Taxes
The income tax expense reported differs from the amount computed by applying the U.S. statutory rate to loss before income taxes for the following reasons:
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| Year Ended December 31, |
(Thousands of U.S. Dollars) | 2017 | | 2016 | | 2015 |
Income (Loss) before income taxes | | | | | |
United States | $ | (51,215 | ) | | $ | (23,986 | ) | | $ | (14,061 | ) |
Foreign | 88,545 |
| | (626,248 | ) | | (354,027 | ) |
| 37,330 |
| | (650,234 | ) | | (368,088 | ) |
| 35 | % | | 35 | % | | 35 | % |
Income tax expense (recovery) expected | 13,066 |
| | (227,582 | ) | | (128,831 | ) |
Impact of foreign taxes(1) | 12,310 |
| | (9,799 | ) | | (13,087 | ) |
Other local taxes | 1,056 |
| | 1,998 |
| | 2,354 |
|
Stock-based compensation | 2,001 |
| | 1,955 |
| | 919 |
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Increase in valuation allowance | 52,269 |
| | 47,675 |
| | 37,691 |
|
Sale of Peru and Brazil business units | (12,527 | ) | | — |
| | — |
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Non-deductible third party royalty in Colombia | 3,194 |
| | 2,550 |
| | 3,416 |
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Other permanent differences | (2,331 | ) | | (1,466 | ) | | (2,521 | ) |
Total income tax expense (recovery) | $ | 69,038 |
| | $ | (184,669 | ) | | $ | (100,059 | ) |
| | | | | |
Current income tax expense | | | | | |
United States | $ | 3,457 |
| | $ | 1,818 |
| | $ | 1,070 |
|
Foreign | 20,865 |
| | 18,304 |
| | 14,313 |
|
| 24,322 |
| | 20,122 |
| | 15,383 |
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Deferred income tax expense (recovery) | | | | | |
Foreign(2) | 44,716 |
| | (204,791 | ) | | (115,442 | ) |
Total income tax expense (recovery) | $ | 69,038 |
| | $ | (184,669 | ) | | $ | (100,059 | ) |
(1) Impact of foreign taxes in the rate reconciliation are tax effected at the 35% statutory rate and were primarily due to higher income tax rates in Colombia. Impact of foreign taxes for the years ended December 31, 2017, 2016 and 2015, included $8.0 million (expense), $23.3 million (recovery) and $11.8 million (recovery), respectively, in Colombia.
(2) The deferred tax recovery for the year ended December 31, 2016, included $201.3 million associated with the ceiling test impairment loss in Colombia.
Undistributed earnings of foreign subsidiaries as of December 31, 2017, were considered to be permanently reinvested. A determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.
In the fourth quarter of 2016, the Colombian government approved tax legislation consolidating the corporate Income and CREE taxes into a single income tax at 40% for 2017 (including a surtax of 6%), 37% for 2018 (including a surtax of 4%) and 33% for 2019 and onwards. The tax rates applied to the calculation of deferred income taxes, before valuation allowances, have been adjusted to reflect these changes. In the same legislation, the Colombian government also instituted a 5% dividend tax on distributions of previously taxed earnings from 2017 and onwards. The Law also increased the corporate minimum presumptive income tax from 3% to 3.5%. The tax is imposed on a taxpayer’s net equity at the prior year-end when the presumptive income exceeds actual taxable profits.
The US government enacted the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. As of December 31, 2017, the Company is still evaluating the complete tax effects of the enactment of the TCJA. However, the Company has determined a reasonable estimate of the impact of the TCJA on its existing deferred tax balances and the one-time transition tax. Based on this estimate, the Company has determined that the there is no current tax expense impact to its financial statements as a result of the TCJA. The Company has also calculated an estimated deferred tax asset impact of $59 million, which is subject to a full valuation allowance because its recognition does not meet the “more-likely-than-not” threshold. Of the estimated amount, $1.1 million relates to the remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future.
As noted above, the Company is still evaluating the complete tax effects of the enactment of the TCJA and there are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the TCJA. In the absence of guidance on these matters and until the 2017 tax returns are finalized, which the Company expects to occur in October 2018, the Company expects to use what it believes are reasonable interpretations and assumptions in applying the TCJA for purposes of determining its cash tax liabilities and results of operations, which may change as it receives additional clarification and implementation guidance. Despite the fact that the Company has not prepared its tax returns for 2017, and therefore cannot provide a final estimate of 2017 foreign earning and profits, but considering the consistency of the Company’s 2017 foreign operations with prior years, the Company’s overall analysis of the one-time transition tax has not identified, nor does it expect to identify, any overall material adverse effect on its tax liability and financial condition.
