| Income Taxes | 16. Income Taxes
Our income tax expense is a function of the mix between our
domestic and international pre-tax earnings or losses, as well as
the mix of international tax jurisdictions in which we operate.
Certain of our rigs are owned and operated, directly or indirectly,
by Diamond Foreign Asset Company, or DFAC, a Cayman Islands
subsidiary that we own. It is our intention to indefinitely
reinvest future earnings of DFAC and its foreign subsidiaries to
finance foreign activities. Accordingly, we have not made a
provision for U.S. income taxes on approximately $1.8 billion of
undistributed foreign earnings and profits. Although we do not
intend to repatriate the earnings of our foreign subsidiary, and
have not provided U.S. income taxes for such earnings, except to
the extent that such earnings were immediately subject to U.S.
income taxes, these earnings could become subject to U.S. income
tax if remitted, or if deemed remitted as a dividend; however, it
is not practical to estimate this potential liability.
The components of income tax expense (benefit) are as
follows:
Year Ended December 31,
2016 2015 2014
(In
thousands)
Federal
— current $ 230 $ 63,223 $ 66,843
State
— current (60 ) 93 (121 )
Foreign
— current 10,297 71,655 59,926
Total
current 10,467 134,971 126,648
Federal
— deferred (108,274 ) (245,045 ) (6,699 )
Foreign
— deferred 2,011 3,011 8,231
Total
deferred (106,263 ) (242,034 ) 1,532
Total $ (95,796 ) $ (107,063 ) $ 128,180
The difference between actual income tax expense and the tax
provision computed by applying the statutory federal income tax
rate to income before taxes is attributable to the
following:
Year Ended December 31,
2016 2015 2014
(In
thousands)
Income
before income tax expense:
U.S. $ (146,037 ) $ (11,158 ) $ 288,080
Foreign (322,262 ) (370,190 ) 227,111
Worldwide $ (468,299 ) $ (381,348 ) $ 515,191
Expected
income tax expense at federal statutory rate $ (163,905 ) $ (133,472 ) $ 180,317
Foreign
earnings of foreign subsidiaries (not taxed at the statutory
federal income tax rate) net of related foreign taxes 47,932 (5,518 ) (46,163 )
Foreign
earnings of foreign subsidiaries for which U.S. federal income
taxes have been provided (1,265 ) 9 7,190
Foreign
taxes of domestic and foreign subsidiaries for which U.S. federal
income taxes have also been provided 28,569 27,193 38,358
Foreign
tax credits (26,663 ) (26,590 ) (39,843 )
Allowance
for foreign tax credits 62,400 — —
Interest
capitalized by foreign subsidiaries (7,285 ) (5,708 ) (16,492 )
Uncertain
tax positions, including foreign currency revaluation (42,423 ) 1,169 (47,964 )
Amortization of deferred charges associated with intercompany
rig sales to other tax jurisdictions — 38,466 44,301
Net
expense (benefit) in connection with resolutions of tax issues and
adjustments relating to prior years 7,757 (2,283 ) 7,775
Other (913 ) (329 ) 701
Income
tax (benefit) expense $ (95,796 ) $ (107,063 ) $ 128,180
Deferred Income Taxes.
December 31,
2016 2015
(In
thousands)
Deferred
tax assets:
Net
operating loss carryforwards, or NOLs $ 159,653 $ 143,231
Foreign
tax credits 95,145 33,699
Worker’s compensation and other current
accruals 14,824 19,888
Bareboat
charter deductions 23,353 32,469
UK
depreciation deduction 21,222 17,358
Disputed
receivables reserved 122 3,109
Deferred
compensation 4,689 5,362
Foreign
contribution taxes 3,857 3,630
Stock
compensation awards 11,679 11,294
Deferred
deductions 8,185 14,185
Interest
— Uncertain Tax Positions 592 1,153
Other 1,812 2,089
Total
deferred tax assets 345,133 287,467
Valuation
allowance for NOLs (91,219 ) (93,191 )
Valuation
allowance for foreign tax credits (62,400 ) —
Valuation
allowance for other deferred tax assets (57,097 ) (53,456 )
Net
deferred tax assets 134,417 140,820
Deferred
tax liabilities:
Depreciation (284,480 ) (372,334 )
Mobilization (46,274 ) (30,990 )
Unbilled
revenue (38 ) (13,971 )
Undistributed earnings of foreign subsidiaries (220 ) (50 )
Other (416 ) (4 )
Total
deferred tax liabilities (331,428 ) (417,349 )
Net
deferred tax liability $ (197,011 ) $ (276,529 )
We record a valuation allowance to derecognize a portion of our
deferred tax assets, which we do not expect to be ultimately
realized. A summary of changes in the valuation allowance is as
follows:
For the Year Ended
December 31,
2016 2015 2014
(In
thousands)
Valuation
allowance as of January 1 $ 146,647 $ 48,036 $ 7,321
Establishment of valuation allowances:
Net
operating losses 10,318 82,155 15,677
Foreign
tax credits 62,400 — 516
Other
deferred tax assets 4,823 27,928 27,243
Releases
of valuation allowances in various jurisdictions (13,472 ) (11,472 ) (2,721 )
Valuation
allowance as of December 31 $ 210,716 $ 146,647 $ 48,036
Net Operating Loss Carryforwards —
Year
Expiring Tax Benefit of Carryforwards (In
millions)
2020 $ 0.1
2021 0.1
2022 0.1
2023 0.1
2024 0.1
2025 58.1
2036 67.4
Total $ 126.0
As of December 31, 2016, a valuation allowance for $91.2
million has been recorded for our NOLs for which the deferred tax
assets are not likely to be realized.
