Note 20 — Income Taxes

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



	2015			2014			2013
Domestic	$	(62,903	)	$	(401,741	)	$	76,957
Foreign	(66,958		)	(41,418		)	275,522
	$	(129,861	)	$	(443,159	)	$	352,479

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



	2015			2014			2013
Current:
Federal	$	46,680		$	(20,824	)	$	58,507
State	1,079			(403		)	14,691
Foreign	161			9,195			15,545
	47,920			(12,032		)	88,743
Deferred:
Federal	(27,173		)	41,986			(53,711		)
State	(3,719		)	(997		)	(4,325		)
Foreign	2,754			(6,162		)	(4,410		)
Provision for valuation allowance on deferred tax assets	97,069			3,601			15,764
	68,931			38,428			(46,682		)
Total	$	116,851		$	26,396		$	42,061

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:



	2015			2014			2013
Expected income tax expense (benefit) at statutory rate	$	(45,451	)	$	(155,106	)	$	123,368
Differences between expected and actual income tax expense:
Impairment of goodwill	—			92,034			—
State tax, after Federal tax benefit	(2,867		)	(1,084		)	5,639
Provision for liability for uncertain tax positions	18,205			47			4,935
Provision for liability for intra-entity transactions	4,700			6,037			7,283
Non-deductible regulatory settlements	700			53,375			—
Other permanent differences	(463		)	(254		)	(636		)
Foreign tax differential	41,695			27,799			(112,997		)
Provision for valuation allowance on deferred tax assets (1)	97,069			3,601			15,764
Other	3,263			(53		)	(1,295		)
Actual income tax expense	$	116,851		$	26,396		$	42,061

(1)

The provision for valuation allowance in 2015 primarily relates to the recording of the valuation allowance on both the U.S. and USVI net deferred tax assets as of December 31, 2015. Also included in the provision for valuation allowance is the reversal of a portion of the valuation allowance previously recorded on taxable losses earned by OMS which were taxable in the U.S. as effectively connected income (ECI), which is equal to the positive taxable income that is expected to be generated for ECI purposes for the year ended December 31, 2015.

We are a global company with operations in the USVI, India and the Philippines, among other jurisdictions. In the effective tax rate reconciliation, we first calculate income tax expense attributable to worldwide continuing operations at the U.S. statutory tax rate of 35%. The foreign tax rate differential therefore represents the difference in tax expense between jurisdictional income taxed at the U.S. statutory rate of 35% and each respective jurisdictional statutory rate. As the U.S. tax rate is among the highest global tax rates and a majority of our income is subject to tax in the USVI at a significantly lower tax rate, the foreign tax rate differential component of our effective tax rate reconciliation is often the most significant adjusting item to our global rate.

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



	2015			2014
Deferred tax assets:
Net operating loss carryforward	$	24,511		$	35,433
Mortgage servicing rights amortization	15,697			—
Accrued legal settlements	10,519			7,403
Intangible asset amortization	10,293			10,741
Partnership losses	10,137			10,663
Accrued incentive compensation	10,107			5,029
Bad debt and allowance for loan losses	6,227			10,727
Accrued other liabilities	5,641			6,271
Stock-based compensation expense	4,834			3,431
Tax residuals and deferred income on tax residuals	4,052			4,021
Foreign deferred assets	3,647			2,568
Reserve for servicing exposure	3,353			7,093
Delinquent servicing fees	2,360			3,591
Capital losses	1,710			1,464
Accrued lease termination costs	1,251			1,831
Valuation allowance on real estate	736			1,007
Interest rate swaps	103			494
Other	4,966			5,606
	120,144			117,373
Deferred tax liabilities:
Foreign undistributed earnings	5,421			6,249
Mortgage servicing rights amortization	—			14,696
Other	77			76
	5,498			21,021
	114,646			96,352
Valuation allowance	(116,434		)	(19,365		)
Deferred tax assets (liabilities), net	$	(1,788	)	$	76,987

