Income Taxes
Kosmos Energy Ltd. is a Bermuda company that is not subject to taxation at the corporate level. We provide for income taxes based on the laws and rates in effect in the countries in which our operations are conducted. The relationship between our pre‑tax income or loss from continuing operations and our income tax expense or benefit varies from period to period as a result of various factors which include changes in total pre‑tax income or loss, the jurisdictions in which our income (loss) is earned and the tax laws in those jurisdictions.
On December 22, 2017, the President of the United States signed P.L. 115-97, the Tax Cut and Jobs Act (the Tax Reform Act), into law. Many of the provisions of the Tax Reform Act are effective beginning January 1, 2018, most notable of which is the reduction in the U.S. corporate income tax rate from 35% to 21%. Accounting Standards Codification Topic 740 requires deferred tax assets and liabilities be adjusted for the effect of changes in tax laws or tax rates during the period that includes the date of enactment. Accordingly, we have recorded a $16.7 million charge to deferred tax expense in December 2017 as a result of reducing our net deferred tax assets.
The components of income (loss) before income taxes were as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Bermuda | $ | (66,914 | ) | | $ | (63,749 | ) | | $ | (62,372 | ) |
United States | 6,068 |
| | 5,083 |
| | 10,652 |
|
Foreign—other | (117,009 | ) | | (235,898 | ) | | 137,156 |
|
Income (loss) before income taxes | $ | (177,855 | ) | | $ | (294,564 | ) | | $ | 85,436 |
|
The components of the provision for income taxes attributable to our income (loss) before income taxes consist of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Current: | |
| | |
| | |
|
Bermuda | $ | — |
| | $ | — |
| | $ | — |
|
United States | 10,976 |
| | 12,675 |
| | 15,199 |
|
Foreign—other | 24,456 |
| | 102 |
| | 29,287 |
|
Total current | 35,432 |
| | 12,777 |
| | 44,486 |
|
Deferred: | | | | | |
Bermuda | — |
| | — |
| | — |
|
United States | 15,310 |
| | (3,594 | ) | | 8,241 |
|
Foreign—other | (5,805 | ) | | (19,967 | ) | | 102,545 |
|
Total deferred | 9,505 |
| | (23,561 | ) | | 110,786 |
|
Income tax expense (benefit) | $ | 44,937 |
| | $ | (10,784 | ) | | $ | 155,272 |
|
Our reconciliation of income tax expense (benefit) computed by applying our Bermuda statutory rate and the reported effective tax rate on income (loss) from continuing operations is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Tax at Bermuda statutory rate | $ | — |
| | $ | — |
| | $ | — |
|
Foreign income (loss) taxed at different rates | (1,978 | ) | | (57,898 | ) | | 94,184 |
|
Change in valuation allowance and the expiration of fully valued deferred tax assets | 6,008 |
| | 29,263 |
| | 40,600 |
|
Non-deductible and other items(1) | 21,100 |
| | 12,347 |
| | 1,885 |
|
Tax shortfall on equity-based compensation | 3,086 |
| | 5,504 |
| | 18,603 |
|
Change in U.S. tax rate | 16,721 |
| | — |
| | — |
|
Total tax expense (benefit) | $ | 44,937 |
| | $ | (10,784 | ) | | $ | 155,272 |
|
Effective tax rate(2) | 25 | % | | 4 | % | | 182 | % |
______________________________________
| |
(1) | Includes $5.0 million of tax expense related to the expiration of a Moroccan tax loss carryforward; $4.7 million of tax related interest expense incurred in 2017; and other various items. |
| |
(2) | The effective tax rate during the years ended December 31, 2017, 2016 and 2015 were impacted by losses of $164.4 million, $121.4 million and $153.5 million, respectively, incurred in jurisdictions in which we are not subject to taxes and therefore do not generate any income tax benefits. |
The effective tax rate for the United States is approximately 433%, 179% and 220% for the years ended December 31, 2017, 2016 and 2015, respectively. The effective tax rate in the United States is impacted by the effect of writing-down our deferred tax assets as a result of the change in tax rate under the Act and the sum of equity-based compensation tax shortfalls and tax windfalls equal to the difference between the income tax benefit recognized for financial statement reporting purposes compared to the income tax benefit realized for tax return purposes.
The effective tax rate for Ghana is approximately 49%, 23% and 35% for the years ended December 31, 2017, 2016 and 2015, respectively. The effective tax rate in Ghana is impacted by non-deductible expenditures, including amounts associated with the damage to the turret bearing, which we expect to recover from insurance proceeds. Any such insurance recoveries would not be subject to income tax.
Our operations in other foreign jurisdictions have a 0% effective tax rate because they reside in countries with a 0% statutory rate or we have incurred losses in those countries and have full valuation allowances against the corresponding net deferred tax assets.
Deferred tax assets and liabilities, which are computed on the estimated income tax effect of temporary differences between financial and tax bases in assets and liabilities, are determined using the tax rates expected to be in effect when taxes are actually paid or recovered. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | |
| | |
|
Foreign capitalized operating expenses | $ | 68,218 |
| | $ | 69,804 |
|
Foreign net operating losses | 25,307 |
| | 36,352 |
|
Equity compensation | 20,783 |
| | 30,752 |
|
Unrealized derivative losses | 33,963 |
| | — |
|
Asset retirement obligation and other | 24,784 |
| | 33,744 |
|
Total deferred tax assets | 173,055 |
| | 170,652 |
|
Valuation allowance | (93,525 | ) | | (87,517 | ) |
Total deferred tax assets, net | 79,530 |
| | 83,135 |
|
Deferred tax liabilities: | | | |
Depletion, depreciation and amortization related to property and equipment | (533,561 | ) | | (526,945 | ) |
Unrealized derivative gains | — |
| | (584 | ) |
Total deferred tax liabilities | (533,561 | ) | | (527,529 | ) |
Net deferred tax liability | $ | (454,031 | ) | | $ | (444,394 | ) |
The Company has recorded a full valuation allowance against the net deferred tax assets in countries where we only have exploration operations.
The Company has foreign net operating loss carryforwards of $94.1 million. Of these losses, we expect $0.9 million, $0.5 million, $0.5 million, $0.6 million, $0.7 million and $15.0 million to expire in 2019, 2020, 2021, 2022, 2023 and 2029, respectively, and $75.9 million do not expire. All of these losses currently have offsetting valuation allowances.
A subsidiary of the Company files a U.S. federal income tax return and a Texas margin tax return. The Company is open to U.S. federal income tax examinations for tax years 2014 through 2017 and to Texas margin tax examinations for the tax years 2011 through 2017. In addition to the United States, the Company files income tax returns in the countries in which we operate. The Company is open to income tax examinations for years 2014 through 2017 in its significant other foreign jurisdictions, primarily Ghana.
As of December 31, 2017, the Company had no material uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to income tax matters in income tax expense.