11. Income taxes
The income tax provision differs from the amount that would be obtained by applying the Bermuda statutory income tax rate of 0% for 2017, 2016 and 2015 to income (loss) from continuing operations as follows:
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
(in thousands except rates) |
|
|||||||||
|
Statutory rate |
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
$ |
(18,446 |
) |
|
$ |
(16,399 |
) |
|
$ |
(4,436 |
) |
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign tax rate differentials |
$ |
945 |
|
|
$ |
(1,018 |
) |
|
$ |
1,676 |
|
|
Uncertain tax position |
|
1,050 |
|
|
|
(958 |
) |
|
|
10,066 |
|
|
Unremitted earnings |
|
1,677 |
|
|
|
4,777 |
|
|
|
11,561 |
|
|
Derivative contracts |
|
– |
|
|
|
– |
|
|
|
(5,038 |
) |
|
Change in valuation allowance |
|
640 |
|
|
|
(147 |
) |
|
|
3,232 |
|
|
Expiration of non-capital tax loss carryovers |
|
792 |
|
|
|
2,056 |
|
|
|
1,740 |
|
|
Other |
|
325 |
|
|
|
1,336 |
|
|
|
(1,008 |
) |
|
Total |
$ |
5,429 |
|
|
$ |
6,046 |
|
|
$ |
22,229 |
|
The components of the net deferred income tax liability at December 31, 2017 and 2016 were as follows:
|
|
2017 |
|
|
2016 |
|
||
|
|
(in thousands) |
|
|||||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Property and equipment |
$ |
1,279 |
|
|
$ |
3,003 |
|
|
Unrealized gains on derivative contracts |
|
432 |
|
|
|
168 |
|
|
Timing of accruals |
|
132 |
|
|
|
162 |
|
|
Non-capital loss carryovers |
|
16,502 |
|
|
|
22,364 |
|
|
Valuation allowance |
|
(17,731 |
) |
|
|
(25,452 |
) |
|
Other |
|
47 |
|
|
|
– |
|
|
Total deferred tax assets |
$ |
661 |
|
|
$ |
245 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Property and equipment |
$ |
(10,044 |
) |
|
$ |
(9,986 |
) |
|
Unremitted earnings |
|
(9,631 |
) |
|
|
(8,586 |
) |
|
Timing of accruals |
|
(597 |
) |
|
|
(479 |
) |
|
Total deferred tax liabilities |
|
(20,272 |
) |
|
|
(19,051 |
) |
|
Net deferred tax liabilities |
$ |
(19,611 |
) |
|
$ |
(18,806 |
) |
|
Components of net deferred tax liabilities |
|
|
|
|
|
|
|
|
Non-current assets |
$ |
661 |
|
|
$ |
245 |
|
|
Non-current liabilities |
|
(20,272 |
) |
|
|
(19,051 |
) |
|
Net deferred tax liabilities |
$ |
(19,611 |
) |
|
$ |
(18,806 |
) |
We have accumulated losses or resource-related deductions available for income tax purposes in Turkey, Romania, Bulgaria and the United States. As of December 31, 2017, we had non-capital tax losses in Turkey of approximately 83.3 million TRY (approximately $22.0 million), which will begin to expire in 2018; non-capital tax losses in Romania of approximately 8.1 million Romanian New Leu (approximately $2.0 million), which will begin to expire in 2018; non-capital losses in Bulgaria of approximately 7.8 million Bulgarian Lev (approximately $4.8 million), which will begin to expire in 2018; and non-capital tax losses in the United States of approximately $53.7 million, which will begin to expire in 2018. As of December 31, 2017 and 2016, we recorded a valuation allowance of $17.7 million and $25.5 million, respectively, as a reduction to our net operating losses and deferred tax assets.
Effective October 1, 2009, we continued to the jurisdiction of Bermuda under the Bermuda Companies Act 1981. We have determined that no taxes were payable upon the continuance. However, our tax filing positions are still subject to review by taxation authorities who may successfully challenge our interpretation of the applicable tax legislation and regulations, with the result that additional taxes could be payable by us.
We file income tax returns in the United States, Turkey, Bulgaria and Cyprus, with Turkey being the only jurisdiction with significant amounts of taxes due. Except for the outstanding examination of the 2011 income tax filings for Petrogas Petrol Gaz ve Petrokimya Urunleri Insaat Sanayi ve Ticaret A.S. (“Petrogas”), Turkish income tax filings before 2012 are no longer subject to examination. As the result of 2016 Turkish legislation allowing us the option to enter into an agreement to exempt corporate income tax filings from examination, we were able to close additional years from examination.
As of December 31, 2017 and 2016 we recorded an $8.7 million and $8.1 million liability, respectively, primarily due to uncertain tax positions related to the unwinding of all our crude oil hedge collars and three-way contracts, which are included in long-term accrued liabilities on our consolidated balance sheet. The unrecognized tax benefits at December 31, 2017 and 2016 were as follows:
|
|
2017 |
|
|
2016 |
|
||
|
|
(in thousands) |
|
|||||
|
Unrecognized tax benefits at beginning of period |
$ |
8,079 |
|
|
$ |
11,014 |
|
|
Gross increases - tax positions in prior period |
|
1,125 |
|
|
|
910 |
|
|
Gross decreases - tax positions in prior period |
|
– |
|
|
|
(3,087 |
) |
|
Gross increases - tax positions in current period |
|
– |
|
|
|
1,219 |
|
|
Gross decreases - tax positions in current period |
|
– |
|
|
|
– |
|
|
Foreign exchange change effect |
|
(541 |
) |
|
|
(1,914 |
) |
|
Unrecognized tax benefits at end of period |
|
8,663 |
|
|
|
8,142 |
|
|
Less: TBNG liability held for sale |
|
– |
|
|
|
(63 |
) |
|
Unrecognized tax benefits at end of period |
$ |
8,663 |
|
|
$ |
8,079 |
|
As of December 31, 2017, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
Unremitted earnings
Our foreign subsidiaries generate earnings that are not subject to Turkish dividend withholding taxes so long as they are permanently reinvested in our operations in Turkey. Pursuant to ASC Topic No. 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to Turkish dividend withholding taxes. Prior to fiscal year 2015, we asserted that the undistributed earnings of our foreign Turkish subsidiaries were permanently reinvested.
Primarily due to the increase in our U.S. debt service obligations resulting from the issuance of the 2017 Notes in the aggregate principal amount of $55.0 million in 2015 (see Note 9 “Loans payable”), management concluded that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet corporate cash flow needs without constraining foreign objectives. Accordingly, in the fourth quarter of fiscal year 2015, we withdrew the permanent reinvestment assertion on 135.2 million TRY of cumulative earnings generated by certain of our Turkish foreign subsidiaries through fiscal year 2015. We provided for Turkish dividend withholding taxes on the 135.2 million TRY of cumulative undistributed foreign Turkish earnings, resulting in the recognition of a deferred tax liability. Although the 2017 Notes were paid off on July 3, 2017 (see Note 9 “Loans Payable”), due to our obligation to pay dividends on our Series A Preferred Shares issued on November 4, 2016 (see Note 5 “Series A Preferred Shares”), as of December 31, 2017 and 2016, we maintain the same position, and we provided for Turkish dividend, withholding taxes on 242.1 million and 201.3 million TRY, respectively, of cumulative undistributed foreign Turkish earnings, resulting in an additional increase in our deferred tax liability.
There is no certainty as to the timing of when such Turkish foreign earnings will be distributed in whole or in part.