INCOME TAXES
Following is a reconciliation of the expected statutory U.S. Federal income tax provision to the actual income tax expense for the respective periods:
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| | | | | | | | | | | |
| Years Ended December 31, |
(In thousands) | 2017 | | 2016 | | 2015 |
Net loss attributable to Erin Energy Corporation before income tax expense | $ | (151,892 | ) | | $ | (142,401 | ) | | $ | (430,937 | ) |
Expected income tax benefit at statutory rate of 35% | (53,162 | ) | | (49,840 | ) | | (150,828 | ) |
Increase (decrease) due to: | | | | | |
Tax Reform Act - rate change | 18,762 |
| | — |
| | — |
|
Foreign rate differential | (19,530 | ) | | (17,202 | ) | | (59,467 | ) |
Change in valuation allowance | 79,768 |
| | 71,148 |
| | 256,910 |
|
Investment tax credit - Nigeria | (23,728 | ) | | 1,991 |
| | (35,580 | ) |
Non-deductible expenses and other | (2,110 | ) | | (6,097 | ) | | (11,035 | ) |
Total income tax benefit | $ | — |
| | $ | — |
| | $ | — |
|
Significant components of our deferred tax assets are as follows:
|
| | | | | | | |
| As of December 31, |
(In thousands) | 2017 | | 2016 |
Basis difference in fixed assets | $ | 19,126 |
| | $ | (3,249 | ) |
Unused capital allowances | 644,099 |
| | 572,051 |
|
Net operating losses | 96,701 |
| | 109,230 |
|
Other | 10,295 |
| | 12,421 |
|
| 770,221 |
| | 690,453 |
|
Valuation allowance | (770,221 | ) | | (690,453 | ) |
Net deferred income tax assets | $ | — |
| | $ | — |
|
The majority of the Company’s basis difference in fixed assets and unused capital allowances were generated from its Nigerian operations. The Company’s foreign net operating losses in Nigeria are not subject to expiration, and can be carried forward indefinitely. The foreign operating losses in The Gambia, Kenya and Ghana are included in the respective subsidiaries cost oil accounts, which will be offset against future taxable revenues. The U.S. Federal NOL will begin to expire in 2027. The ability to utilize NOLs and other tax attributes could be subject to a limitation if the Company were to undergo an ownership change as defined in Section 382 of the Tax Code.
Management assesses the available positive and negative evidence to estimate if existing deferred tax assets will be utilized. Based on current facts and circumstances related to its Nigerian operations, management has determined that it cannot demonstrate that it is more likely than not that the Nigerian losses and unutilized capital allowances will be utilized to reduce the Company’s petroleum profit tax liability within the foreseeable future.
Furthermore, because the Company does not currently have any revenue generating activities either in the U.S. or in any of its non-Nigerian subsidiaries, it cannot demonstrate that it is more likely than not that any of the related deferred tax assets will be utilized in the foreseeable future.
On the basis of this assessment, valuation allowances of $770.2 million and $690.5 million were recorded as of December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, the Company was subject to foreign and United States federal taxes only, with no allocations made to state and local taxes.
The Company recognizes the financial statement benefit of a tax position only after determining that they are more likely than not to sustain the position following an audit. The Company believes that its income tax positions and deductions will be sustained on audit and therefore no reserves for uncertain tax positions have been established. Accordingly, no interest or penalties have been accrued as of December 31, 2017 and 2016. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.
The following table summarizes the tax years that remain subject to examination by major tax jurisdictions:
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| | | |
United States: | 2007 | - | 2017 |
Nigeria: | 2010 | - | 2017 |
Kenya: | 2012 | - | 2017 |
The Gambia: | 2012 | - | 2017 |
U.S. Tax Reform
On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax Reform Act includes significant changes to the U.S. income tax system including but not limited to: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; repeal of the Alternative Minimum Tax (“AMT”); full expensing provisions related to business assets; creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The provisional impacts of this legislation are outlined below:
· Beginning January 1, 2018, the U.S. corporate income tax rate will be 21%. The Company is required to recognize the impacts of this rate change on its deferred tax assets and liabilities in the period enacted. The provisional effect of the rate change is a decrease to the deferred tax asset of $18.8 million. However, as the Company has a full valuation allowance on its net deferred tax asset, the deferred tax recognized due to the change in rate will be offset with a change in the valuation allowance. Therefore, there was no overall impact to the Financial Statements in 2017 due to this change in rate.
· The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on the Company’s reasonable estimate of the Transition Tax, there is no provisional Transition Tax expense. The Company has not completed its accounting for the income tax effects of the transition tax and is continuing to evaluate this provision of the Tax Act.
· The Tax Act creates a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the accounting treatment whether to record deferred taxes attributable to the GILTI tax. The Company has not recorded any amounts related to potential GILTI tax in the Company’s financial statements.
Other provisions in the legislation, such as interest deductibility and changes to executive compensation plans are not expected to have material implications to the Company’s financial statements. The income tax effects recorded in the Company’s financial statements as a result of the Tax Reform Act are provisional in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin number 118 (“SAB 118”) as the Company has not yet completed its evaluation of the impact of the new law. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts. The Company does not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of operations.