Foreign Tax Credits.
Year
Expiring Foreign Tax
2024 $ 6.6
2025 27.4
2026 28.4
Total $ 62.4
As of December 31, 2016, a valuation allowance of $62.4
million has been recorded for our foreign tax credits for which the
deferred tax assets are not likely to be realized.
Valuation Allowances — Other Deferred Tax
Assets.
Deferred Tax Asset Valuation (In millions)
Bareboat
charter deductions in the U.K. $ 23.4
Depreciation deduction in the U.K. 21.7
Construction services invoices in Mexico 8.1
Foreign
contribution taxes in Brazil 3.9
Total $ 57.1
Unrecognized Tax Benefits.
For the Year Ended
December 31,
2016 2015 2014
(In
thousands)
Balance,
beginning of period $ (53,952 ) $ (57,116 ) $ (90,921 )
Additions
for current year tax positions (4,233 ) (7,013 ) (5,813 )
Additions
for prior year tax positions (1,020 ) (82 ) (292 )
Reductions for prior year tax positions 19,661 2,673 34,630
Reductions related to statute of limitation
expirations 4,574 7,586 5,280
Balance,
end of period $ (34,970 ) $ (53,952 ) $ (57,116 )
The $19.7 million reduction for prior year tax positions
results primarily from the devaluation of the Egyptian
Pound.
At December 31, 2016, $2.1 million, $3.1 million and $35.0
million of the net liability for uncertain tax positions were
reflected in “Other assets,” “Deferred tax
liability” and “Other liabilities,” respectively.
At December 31, 2015, $2.8 million, $1.9 million and $50.3
million of the net liability for uncertain tax positions were
reflected in “Other assets,” “Deferred tax
liability” and “Other liabilities,” respectively.
Of the net unrecognized tax benefits at December 31, 2016,
2015 and 2014, all $36.0 million, $49.4 million and $50.5 million,
respectively, would affect the effective tax rates if
recognized.
The following table presents the amount of accrued interest and
penalties at December 31, 2016 and 2015 related to uncertain
tax positions:
December 31,
2016 2015
(In
thousands)
Uncertain
tax positions net, excluding interest and penalties $ (36,019 ) $ (49,380 )
Accrued
interest on uncertain tax positions (2,651 ) (2,743 )
Accrued
penalties on uncertain tax positions (16,751 ) (39,924 )
Uncertain
tax positions net, including interest and penalties $ (55,421 ) $ (92,047 )
We record interest related to accrued uncertain tax positions
in interest expense and recognize penalties associated with
uncertain tax positions in tax expense. Interest expense and
penalties recognized during the three years ended December 31,
2016 related to uncertain tax positions are as follows:
For the Year Ended
December 31,
2016 2015 2014
(In
thousands)
Net
increase (decrease) in interest expense related to uncertain tax
positions $ (92 ) $ (4,761 ) $ (5,283 )
Net
increase (decrease) in penalties related to uncertain tax
positions (23,172 ) 2,302 (22,175 )
The $23.2 million reduction in penalties related to uncertain
tax positions results primarily from the devaluation of the
Egyptian Pound.
In several of the international locations in which we operate,
certain of our wholly-owned subsidiaries enter into agreements with
other of our wholly-owned subsidiaries to provide specialized
services and equipment in support of our foreign operations. We
apply a transfer pricing methodology to determine the amount to be
charged for providing the services and equipment. In most cases,
there are alternative transfer pricing methodologies that could be
applied to these transactions and, if applied, could result in
different chargeable amounts. Taxing authorities in the various
foreign locations in which we operate could apply one of the
alternative transfer pricing methodologies which could result in an
increase to our income tax liabilities with respect to tax returns
that remain subject to examination.