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. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses. We are diversifying our strategic focus due to both regulatory and market-based factors affecting the Servicing business, and we believe our residential lending business and other new business lines will be our primary driver of growth for the future. Despite having cumulative income incurred over the three-year period ended December 31, 2015 for the USVI filing jurisdiction, the significant driver of this cumulative income position is the positive income earned during 2013 when our business was growing rapidly through acquisitions of MSRs and our lending operations were comparatively less important to our overall business. There has also been a significant increase in monitoring costs required by regulators that has been a key factor impacting our Servicing business profitability. As a result, we are seeking to transform Ocwen over time by reinvesting cash flows generated by the Servicing business to grow not only our residential mortgage lending business but also to grow other new business lines, which we believe can diversify our income profile and assist us in returning Ocwen to profitability. Accordingly, we do not believe that our historical USVI-sourced profitability is as indicative of our ability to generate income in future years as it was previously. Additionally, the U.S. jurisdiction is in a three-year cumulative loss as of December 31, 2015 due to poor operating results for the current period in addition to the significant goodwill impairment and NY DFS settlement from the prior year. Other factors considered in these evaluations 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 these evaluations, as of December 31, 2015, we have recorded a full valuation allowance for the $84.5 million of U.S. net deferred tax assets and for the $17.4 million of USVI net deferred tax assets as these jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend to continue maintaining a full valuation allowance on our deferred tax assets in both the U.S. and USVI until there is sufficient evidence to support the reversal of all or some portion of these allowances.

We recognized total interest and penalties of $6.3 million, $2.3 million and $2.0 million in 2015, 2014 and 2013, respectively. At December 31, 2015 and 2014, accruals for interest and penalties were $12.2 million and $5.9 million, respectively. As of December 31, 2015 and 2014, we had a liability for uncertain tax positions of $32.5 million and $22.5 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, 2015.

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 December 31, 2010 and December 31, 2012 through the present, our USVI corporate tax return for the years ended December 31, 2012 through the present and our India corporate tax returns for the years ended March 31, 2005 through the present. Our U.S. federal tax return for the years ended December 31, 2008, 2009, 2010 and 2012 are currently under examination. In addition, the U.S. federal tax return filed by our USVI subsidiary for the year ended December 31, 2012 is currently under examination. A reconciliation of the beginning and ending amount of the total liability for uncertain tax positions is as follows for the years ended December 31:



	2015			2014			2013
Beginning balance	$	22,523		$	27,273		$	22,702
Additions for tax positions of prior years	13,162			1,392			4,944
Reductions for tax positions of prior years	(2,741		)	(6,010		)	—
Lapses in statute of limitations	(396		)	(132		)	(373		)
Ending balance	$	32,548		$	22,523		$	27,273

At December 31, 2015, we had U.S. NOL carryforwards and USVI NOL carryforwards of $68.4 million and $199.0 million. These carryforwards will expire beginning 2019 through 2034. We believe that it is more likely than not that the benefit from certain U.S. NOL carryforwards will not be realized. In recognition of this risk, we have provided a total valuation allowance of $23.9 million on the deferred tax assets relating to these U.S. 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, 2015 will be accounted for as a reduction of income tax expense. Additionally, it is our expectation that $199.0 million of USVI NOLs will be carried back to offset prior period tax due in the USVI and we have, therefore, reflected the tax-effect of this attribute as a component of income taxes receivable. Note that we also have USVI capital loss carryforwards of $23.5 million at December 31, 2015 against which a valuation allowance has been recorded.

As of December 31, 2015, we have recognized a deferred tax liability of $5.4 million for India and Philippines subsidiary undistributed earnings of $35.4 million. With the exception of the India and Philippines subsidiary earnings, we consider the remainder of our foreign subsidiary undistributed earnings to be indefinitely invested outside the U.S. based on our specific plans for reinvestment. As of December 31, 2015, our foreign subsidiaries have approximately $241.4 million of undistributed earnings and $221.8 million of cash and short-term investments. 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 reinvested. Determination of the amount of unrecognized deferred tax liability is not practicable.

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 may 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 our current foreign tax benefit by $68.2 million related to 2015 USVI losses, and decreased our foreign tax expense by $61.2 million and $109.1 million related to 2014 and 2013 USVI income, respectively. The benefit (detriment) of these EDC benefits on diluted earnings per share was $(0.54), $0.47 and $0.78 for 2015, 2014 and 2013, respectively.