Note 10— Income Taxes
Noble-UK is a company which is a tax resident in the UK and, as such, will be subject to UK corporation tax on its taxable profits and gains. A UK tax exemption is available in respect of qualifying dividends income and capital gains related to the sale of qualifying participations. We operate in various countries throughout the world, including the United States. The income or loss of the non-UK subsidiaries is not expected to be subject to UK corporation tax. Prior to the redomiciliation, Noble-Swiss was the group holding company and was exempt from Swiss cantonal and communal income tax on its worldwide income or loss, and was also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying participations. It is expected that the participation relief will result in a full exemption of participation income from Swiss federal income tax. We do not expect the redomiciliation from Switzerland to the UK to have a material impact on our effective tax rate.
Consequently, we have taken account of those tax exemptions and provided for income taxes based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries have a taxable presence for income tax purposes.
On December 22, 2017, the President of the United States signed The Act into law. The Act makes significant changes to various areas of U.S. federal income tax law by, among other things, lowering corporate income tax rates, implementing the territorial tax system, and rules limiting base erosion, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries of U.S parent shareholders.
The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with ASC Topic 740, Income Taxes, in the reporting period in which the Act was enacted. Based on guidance issued from SAB 118, the Company has not provided provisional estimates for items in which the accounting for certain income tax effects of the Act is incomplete and as such, the Company will continue to apply ASC 740 on the basis of the laws in effect immediately before the enactment of the Act.
The changes to existing U.S. tax law as a result of the Act, which had an impact on the Company's federal income taxes for 2017, are as follows:
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• | The Act reduces the federal corporate income tax rate to 21% from 35% effective January 1, 2018. Accordingly, the Company recorded a financial statement benefit of $109.0 million as a result of the remeasurement of its net deferred tax liabilities during the quarter ended December 31, 2017. |
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• | The Act provides for a Deemed Repatriation Transition Tax (the “Transition Tax”), which is a one-time tax on previously untaxed accumulated earnings and profits (“E&P”) of certain foreign subsidiaries. For the quarter ended December 31, 2017, no additional income taxes were provided for as the Company has estimated there to be no untaxed accumulated E&P. |
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• | The Act provides for immediate an deduction of 100% of the costs of qualified property that is placed in service after September 27, 2017 and before January 1, 2023.The deduction will phase out by 20 percentage points each calendar year for qualified property that is placed in service after December 21, 2022. The company has estimated no material impact from this provision for the quarter ended December 31, 2017. |
The estimates above are provisional amounts based on information available as of December 31, 2017. These amounts are subject to changes as we refine our estimates and our interpretation of the Act. Any adjustments to these provisional amounts will be included in the financial statements in the reporting period in which such adjustments are determined, which will be no later than the fourth quarter of 2018.
Other provisions of the Act, which are effective January 1, 2018 and could have an impact on the Company's financial results for 2018 and later periods are as follows:
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• | The Act limits the deduction of business interest to 30% of “adjusted taxable income”, which is taxable income computed without regard to (i) any items not attributable to a trade or business, (ii) business interest income and business interest expense, (iii) any net operating loss deduction, and (iv) for taxable years beginning before January 1, 2022, deductions for depreciation , amortization and depletion. This limitation could result in a deferral or permanent reduction in the amount of interest that is deductible for U.S. federal income tax purposes after 2017. |
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• | The Act eliminates the U.S. federal income tax carryback provision for net operating losses (“NOLs”) generated after 2017 and limits the taxpayer's ability to utilize NOL carryforwards to 80% of taxable income. These changes could impact the company's valuation allowance assessment for NOLs generated after December 31, 2017. |
