| Income Taxes | 14. Income Taxes Several of our rigs are owned by Swiss branches of entities incorporated in the U.K. that have historically been taxed under a special tax regime pursuant to Swiss corporate income tax rules. On September 3, 2019, the Swiss federal government, along with the Canton of Zug, enacted tax legislation, which we refer to as Swiss Tax Reform, effective as of January 1, 2020. Swiss Tax Reform significantly changed Swiss corporate income tax rules by, 70 among other things, abolishing special tax regimes. The legislation also provides transition rules under which companies can maintain their current basis of taxation through January 1, 2022. The abolition of special tax regimes will require us to determine our Swiss tax liability on a net income basis beginning on January 1, 2022, thus also requiring deferred taxes to be computed on the difference between the Swiss tax basis and U.S. GAAP basis of certain items, including property, plant and equipment. There are still many uncertainties in the application of Swiss Tax Reform, including the values to be used to measure depreciable property. Therefore, we have recorded a $74.2 million net deferred tax asset for the difference in basis of certain of our rigs between Swiss tax and U.S. GAAP, offset, where appropriate, by a reserve for an uncertain tax position. As further clarification is issued by the Swiss tax authorities, deferred tax balances and the reserve for uncertain tax positions may need to be adjusted. The potential changes could have a material effect on our consolidated financial statements. In 2019, the Internal Revenue Service, or IRS, issued final regulations with respect to the calculation of the toll charge associated with the deemed repatriation of previously deferred earnings of our non-U.S. subsidiaries, or Transition Tax, in response to the Tax Cuts and Jobs Act enacted in 2017, commonly referred to as the Tax Reform Act. Based on the new regulations, we recorded a net tax benefit of $14.2 million in the second quarter of 2019, primarily to reverse a previously recorded uncertain tax position related to the Transition Tax. Consequently, our revised net tax benefit associated with the Tax Reform Act is $34.5 million, which now consists of (i) a $38.0 million charge relating to the one-time mandatory repatriation of previously deferred earnings of certain non-US subsidiaries that are owned either wholly or partially by our U.S. subsidiaries, inclusive of the utilization of certain tax attributes and (ii) a $72.5 million credit resulting from the determination and re-measurement of our net U.S. deferred tax liabilities at the lower corporate income tax rate. Our income tax expense is a function of the mix between our domestic and international pre-tax earnings or losses, the mix of international tax jurisdictions in which we operate and recognition of valuation allowances for deferred tax assets for which the tax benefits are not likely to be realized. Certain of our rigs are owned and operated, directly or indirectly, by DFAC. Our management has determined that we will no longer permanently reinvest foreign earnings. The components of income tax expense (benefit) are as follows (in thousands):
Year Ended December 31,
2019
2018
2017
Federal – current
$
(13,810
)
$
20,107
$
6,994
State – current
19
2
95
Foreign – current
25,899
9,531
25,252
Total current
12,108
29,640
32,341
Federal – deferred
(67,015
)
(75,279
)
(85,066
)
Foreign – deferred
10,107
(714
)
12,939
Total deferred
(56,908
)
(75,993
)
(72,127
)
Total
$
(44,800
)
$
(46,353
)
$
(39,786
) 71 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 (in thousands):
Year Ended December 31,
2019
2018
2017
(Loss) income before income tax expense:
U.S.