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| As at December 31, |
(Thousands of U.S. Dollars) | 2017 | | 2016 |
Deferred Tax Assets | |
| | |
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Tax benefit of operating loss carryforwards | $ | 60,460 |
| | $ | 74,604 |
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Tax basis in excess of book basis | 62,768 |
| | 187,651 |
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Foreign tax credits and other accruals | 70,157 |
| | 48,341 |
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Tax benefit of capital loss carryforwards | 52,575 |
| | 32,278 |
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Deferred tax assets before valuation allowance | 245,960 |
| | 342,874 |
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Valuation allowance | (188,650 | ) | | (341,263 | ) |
| 57,310 |
| | 1,611 |
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Deferred Tax Liabilities | 28,417 |
| | 107,230 |
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Net Deferred Tax Assets (Liabilities)(1) | $ | 28,893 |
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| $ | (105,619 | ) |
(1) Effective November 1, 2016, several of Gran Tierra's subsidiaries executed intercompany sale agreements whereby certain depreciable assets were transferred within the consolidated Gran Tierra group. The purpose of the transaction was to improve the efficiency of Gran Tierra's operating and tax structures. The restructuring resulted in a consolidation of certain assets into a single entity in Colombia, an increase in the depreciable tax basis of the assets transferred, and current income taxes payable as at December 31, 2016, as a result of the capital gains taxes incurred. GAAP prohibited the recognition of current and deferred income taxes for intra-entity transfers until an asset leaves the consolidated group, therefore, the current and deferred income tax effect of the restructuring was deferred and recognized as prepaid income taxes at December 31, 2016. At January 1, 2017, the impact of the November 1, 2016, intercompany asset transfers was recognized pursuant to adoption of ASU 2016-16 (Note 2), which resulted in a material increase in the tax basis of certain Colombian assets. Accordingly, for 2017, this resulted in the Company realizing a change in its net deferred balance from a deferred tax liability at December 31, 2016, to a deferred tax asset at December 31, 2017.
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| As at December 31, |
(Thousands of U.S. Dollars) | 2017 | | 2016 |
Operating loss carryforwards | $ | 199,138 |
| | $ | 257,023 |
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Capital loss carryforwards | $ | 288,322 |
| | $ | 239,095 |
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Of the operating loss and capital loss carryforwards, losses generated by the foreign subsidiaries of the Company. | $ | 392,053 |
| | $ | 496,118 |
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In certain jurisdictions, operating loss carryforwards expire between 2018 and 2037, while certain other jurisdictions allow operating losses to be carried forward indefinitely. Capital losses can be carried forward indefinitely.
The valuation allowance decreased by $152.6 million during the year ended December 31, 2017. The change in the valuation allowance was primarily due to $212.1 million decrease as a result of the sale of Peru and Brazil business units.This is partially offset by $86.7 million increase in capital losses generated in Luxembourg as a result of the sale of Brazil, $20.9 million increase in foreign tax credits in the U.S. arising from the U.S. legislated one-time deemed repatriation of foreign earning, $7.1 million increase in tax basis as a result of the 2016 intercompany asset transfers recognized on January 1, 2017, pursuant to adoption of ASU 2016-16 and $10.2 million of losses incurred in the U.S., Colombia and Canada as well as other credits. These future tax benefits are fully off-set by valuation allowances, as their recognition does not meet the “more-likely-than-not” threshold.
The Company and its subsidiaries file income tax returns in U.S. federal and state jurisdictions and certain other foreign jurisdictions. The Company is potentially subject to income tax examinations for open tax years 2009 through 2016 in certain jurisdictions. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component of income taxes in the consolidated statement of operations.
On December 23, 2014, the Colombian Congress passed legislation which imposed an equity tax levied on Colombian operations for 2015, 2016 and 2017. The equity tax was calculated based on a legislated measure, which was based on the Company’s Colombian legal entities' balance sheet equity for tax purposes at January 1, 2015. This measure was subject to adjustment for inflation in future years. The equity tax rates for January 1, 2015, 2016 and 2017, were 1.15%, 1% and 0.4%, respectively. The legal obligation for each year's equity tax liability arose on January 1 of each year; therefore, the Company recognized the annual amount of $1.2 million, $3.1 million and $3.8 million for the equity tax expense in the consolidated statement of operations for the years ended December 31, 2017, 2016 and 2015. These amounts were paid in May and September of each year and at December 31, 2017, accounts payable included nil (December 31, 2016 - nil).