Note 13 Income Taxes

We apply the provisions of the Income Taxes Topic in the ASC relating to uncertain tax positions. The change in our unrecognized tax benefits for years ended December 31, 2012, 2011 and 2010 were as follows:

	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Balance as of January 1	$	68,848		$	81,174		$	69,048
Additions based on tax positions related to the current year	922			1,850			1,026
Additions for tax positions of prior years	16,372		(1)	11,748			17,060
Reductions for tax positions for prior years	(1,174		)	(11,082		)	(4,709		)
Settlements	(1,018		)	(14,842		)	(1,251		)
Balance as of December 31	$	83,950		$	68,848		$	81,174

(1) Includes an unrecognized tax benefit of $10.4 million related to a Mexico audit assessment.

The balance also represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods. As of December 31, 2012, 2011 and 2010, we had approximately $42.8 million, $28.2 million and $42.9 million, respectively, of interest and penalties related to our total gross unrecognized tax benefits. During the years ended December 31, 2012, 2011 and 2010, we accrued and recognized estimated interest related to unrecognized tax benefits and penalties of approximately $2.7 million, $4.6 million and $5.1 million, respectively. We recognize interest and penalties related to income tax matters in the income tax expense line item in our consolidated statements of income (loss).

We are subject to income taxes in the United States and numerous other jurisdictions. A number of our United States and non-United States income tax returns from 1998 through 2011 are currently under audit examination. We anticipate that several of these audits could be finalized within the next 12 months. It is possible that the benefit relating to our unrecognized tax positions could significantly increase or decrease within the next 12 months. However, based on the current status of examinations, and the protocol for finalizing audits with the relevant tax authorities, which could include formal legal proceedings, it is not possible to estimate the future impact of the amount of changes, if any, to recorded uncertain tax positions at December 31, 2012.

Income (loss) from continuing operations before income taxes was comprised of the following:

	Year Ended December 31,
	2012		2011		2010
United States and Other Jurisdictions	(In thousands)
United States	$	190,848	$	178,270	$	(82,723	)
Other jurisdictions	83,835		309,499		376,293
Income (loss) before income taxes from continuing operations	$	274,683	$	487,769	$	293,570

Income taxes have been provided based upon the tax laws and rates in the countries where we operate. We are a Bermuda exempted company. Bermuda does not impose corporate income taxes. Our U.S. subsidiaries are subject to a U.S. federal tax rate of 35%.

Income tax expense (benefit) from continuing operations consisted of the following:

	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current:
U.S. federal	$	25,802		$	27,649		$	(137,847	)
Outside the U.S.	82,950			43,732			54,779
State	34,242			38,321			5,859
	$	142,994		$	109,702		$	(77,209	)
Deferred:
U.S. federal	$	(78,556	)	$	41,540		$	97,114
Outside the U.S.	(18,479		)	4,413			13,607
State	(13,331		)	(13,050		)	3,438
	$	(110,366	)	$	32,903		$	114,159
Income tax expense (benefit)	$	32,628		$	142,605		$	36,950

Nabors is not subject to tax in Bermuda. A reconciliation of the differences between taxes on income (loss) before income taxes computed at the appropriate statutory rate and our reported provision for income taxes follows:

	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Income tax provision at statutory (Bermuda rate of 0%)	$	—		$	—		$	—
Taxes on U.S. and other international earnings (losses) at greater than the Bermuda rate	(48,188		)	112,094			18,686
Increase (decrease) in valuation allowance	33,730			(6,450		)	2,407
Effect of change in tax rate	—			(258		)	40
Tax reserves and interest	26,176			11,948			8,808
State income taxes	20,910			25,271			7,009
Income tax expense (benefit)	$	32,628		$	142,605		$	36,950
Effective tax rate	11.9		%	29.2		%	12.6		%

The changes in our effective tax rate from 2011 to 2012 and from 2010 to 2011 are mainly a result of the proportion of income generated in the United States versus the international jurisdictions where we operate. Income generated in the United States is generally taxed at a higher rate than other jurisdictions.