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• | The Act includes an anti-base erosion provision which establishes a tax on certain payments made by U.S. corporate taxpayers to related foreign persons, also referred to as Base Erosion and Anti-Abuse Tax (“BEAT”). The company is continuing to gather additional information to determine the ultimate impact of BEAT. |
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• | The Act introduces a new anti-deferral provision, which subjects a U.S. parent shareholder to current tax on certain income referred to as GILTI, of its foreign subsidiaries. The company has not made any adjustments related to potential GILTI tax in its financial statements and has adopted a policy to treat tax due on future U.S. inclusions in taxable income as period costs when incurred. |
The components of the net deferred taxes are as follows:
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| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets | | |
| | |
|
United States | | |
| | |
|
Excess of net tax basis over remaining book basis | | $ | — |
| | $ | 56,351 |
|
Deferred pension plan amounts | | 10,758 |
| | 16,797 |
|
Accrued expenses not currently deductible | | 11,585 |
| | 19,012 |
|
Other | | 2,150 |
| | 6,803 |
|
Non-U.S. | | | | |
|
Net operating loss carry forwards | | — |
| | 3,800 |
|
Deferred pension plan amounts | | 134 |
| | 3,120 |
|
Accrued expense not currently deductible | | 14,085 |
| | 2,064 |
|
Deferred tax assets | | 38,712 |
| | 107,947 |
|
Less: valuation allowance | | — |
| | (3,800 | ) |
Net deferred tax assets | | $ | 38,712 |
| | $ | 104,147 |
|
Deferred tax liabilities | | |
| | |
|
United States | | |
| | |
|
Excess of net book basis over remaining tax basis | | $ | (182,401 | ) | | $ | — |
|
Other | | (6,652 | ) | | (7,672 | ) |
Non-U.S. | |
|
| | |
|
Excess of net book basis over remaining tax basis | | — |
| | (200 | ) |
Other | | (402 | ) | | (4,305 | ) |
Deferred tax liabilities | | (189,455 | ) | | (12,177 | ) |
Net deferred tax assets (liabilities) | | $ | (150,743 | ) | | $ | 91,970 |
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Income (loss) from continuing operations before income taxes consists of the following:
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | (81,329 | ) | | $ | (428,087 | ) | | $ | 4,031 |
|
Non-U.S. | | (368,485 | ) | | (538,942 | ) | | 738,402 |
|
Total | | $ | (449,814 | ) | | $ | (967,029 | ) | | $ | 742,433 |
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The income tax provision (benefit) for continuing operations consists of the following:
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current- United States | | $ | (227,707 | ) | | $ | 61,928 |
| | $ | 113,648 |
|
Current- Non-U.S. | | 29,010 |
| | 18,813 |
| | 81,756 |
|
Deferred- United States | | 257,432 |
| | (189,880 | ) | | (38,103 | ) |
Deferred- Non-U.S. | | (16,106 | ) | | (17 | ) | | 1,931 |
|
Total | | $ | 42,629 |
| | $ | (109,156 | ) | | $ | 159,232 |
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The following is a reconciliation of our reserve for uncertain tax positions, excluding interest and penalties. In 2016, we released an uncertain tax position in Libya in the gross amount of $40 million coupled with a related tax benefit of $13 million.
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| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Gross balance at January 1, | | $ | 159,826 |
| | $ | 169,687 |
| | $ | 108,812 |
|
Additions based on tax positions related to current year | | 14,187 |
| | 15,665 |
| | 31,022 |
|
Additions for tax positions of prior years | | 1,284 |
| | 18,662 |
| | 47,561 |
|
Reductions for tax positions of prior years | | (860 | ) | | (43,701 | ) | | (11,945 | ) |
Expiration of statutes | | — |
| | (487 | ) | | (1,237 | ) |
Tax settlements | | — |
| | — |
| | (4,526 | ) |
Gross balance at December 31, | | 174,437 |
| | 159,826 |
| | 169,687 |
|
Related tax benefits | | (1,008 | ) | | (1,008 | ) | | (14,369 | ) |
Net reserve at December 31, | | $ | 173,429 |
| | $ | 158,818 |
| | $ | 155,318 |
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The liabilities related to our reserve for uncertain tax positions are comprised of the following:
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| | | | | | | | |
| | 2017 | | 2016 |
Reserve for uncertain tax positions, excluding interest and penalties | | $ | 173,429 |
| | $ | 158,818 |
|
Interest and penalties included in “Other liabilities” | | 18,431 |
| | 13,702 |
|
Reserve for uncertain tax positions, including interest and penalties | | $ | 191,860 |
| | $ | 172,520 |
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At December 31, 2017, the reserves for uncertain tax positions totaled $191.9 million (net of related tax benefits of 1.0 million). If the December 31, 2017 reserves are not realized, the provision for income taxes would be reduced by $186.6 million. At December 31, 2016, the reserves for uncertain tax positions totaled $172.5 million (net of related tax benefits of 1.0 million).