$
(339,072
)
$
(266,855
)
$
(241,178
)
Foreign
(62,942
)
40,230
219,738
$
(402,014
)
$
(226,625
)
$
(21,440
)
Expected income tax benefit at federal statutory rate
$
(84,423
)
$
(47,591
)
$
(7,504
)
Effect of tax rate changes
(74,168
)
1,763
(74,294
)
Mandatory repatriation of earnings pursuant to Tax Reform Act
—
—
94,194
Effect of foreign operations
3,129
15
(42,102
)
Valuation allowance
11,650
11,929
(41,492
)
Uncertain tax positions, settlements and adjustments relating to prior years
96,960
(15,777
)
31,726
Other
2,052
3,308
(314
)
Income tax benefit
$
(44,800
)
$
(46,353
)
$
(39,786
) Deferred Income Taxes. Significant components of our deferred income tax assets and liabilities are as follows (in thousands):
December 31,
2019
2018
Deferred tax assets:
Net operating loss carryforwards, or NOLs
$
253,973
$
209,679
Foreign tax credits
43,026
43,225
Disallowed interest deduction
40,777
16,248
Worker’s compensation and other current accruals
6,250
8,375
Deferred deductions
12,345
10,481
Deferred revenue
7,209
—
Operating lease liability
5,461
—
Other
4,367
6,380
Total deferred tax assets
373,408
294,388
Valuation allowance
(186,620
)
(174,970
)
Net deferred tax assets
186,788
119,418
Deferred tax liabilities:
Property, plant and equipment
(225,643
)
(212,251
)
Mobilization
(2,245
)
(11,012
)
Right-of-use assets
(5,461
)
—
Other
(967
)
(535
)
Total deferred tax liabilities
(234,316
)
(223,798
)
Net deferred tax liability
$
(47,528
)
$
(104,380
) Net Operating Loss Carryforwards . As of December 31, 2019, we recorded a deferred tax asset of $254.0 million for the benefit of NOL carryforwards, comprised of $149.4 million related to our U.S. losses and $104.6 million related to our international operations. Approximately $154.7 million of this deferred tax asset relates to NOL carryforwards that have an indefinite life. The remaining $99.3 million relates to NOL carryforwards in several of our foreign subsidiaries, as well as in the U.S. Unless utilized, these NOL carryforwards will expire between 2021 and 2038. 72 Foreign Tax Credits. As of December 31, 2019, we recorded a deferred tax asset of $43.0 million for the benefit of foreign tax credits in the U.S., all of which will expire, Valuation Allowances. Changes in Accounting Principles - As of December 31, 2019, valuation allowances aggregating $186.6 million have been recorded for our net operating losses, foreign tax credits and other deferred tax assets for which the tax benefits are not likely to be realized. Unrecognized Tax Benefits. Our income tax returns are subject to review and examination in the various jurisdictions in which we operate, and we are currently contesting various tax assessments. We accrue for income tax contingencies, or uncertain tax positions, that we believe are not likely to be realized. A rollforward of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
For the Year Ended December 31,
2019
2018
2017
Balance, beginning of period
$
(55,943
)
$
(81,864
)
$
(34,970
)
Additions for current year tax positions
(85,970
)
(2,906
)
(51,260
)
Additions for prior year tax positions
(2,113
)
(20,943
)
(2,938
)
Reductions for prior year tax positions
23,267
49,175
623
Reductions related to statute of limitation expirations
1,875
595
6,681
Balance, end of period
$
(118,884
)
$
(55,943
)
$
(81,864
) The addition for current year tax positions in 2019 is due to a recent change in Switzerland tax legislation. Due to the uncertainties regarding the application of Swiss Tax Reform, including the values to be used to measure depreciable property, a liability for an uncertain tax position was recorded in the amount of $ 86.2 million. The $23.3 million reduction for prior year tax positions is mainly due to reversal of an uncertain tax position recorded for the one-time mandatory repatriation provision of the Tax Reform Act, following final regulations issued by the IRS in June 2019. The $20.9 million addition for prior year tax positions in 2018 and the $51.3 million addition for current year tax positions in 2017, as well as the $49.2 million reduction for prior year tax positions in 2018 are all primarily due to uncertainty associated with the enactment of the Tax Reform Act and subsequent clarification issued by the IRS related to the positions in question. At December 31, 2019, $0.5 million, $91.1 million and $58.3 million of the net liability for uncertain tax positions were reflected in “Other assets,” “Deferred tax liability” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. At December 31, 2018, $1.2 million, $7.5 million and $75.3 million of the net liability for uncertain tax positions were reflected in “Other assets,” “Deferred tax liability” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. Of the net unrecognized tax benefits at December 31, 2019, 2018 and 2017, $148.8 million, $81.6 million and $101.9 million, respectively, would affect the effective tax rates if recognized. At December 31, 2019, the amount of accrued interest and penalties related to uncertain tax positions was $4.0 million and $16.5 million, respectively. At December 31, 2018, the amount of accrued interest and penalties related to uncertain tax positions was $3.2 million and $16.3 million, respectively. 73 Interest expense recognized during the years ended December 31, 2019, 2018 and 2017 related to uncertain tax positions was $1.0 million, $0.1 million and $0.5 million, respectively. Penalties recognized during the years ended December 31, 2019, 2018 and 2017 related to uncertain tax positions were $0.3 million, $0.6 million and $(1.7) million, respectively. We expect the statute of limitations for the 2013 through 2015 tax years to expire in 2020 for various of our subsidiaries operating in Ireland, Malaysia and Mexico. We anticipate that the related unrecognized tax benefit will decrease by $5.1 million at that time. Tax Returns and Examinations. We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various foreign jurisdictions. Tax years that remain subject to examination by these jurisdictions include the year 2000 and the years 2009 to 2018. We are currently under audit in Australia, Brazil, Egypt, Equatorial Guinea, Malaysia, Mexico, Nicaragua, Qatar and the United Kingdom, or U.K. We do not anticipate that any adjustments resulting from the tax audit of any of these years will have a material impact on our consolidated results of operations, financial condition or cash flows. |