The significant components of our deferred tax assets and liabilities were as follows:

	December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	1,826,597		$	2,009,318
Equity compensation	29,337			25,937
Deferred revenue	33,523			32,200
Tax credit and other attribute carryforwards	110,563			90,297
Insurance loss reserves	10,873			24,598
Other	104,699			114,043
Subtotal		2,115,592			2,296,393
Valuation allowance	(1,520,852		)	(1,485,540		)
Deferred tax assets:	$	594,740		$	810,853

Deferred tax liabilities:
Depreciation and amortization for tax in excess of book expense	$	945,888		$	1,317,256
Variable interest investments	144,020			116,005
Other	—			34,822
Deferred tax liability	$	1,089,908		$	1,468,083
Net deferred assets (liabilities)	$	(495,168	)	$	(657,230	)

Balance Sheet Summary
Net current deferred asset	$	110,480		$	127,874
Net noncurrent deferred asset (1)	4,408			13,090
Net current deferred liability (2)	(10,721		)	(269		)
Net noncurrent deferred liability	(599,335		)	(797,925		)
Net deferred asset (liability)	$	(495,168	)	$	(657,230	)

(1) This amount is included in other long-term assets.

(2) This amount is included in accrued liabilities.

For U.S. federal income tax purposes, we have net operating loss (“NOL”) carryforwards of approximately $649 million that, if not utilized, will expire between 2018 and 2031. The NOL carryforwards for alternative minimum tax purposes are approximately $528 million. Additionally, we have NOL carryforwards in other jurisdictions of approximately $5.5 billion of which $530 million that, if not utilized, will expire at various times from 2013 to 2032. We provide a valuation allowance against NOL carryforwards in various tax jurisdictions based on our consideration of existing temporary differences and expected future earning levels in those jurisdictions. We have recorded a deferred tax asset of approximately $1.45 billion as of December 31, 2012 relating to NOL carryforwards that have an indefinite life in several non-U.S. jurisdictions. A valuation allowance of approximately $1.45 billion has been recognized because we believe it is more likely than not that substantially all of the deferred tax asset will not be realized.

The NOL carryforwards by year of expiration:

Year Ended December 31,	Total		U.S. Federal		Non-U.S.
	(In thousands)
2013	$	24,552	$	—	$	24,552
2014	4,531		—		4,531
2015	21,567		—		21,567
2016	34,058		—		34,058
2017	47,961		—		47,961
2018	51,197		11,703		39,494
2019	28,518		17,722		10,796
2020	16,394		—		16,394
2021	23,086		—		23,086
2022	1,514		—		1,514
2026	—		—		—
2027	114		—		114
2028	22,982		—		22,982
2029	51,813		—		51,813
2030	329,997		280,732		49,265
2031	413,899		338,640		75,259
2032	106,587		—		106,587
Subtotal: expiring NOLs	$	1,178,770	$	648,797	$	529,973
Non-expiring NOLs	4,972,658		—		4,972,658
Total	$	6,151,428	$	648,797	$	5,502,631

In addition, for state income tax purposes, we have net operating loss carryforwards of approximately $382 million that, if not utilized, will expire at various times from 2013 to 2032.

Under U.S. federal tax law, the amount and availability of loss carryforwards (and certain other tax attributes) are subject to a variety of interpretations and restrictive tests applicable to Nabors and our subsidiaries. The utilization of these carryforwards could be limited or effectively lost upon certain changes in our shareholder base. Accordingly, although we believe substantial loss carryforwards are available to us, no assurance can be given that they will be available in the future.

Various bills have been introduced in the U.S. Congress that could reduce or eliminate the U.S. tax benefits associated with our 2002 reorganization as a Bermuda company. Legislation enacted by Congress in 2004 provides that a corporation that reorganized in a foreign jurisdiction on or after March 4, 2003 be treated as a domestic corporation for United States federal income tax purposes. There has been and we expect that there may continue to be legislation proposed in Congress from time to time which, if enacted, could limit or eliminate the tax benefits associated with our reorganization.

Because we cannot predict whether legislation will ultimately be adopted, no assurance can be given that the tax benefits associated with our reorganization will ultimately accrue to the benefit of the Company and its shareholders. It is possible that future changes to tax laws (including tax treaties) could impact our ability to realize the tax savings recorded to date as well as future tax savings resulting from our reorganization.