It is reasonably possible that our existing liabilities related to our reserve for uncertain tax positions may fluctuate in the next 12 months primarily due to the completion of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of changes in our existing liabilities due to various uncertainties, such as the unresolved nature of various audits.
We include, as a component of our “Income tax provision,” potential interest and penalties related to recognized tax contingencies within our global operations. Interest and penalties resulted in an income tax expense of $4.7 million in 2017, an income tax expense of $2.7 million in 2016 and an income tax benefit of $2.9 million in 2015.
During the year ended December 31, 2017, our income tax provision included a non-cash, discrete item of $260.7 million as the result of an internal tax restructuring, which was implemented to reduce costs associated with the ownership of multiple legal entities, simplify the overall legal entity structure, ease deployment of cash throughout the business and consolidate operations into one centralized group of entities.
As of December 31, 2017, we recorded deferred charges of $145.3 million related to the deferral of income tax expense on intercompany asset transfers as a result of our internal tax restructuring. The deferred charges are included in “Other assets” on the accompanying Consolidated Balance Sheet and are amortized as a component of income tax expense over the remaining life of the underlying assets.
We conduct business globally and, as a result, we file numerous income tax returns in U.S. and in non-U.S. jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including in jurisdictions such as Brazil, Brunei, Bulgaria, Cyprus, Mexico, Norway, Saudi Arabia, Argentina, Australia, Denmark, Gabon, Luxembourg, Malaysia, the Netherlands, Tanzania, Singapore, Switzerland, the United Kingdom and the United States. We are no longer subject to U.S. Federal income tax examinations for years before 2010 and non-U.S. income tax examinations for years before 2000.
Noble-UK conducts substantially all of its business through Noble-Cayman and its subsidiaries. The income or loss of our non-UK subsidiaries is not subject to UK income tax. Earnings are taxable in the United Kingdom at the UK statutory rate of 19 percent. The ongoing consultative process in the United Kingdom and a possible change in law could materially impact our tax rate on operations in the United Kingdom continental shelf. A reconciliation of tax rates outside of the United Kingdom and the Cayman Islands to our Noble-UK effective rate for continuing operations is shown below:
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| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Effect of: | | |
| | |
| | |
|
Tax rates which are different than the UK and Cayman Island rates | | 23.4 | % | | 8.4 | % | | 14.4 | % |
Tax impact of asset impairment | | 11.7 | % | | 3.9 | % | | 5.3 | % |
Tax impact of tax restructuring | | (76.1 | )% | | — | % | | — | % |
Tax impact of tax reform | | 33.4 | % | | — | % | | — | % |
Reserve for (resolution of) tax authority audits | | (1.9 | )% | | (1.0 | )% | | 1.7 | % |
Total | | (9.5 | )% | | 11.3 | % | | 21.4 | % |
We generated and fully utilized U.S. foreign tax credits of $15.0 million in 2015. Due to foreign tax credit limitation constraints, in 2017 and 2016, the Company has made the determination to take foreign tax expense as a deduction against U.S. taxable income.
At December 31, 2017, the company asserts that the investment in foreign subsidiaries is permanent in nature, and estimates that there are no net cumulative earnings in its foreign subsidiaries. At December 31, 2016, we had no undistributed earnings of our subsidiaries for which deferred income taxes have not been provided.