We expect the statute of limitations for the 2010 tax year to
expire in 2017 for one of our subsidiaries operating in Malaysia,
and we anticipate that the related unrecognized tax benefit will
decrease by $3.0 million at that time.
Tax Returns and Examinations.
U.S. Tax Jurisdiction. Our 2013 tax year is under audit by the
U.S. Internal Revenue Service.
Brazil Tax Jurisdiction. In December 2009, we received an
assessment of approximately $26.0 million for the years 2004 and
2005, including interest and penalty. We contested the tax
assessment in 2010 and, during the third quarter of 2014, received
a favorable court decision resulting in the closure of the 2004 and
2005 tax years. As a consequence, we reversed our $14.0 million
reserve for this uncertain tax position, of which $3.5 million was
interest and $4.4 million was penalty.
In February 2012, the tax authorities concluded their audit of
our income tax return for the 2007 tax year for which we received
an assessment of approximately $17.1 million for income tax,
including interest and penalties. We contested the assessment and a
court in Brazil ruled to cancel the assessment. However, the
Brazilian tax authorities have appealed the ruling, and we are
awaiting the outcome of the appeal. We have not accrued any tax
expense related to this assessment. If our position is not
sustained, tax expense and related interest and penalties as of
December 31, 2016 would be approximately $13.7 million.
In addition, the Brazilian tax authorities have issued an
assessment for the 2000 tax year of approximately $1.5 million as
of December 31, 2016, including interest and penalty. We have
appealed the tax assessment and are awaiting the outcome of the
appeal.
Egypt Tax Jurisdiction. During 2014, we settled certain
disputes for years 2006 through 2008 with the Egyptian tax
authorities, which resulted in an aggregate $17.2 million reduction
in tax expense, comprised of a $23.2 million reversal of uncertain
tax positions, partially offset by $6.0 million in current foreign
income tax expense. One issue for the 2006 through 2008 period
remains open, which we appealed. Our court case is currently
pending. We have sought assistance from an agency of the U.S.
Treasury Department, pursuant to international tax treaties, and
continue to believe that our position will, more likely than not,
be sustained. However, if our position is not sustained, tax
expense and related penalties would increase by approximately $22
million related to this issue for the 2006 through 2008 tax years
as of December 31, 2016.
We are also under audit by the Egyptian tax authorities for the
tax years 2009 through 2012.
Malaysia Tax Jurisdiction. During the year ended
December 31, 2016, the statute of limitations for the 2009 tax
year related to an uncertain tax position expired and we reversed
our $5.6 million tax accrual, of which $2.1 million was penalty.
During the third quarter of 2014, we received final approval from
the Malaysian tax authorities for the settlement of tax liabilities
and penalties for the years 2003 through 2008 resulting in the
reversal of a $14.2 million reserve for uncertain tax positions for
these years, of which $5.3 million was penalty.
Mexico Tax Jurisdiction. During the year ended
December 31, 2016, the statute of limitations related to an
uncertain tax position for the 2010 tax year expired, and we
reversed our $1.6 million tax accrual, of which $0.7 million was
interest and $0.3 million was penalty.
During the year ended December 31, 2015, the statute of
limitations related to an uncertain tax position for the 2008 tax
year expired, and we reversed our $3.8 million tax accrual, of
which $1.3 million was interest and $0.5 million was penalty. In
addition, the statute of limitations related to an uncertain tax
position for the 2009 tax year expired, and we reversed our $10.7
million tax accrual, of which $3.6 million was interest and $1.4
million was penalty.
In August 2015, the Mexican tax authorities completed an audit
for the 2008 tax year of one of our subsidiaries operating in
Mexico and issued an assessment in the amount of $5.3 million,
including interest and penalty. We have appealed the tax assessment
and are awaiting the outcome of the appeal. We have not accrued any
tax expense related to this assessment. In June 2015, the Mexican
tax authorities initiated an audit of the 2009 income tax return of
one of our other subsidiaries operating in Mexico. If our position
is not sustained, tax expense and related interest and penalties as
of December 31, 2016 would be approximately $4.6
million.
Due to the 2014 expiration of the statute of limitations in
Mexico for the 2008 tax year for one of our subsidiaries operating
in Mexico, we reversed our $8.0 million accrual for an uncertain
tax position, of which $2.7 million was interest and $1.1 million
was penalty, during the year ended December 31,
2014.
Australia Tax Jurisdiction. We are currently under audit for
tax years 2010 through 2013. |
