Income Taxes

12 Months Ended

Dec. 31, 2019

11. Income Taxes

Income tax expense for the three years ended December 31, 2019, 2018, and 2017 differs from the U.S. federal statutory rate primarily due to the taxation treatment of income attributable to noncontrolling interests in IBG LLC and the enactment of the Tax Act, as discussed below. These noncontrolling interests are held directly through a U.S. partnership. Accordingly, the income attributable to these noncontrolling interests is reported in the consolidated statements of comprehensive income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as it is generally the obligation of the noncontrolling interests. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.

Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the common stock offerings (see Note 4), differences in the valuation of financial assets and liabilities, and for other temporary differences arising from the deductibility of compensation and depreciation expenses in different time periods for accounting and income tax return purposes.

The Tax Act, as previously described (see Note 2), makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21%, effective January 1, 2018; (2) requiring a one-time transition tax on certain undistributed earnings of foreign subsidiaries to be paid over eight years; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible interest expense; (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (9) repealing the Section 199 manufacturing deduction; and (10) full expensing of qualified property for tax return purposes.

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The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), now codified into ASC Topic 740, 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 enactment of the Tax Act for entities to complete the accounting under ASC Topic 740. In accordance with SAB 118, an entity must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC Topic 740 is complete. To the extent that an entity’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the entity must record a provisional estimate on its financial statements. However, if an entity cannot determine a provisional estimate to be included on its financial statements, the entity should continue to apply ASC Topic 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Company’s accounting for the following elements of the Tax Act is complete. The Company has recorded the effects of the Tax Act as follows:

Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of the Company’s deferred tax assets and liabilities, the Company recognized a provisional net decrease of $115 million with a corresponding adjustment to deferred income tax expense (or deferred tax benefit) for the year ended December 31, 2017. Through the year ended December 31, 2018, the Company made no significant adjustments to the provisional amount recorded as of December 31, 2017.

Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings of the relevant foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. As of December 31, 2017, the Company recognized a provisional Transition Tax obligation of $62 million and through the year ended December 31, 2018 made no significant adjustments to the provisional amount recorded.

The Tax Act creates a new requirement that global intangible low taxed income (“GILTI”) earned by controlled foreign corporations (“CFC”s) must be included currently in the gross income of the CFC’s U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC-tested income” over the deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S shareholder’s pro rata share of the qualified business asset investment in each CFC with respect to which it is a U.S shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

Under U.S. GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company elected the period cost method.

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The table below presents the components of the provision for income taxes for the periods indicated.


	Year-Ended December 31,
	2019		2018		2017

	(in millions)
Current
Federal	$	19	$	15	$	76	¹
State and local		3		3		1
Foreign		22		32		32
Total current		44		50		109
Deferred
Federal		24		22		148	²
State and local		—		—		—
Foreign		—		(1)		(1)
Total deferred		24		21		147
	$	68	$	71	$	256

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(1)Includes $62 million of Transition Tax under the Tax Act.

(2)Includes the remeasurement of deferred tax assets and liabilities of $115 million due to the Tax Act.

The table below presents a reconciliation of the statutory U.S. Federal income tax rate of 21% to the Company’s effective tax rate for the two years ending December 31, 2019 and 2018, and 35% for the year ending December 31, 2017.


	Year-Ended December 31,
	2019		2018		2017
U.S. Statutory Tax Rate		21.0%		21.0%		35.0%
Less: rate attributable to noncontrolling interests		(16.8%)		(16.8%)		(26.5%)
State, local and foreign taxes, net of federal benefit		1.7%		1.7%		2.1%
Subtotal		5.9%		5.9%		10.6%
Effects of the Tax Act		0.0%		0.0%		13.7%
		5.9%		5.9%		24.3%

The table below presents significant components of the Company’s deferred tax assets and liabilities, which are reported in other assets and in accounts payable, accrued expenses and other liabilities, respectively, in the consolidated statements of financial condition for the periods indicated.


	December 31,
	2019		2018		2017

	(in millions)
Deferred tax assets
Arising from the acquisition of interests in IBG LLC	$	116	$	140	$	146
Deferred compensation		5		4		4
Other		11		10		7
Total deferred tax assets		132		154		157
Deferred tax liabilities
Foreign		1		—		1
Other		3		1		—
Total deferred tax liabilities		4		1		1
Net deferred tax assets	$	128	$	153	$	156

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As of and for the years ended December 31, 2019, and 2018, the Company had no valuation allowances on its deferred tax assets.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2019, the Company is no longer subject to U.S. Federal and State income tax examinations for tax years prior to 2014, and to non-U.S. income tax examinations for tax years prior to 2009.

As of December 31, 2019, accumulated earnings held by non-U.S. subsidiaries totaled $1.3 billion (as of December 31, 2018 $1.1 billion). Of this amount, approximately $0.2 billion (as of December 31, 2018 $0.2 billion) is attributable to earnings of the Company’s foreign subsidiaries that are considered “pass-through” entities for U.S. income tax purposes. Since the Company accounts for U.S. income taxes on these earnings on a current basis, no additional U.S. tax consequences would result from the repatriation of these earnings other than that which would be due arising from currency fluctuations between the time the earnings are reported for U.S. tax purposes and when they are remitted. With respect to certain of these non-U.S. subsidiaries’ accumulated earnings, approximately $0.2 billion and $0.2 billion as of December 31, 2019 and December 31, 2018, respectively would result in additional foreign taxes in the form of dividend withholding tax imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution upon repatriation. The Company has not provided for its proportionate share of these additional foreign taxes as it does not intend to repatriate these earnings in the foreseeable future. For the same reason, the Company has not provided deferred U.S. tax on cumulative translation adjustments associated with these earnings.