||
Tax on repatriation | 118 | 0.3 | 1,767 | 5.2 | — | — | |||||||||||||||
Other, net | 61 | 0.2 | (525 | ) | (1.6 | ) | (252 | ) | (0.7 | ) | |||||||||||
Total income tax expense | $ | 9,711 | 26.6 | % | $ | 13,904 | 41.0 | % | $ | 11,363 | 33.4 | % | |||||||||
Effective income tax rate | 26.6 | % | 41.0 | % | 33.4 | % | |||||||||||||||
We include penalties and interest on income-based taxes in the “General and administrative” line on our Consolidated Statements of Comprehensive Income. We recorded $140,000, $181,000 and $101,000 of penalties and interest in 2018, 2017 and 2016, 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, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Current taxes: | ||||||||||||
US Federal | $ | 5,949 | $ | 1,122 | $ | 6,765 | ||||||
State and local | 1,477 | 662 | 1,136 | |||||||||
Foreign | 4,034 | 4,578 | 3,313 | |||||||||
Total current taxes | 11,460 | 6,362 | 11,214 | |||||||||
Deferred taxes: | ||||||||||||
US Federal | (1,853 | ) | 7,569 | 314 | ||||||||
State and local | (169 | ) | 22 | 36 | ||||||||
Foreign | 273 | (49 | ) | (201 | ) | |||||||
Total deferred taxes | (1,749 | ) | 7,542 | 149 | ||||||||
Total income tax expense | $ | 9,711 | $ | 13,904 | $ | 11,363 | ||||||
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, | ||||||||
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Share-based compensation expense | $ | 3,137 | $ | 3,851 | ||||
Deferred rent | 389 | 441 | ||||||
Compensation and benefits payable | 2,606 | 719 | ||||||
Federal unrecognized tax benefit | 51 | 46 | ||||||
Other | 4 | 140 | ||||||
Total deferred tax assets | 6,187 | 5,197 | ||||||
Deferred tax liabilities: | ||||||||
Property and equipment | (620 | ) | (586 | ) | ||||
Intangibles | (448 | ) | (1,029 | ) | ||||
Unrealized gains on investments | (17 | ) | (175 | ) | ||||
Total deferred tax liabilities | (1,085 | ) | (1,790 | ) | ||||
Net deferred tax assets | $ | 5,102 | $ | 3,407 | ||||
The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of December 31, 2018, the Company’s 2015, 2016 and 2017 tax years are open for examination by the Internal Revenue Service, and various state and foreign jurisdiction tax years remain open to examination. Our 2015, 2016 and 2017 tax returns are currently under audit in a state jurisdiction in which we operate. It is reasonably possible that the audits may be completed during the next twelve months, and we do not expect the result of the audits to have a material impact on our Consolidated Financial Statements.
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, 2018, the cumulative amount of earnings upon which foreign withholding taxes have not been provided is approximately $33 million, and the unrecognized deferred tax liability related to these earnings is approximately $1.7 million.
As of December 31, 2018 and 2017, the Company's gross liability related to uncertain tax positions was $184,000 and $160,000, 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, 2018 and 2017 is as follows (in thousands):
Balance at January 1, 2017 | $ | 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 | ||
Additions for tax positions related to the current year | 28 | |||
Reductions for tax positions related to prior years | (4 | ) | ||
Balance at December 31, 2018 | $ | 184 | ||
It is reasonably possible that the liability for uncertain tax positions could decrease by as much as $184,000 within the next twelve months as a result of settlements with certain taxing authorities that, if recognized, would decrease our provision for income taxes by $154,000.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2018 | Feb 21, 2019 | Showing above |
| 2017 | Feb 23, 2018 | |
| 2016 | Feb 23, 2017 | |
| 2015 | Feb 25, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.