Note 22 — Income Taxes

For income tax purposes, the components of income before taxes were as follows for the years ended December 31:



	2013		2012		2011
Domestic	$	76,957	$	176,075	$	118,708
Foreign	275,522		81,433		4,287
	$	352,479	$	257,508	$	122,995

The components of income tax expense (benefit) were as follows for the years ended December 31:



	2013			2012			2011
Current:
Federal	$	58,507		$	10,621		$	13,894
State	14,691			(759		)	(195		)
Foreign	15,545			2,968			1,079
	88,743			12,830			14,778
Deferred:
Federal	(53,711		)	62,704			29,440
State	(4,325		)	(431		)	368
Foreign	(4,410		)	1,482			86
Provision for valuation allowance on deferred tax assets	15,764			—			—
	(46,682		)	63,755			29,894
Total	$	42,061		$	76,585		$	44,672

Income tax expense differs from the amounts computed by applying the U.S. Federal corporate income tax rate of 35% as follows for the years ended December 31:



	2013			2012			2011
Expected income tax expense at statutory rate	$	123,368		$	90,127		$	43,049
Differences between expected and actual income tax expense:
State tax, after Federal tax benefit	5,639			(1,184		)	254
Provision for liability for selected tax items	12,218			5,558			1,611
Permanent differences	(636		)	15			61
Foreign tax differential	(112,997		)	(17,816		)	(716		)
Provision for valuation allowance on deferred tax assets	15,764			—			—
Other	(1,295		)	(115		)	413
Actual income tax expense	$	42,061		$	76,585		$	44,672

Net deferred tax assets were comprised of the following at December 31:



	2013			2012
Deferred tax assets:
Net operating loss carryforward	$	35,370		$	16,068
Delinquent servicing fees	36,480			19,559
Accrued legal settlements	27,320			5,411
Reserve for servicing exposure	20,446			59,273
Partnership losses	11,085			11,036
Accrued incentive compensation	10,037			6,210
Accrued other liabilities	7,452			2,662
Bad debt and allowance for loan losses	6,397			6,551
Intangible asset amortization	4,728			2,070
Tax residuals and deferred income on tax residuals	3,963			4,175
Stock-based compensation expense	2,956			3,127
Foreign deferred assets	2,802			3,055
Accrued lease termination costs	1,085			1,887
Capital losses	843			665
Valuation allowance on real estate	767			386
Interest rate swaps	743			3,813
Net unrealized gains and losses on securities	—			2,702
Other	10,560			7,339
	183,034			155,989
Deferred tax liabilities:
Mortgage servicing rights amortization	51,619			56,265
Other	80			2,831
	51,699			59,096
	131,335			96,893
Valuation allowance	(15,764		)	—
Deferred tax assets, net	$	115,571		$	96,893

We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted. As a result of this evaluation, we concluded that a valuation allowance of $15.8 million was necessary at December 31, 2013 but that no valuation allowance was necessary at December 31, 2012.

We recognized total interest and penalties of $2.0 million, $(0.1) million and $1.3 million in 2013, 2012 and 2011, respectively. At December 31, 2013 and 2012, accruals for interest and penalties were $3.6 million and $1.6 million, respectively. As of December 31, 2013 and 2012, we had a liability for selected tax items of $23.7 million and $21.1 million, respectively, all of which if recognized would affect the effective tax rate.

It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to activities of the Internal Revenue Service or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues, or the expiration of applicable statutes of limitations. The range of the possible change in unrecognized tax benefits within the next 12 months cannot be reasonably estimated at December 31, 2013. However, we do not expect that change to have a material impact on our financial position or results of operations.

Our major jurisdiction tax years that remain subject to examination are our U.S. federal tax return for the years ended December 31, 2008 through the present and our India corporate tax returns for the years ended March 31, 2004 through the present. Our U.S. federal tax return for the years ended December 31, 2008, 2009 and 2010 are currently under examination. A reconciliation of the beginning and ending amount of the total liability for selected tax items which includes the accruals for interest and penalties is as follows for the years ended December 31:



	2013			2012
Balance at January 1	$	22,702		$	4,524
Additions based on tax positions related to current year	—			17,396
Additions for tax positions of prior years	4,944			875
Lapses in statutes of limitation	(373		)	(93		)
Balance at December 31	$	27,273		$	22,702

At December 31, 2013, we had U.S. NOL carryforwards of $100.4 million. These carryforwards will expire beginning 2019 through 2034. We believe that it is more likely than not that the benefit from certain federal NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $44.4 million on the deferred tax assets relating to these federal NOL carryforwards. If our assumptions change and we determine we will be able to realize these NOLs, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 2013 will be accounted for as a reduction of income tax expense. We have no capital loss carryforwards.

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. Determination of the amount of unrecognized deferred tax liability is not practicable because of the complexities associated with the hypothetical calculation. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the U.S.

OMS is headquartered in Frederiksted, St. Croix, USVI and is located in a federally recognized economic development zone where qualified entities are eligible for certain benefits. We refer to these benefits as “EDC benefits” as they are granted by the USVI Economic Development Commission. We were approved as a Category IIA service business, and are therefore entitled to receive benefits that have a favorable impact on our effective tax rate. These benefits, among others, enable us to avail ourselves of a credit of 90% of income taxes on certain qualified income related to our servicing business. The exemption was granted as of October 1, 2012 and is available for a period of 30 years until expiration on September 30, 2042. The impact of these EDC benefits decreased foreign taxes by $109.1 million and $25.6 million for 2013 and 2012, respectively. The benefit of these EDC benefits on diluted EPS was $0.78 and $0.19 for 2013 and 2012, respectively.