Income taxes

The Company is incorporated in Bermuda, which does not impose an income tax. OEH’s effective tax rate is significantly affected by its mix of income and loss in various jurisdictions as there is significant variation in the income tax rate imposed and also by the effect of losses in jurisdictions for which it is expected that the tax benefit of losses will not be recognizable at year end.

Accordingly, the income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax and also attributable to the relative amount of earnings or loss in various jurisdictions, the effect of valuation allowances, and uncertain tax positions. The income tax provision is also affected by discrete items that may occur in any given year, but are not consistent from year to year. Discrete items which had the most significant impact on the tax rate include a deferred tax charge of $83,000 in 2012 (2011 - credit of $2,094,000) arising in respect of foreign exchange gain/loss on the remeasurement of deferred taxes on temporary differences in subsidiaries operating in jurisdictions where the local currency differs from the functional currency.

The provision for income taxes consists of the following:



Year ended December 31, 2012	Pre-Tax (Loss)/ Income $’000		Current $’000	Deferred $’000		Total $’000

Bermuda	(8,244	)	—	—		—
United States	1,290		3,656	(647	)	3,009
Rest of the world	16,200		16,744	2,234		18,978

	9,246		20,400	1,587		21,987



Year ended December 31, 2011	Pre-Tax (Loss)/ Income $’000		Current $’000	Deferred $’000		Total $’000

Bermuda	(23,436	)	—	—		—
United States	13,918		3,986	(561	)	3,425
Rest of the world	6,408		17,132	(477	)	16,655

	(3,110	)	21,118	(1,038	)	20,080



Year ended December 31, 2010	Pre-Tax (Loss)/ Income $’000		Current $’000	Deferred $’000		Total $’000

Bermuda	(16,208	)	—	—		—
United States	(7,431	)	1,510	(1,882	)	(372	)
Rest of the world	11,284		7,618	10,938		18,556

	(12,355	)	9,128	9,056		18,184

The reconciliation of earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax at the statutory tax rate to the provision for income taxes is shown in the table below:



	2012		2011		2010
Year ended December 31,	$'000		$'000		$'000

Earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax	9,246		(3,110	)	(12,355	)

Tax charge at statutory tax rate of Nil% (1)	—		—		—

Non-deductible/(taxable) items:
Exchange rate movements on deferred tax	83		(2,094	)	990
Other permanent items	3,054		193		(734	)
Change in valuation allowance	6,093		11,795		19,019
Difference in taxation rates	11,645		9,449		(2,177	)
Change in provisions for uncertain tax positions	(174	)	817		1,153
Change in tax rates	600		(222	)	(107	)
Other	686		142		40

Provision for income taxes	21,987		20,080		18,184

(1) The Company is resident in Bermuda, which does not impose an income tax.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following represents OEH’s deferred tax assets and liabilities:



	2012		2011		2010
Year ended December 31,	$’000		$’000		$’000

Operating loss carry-forwards	93,466		61,708		52,791
Pensions	1,899		2,161		1,517
Share options	2,813		1,647		—
Trademarks	5,563		3,868		—
Other	9,197		2,897		6,975
Less: Valuation allowance	(97,376	)	(50,746	)	(28,201	)

Net deferred tax assets	15,562		21,535		33,082

Other	(5,267	)	(4,609	)	—
Depreciable assets	(171,016	)	(172,643	)	(195,647	)

Deferred tax liabilities	(176,283	)	(177,252	)	(195,647	)

Net deferred tax liabilities	(160,721	)	(155,717	)	(162,565	)

The net deferred tax balances are included in prepaid expenses and other, accrued liabilities, deferred income taxes and deferred income taxes of consolidated variable interest entities presented on the face of the consolidated balance sheets.

The gross amount of tax loss carry-forwards is $350,926,000 at December 31, 2012 (2011 - $211,851,000). Of this amount, $7,126,000 will expire in the five years ending December 31, 2017 and a further $50,889,000 will expire in the five years ending December 31, 2022. The remaining losses of $292,911,000 will expire after December 31, 2022 or have no expiry date. After weighing all positive and negative evidence, a valuation allowance has been provided against gross deferred tax assets where management believes it is more likely than not that the benefits associated with these assets will not be realized.

Except for earnings that are currently distributed, income taxes and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The determination of the additional deferred taxes that have not been provided is not practicable.

OEH’s 2012 tax provision of $21,987,000 (2011 - $20,080,000; 2010 - $18,184,000) included a benefit of $174,000 (2011 - benefit of $3,439,000; 2010 - charge of $1,043,000) in respect of the provision for uncertain tax positions under ASC 740, of which a charge of $121,000 (2011 - benefit of $2,058,000; 2010 - charge of $547,000) related to the potential interest and penalty costs associated with the uncertain tax positions.

The 2012 provision for income taxes included a deferred tax provision of $6,093,000 in respect of valuation allowances due to a change in estimate concerning OEH’s ability to realize loss carry-forwards and other deferred tax assets in certain jurisdictions compared to a $11,795,000 provision in 2011.

At December 31, 2012, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2012	$’000		$’000		$’000		$’000

Balance at January 1, 2012	4,755		3,169		1,148		438
Additional uncertain tax provision identified during the year	403		401		2		—
Uncertain tax provision on prior year positions	444		151		168		125
Uncertain tax provisions paid during the year	—		—		—		—
Uncertain tax provisions settled during the year	(686	)	(622	)	(64	)	—
Foreign exchange	(335	)	(225	)	(80	)	(30	)

Balance at December 31, 2012	4,581		2,874		1,174		533

At December 31, 2012, OEH recognized a $4,581,000 liability in respect of its uncertain tax positions. All of this ASC 740 provision arises in jurisdictions in which OEH conducts business other than Bermuda. The entire balance of uncertain tax benefit at December 31, 2012, if recognized, would affect the effective tax rate.

At December 31, 2011, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2011	$’000		$’000		$’000		$’000

Balance at January 1, 2011	8,194		4,550		1,627		2,017
Additional uncertain tax provision identified during the year	—		—		—		—
Uncertain tax provision on prior year positions	817		600		132		85
Uncertain tax provisions paid during the year	(642	)	(306	)	(192	)	(144	)
Uncertain tax provisions settled during the year	(3,178	)	(1,500	)	(358	)	(1,320	)
Foreign exchange	(436	)	(175	)	(61	)	(200	)

Balance at December 31, 2011	4,755		3,169		1,148		438

At December 31, 2010, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest	Penalties
Year ended December 31, 2010	$’000		$’000		$’000	$’000

Balance at January 1, 2010	7,151		4,054		1,219	1,878
Additional uncertain tax provision identified during the year	1,153		606		408	139
Uncertain tax provision on prior year positions	—		—		—	—
Uncertain tax provisions paid during the year	—		—		—	—
Uncertain tax provisions settled during the year	—		—		—	—
Foreign exchange	(110	)	(110	)	—	—

Balance at December 31, 2010	8,194		4,550		1,627	2,017

Certain subsidiaries of the Company are subject to taxation in the United States and various states and other non-U.S. jurisdictions. As of December 31, 2012, all tax years after 2002 are open to examination by the tax authorities.

OEH believes that it is reasonably possible that within the next 12 months the ASC 740 provision will decrease by approximately $500,000 as a result of expiration of uncertain tax positions in certain jurisdictions in which OEH operates. These amounts relate primarily to transfer pricing inquiries by the tax authorities.