Note 12 Income Taxes

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


	Year Ended December 31,
United States and Other Jurisdictions	2018		2017		2016
	(In thousands)
United States	$	(119,419)	$	(369,162)	$	(728,589)
Other jurisdictions		(399,375)		(210,922)		(469,486)
Income (loss) from continuing operations before income taxes	$	(518,794)	$	(580,084)	$	(1,198,075)

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


	Year Ended December 31,
	2018		2017		2016

	(In thousands)
Current:
U.S. federal	$	(32,351)	$	(160,761)	$	(19,937)
Outside the U.S.		32,928		59,491		31,846
State		1,811		(810)		2,871
	$	2,388	$	(102,080)	$	14,780
Deferred:
U.S. federal	$	37,476	$	49,020	$	(164,297)
Outside the U.S.		39,518		(26,684)		(14,641)
State		(113)		(3,226)		(22,673)
	$	76,881	$	19,110	$	(201,611)
Income tax expense (benefit)	$	79,269	$	(82,970)	$	(186,831)

A reconciliation of our statutory tax rate to our worldwide effective tax rate consists of the following:


	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Income tax provision at statutory (Bermuda rate of 0%)	$	—	$	—	$	—
Taxes (benefit) on U.S. and other international earnings (losses) at greater than the Bermuda rate		49,375		(98,119)		(181,426)
Increase (decrease) in valuation allowance		38,822		29,165		17,865
Impact of Tax Reform Act		—		138,635		—
Tax reserves and interest		(10,626)		(148,615)		(3,468)
State income taxes (benefit)		1,698		(4,036)		(19,802)
Income tax expense (benefit)	$	79,269	$	(82,970)	$	(186,831)
Effective tax rate		(15.3%)		14.3%		15.6%

The increase in tax expense during 2018 was primarily attributable to the change in our geographic mix of pre-tax earnings (losses), primarily due to pre-tax earnings in certain high tax jurisdictions causing a net income tax despite a consolidated pre-tax loss. In addition, management has continued to assess the Company’s ability to more likely than not realize deferred tax assets associated with our Canada Drilling operations and concluded during the fourth quarter of 2018 that the pace of market recovery did not support realization at this time. Accordingly, a non-cash expense of $52 million was recorded to reflect the valuation allowance.

The components of our net deferred taxes consisted of the following:


	December 31,
	2018		2017
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	1,967,910	$	1,974,658
Equity compensation		7,038		10,281
Deferred revenue		16,494		14,005
Tax credit and other attribute carryforwards		100,752		131,640
Insurance loss reserves		2,451		6,626
Accrued interest		206,088		234,033
Other		82,167		80,492
Subtotal		2,382,900		2,451,735
Valuation allowance		(1,917,390)		(1,869,490)
Deferred tax assets:	$	465,510	$	582,245
Deferred tax liabilities:
Depreciation and amortization for tax in excess of book expense	$	102,810	$	146,448
Other		23,920		27,132
Deferred tax liability	$	126,730	$	173,580
Net deferred tax assets (liabilities)	$	338,780	$	408,665
Balance Sheet Summary:
Net noncurrent deferred tax asset (1)	$	345,091	$	419,003
Net noncurrent deferred tax liability		(6,311)		(10,338)
Net deferred tax asset (liability)	$	338,780	$	408,665

(1)

This amount is included in other long-term assets.

For U.S. federal income tax purposes, we have net operating loss (“NOL”) carryforwards of approximately $578.0 million. Of that amount, $442.0 million will expire between 2030 and 2036 if not utilized. Additionally, we have NOL carryforwards in other jurisdictions of approximately $7.1 billion of which $526.0 million, if not utilized, will expire at various times from 2019 to 2038. 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 $1.67 billion as of December 31, 2018 relating to NOL carryforwards that have an indefinite life in several jurisdictions. A valuation allowance of approximately $1.70 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.

In addition, for state income tax purposes, we have NOL carryforwards of approximately $780.0 million that, if not utilized, will expire at various times from 2019 to 2038.

The following is a reconciliation of our uncertain tax positions:


	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Balance as of January 1	$	33,203		$	179,255		$	188,376
Additions based on tax positions related to the current year		—			—			—
Additions for tax positions of prior years		308			25,119	(2)		3,873
Reductions for tax positions for prior years		(7,800)	(1)		(171,171)	(3)		(11,547)	(4)
Settlements		—			—			(1,447)
Balance as of December 31	$	25,711		$	33,203		$	179,255

(1)

Includes $4.8 million reduction in Mexico, $1.0 million in Saudi Arabia and $2.0 million in Egypt.

(2)

Includes $12.0 million addition in Norway, $9.0 million in the U.S. and $2.0 million in Egypt.

(3)

Includes $167.0 million related to internal restructuring.

(4)

Includes $7.2 million related to the expiration of statute of limitations in Australia, Algeria and Mexico, a $2.0 million reduction to Trinidad and $2.1 million related to foreign currency translation.

If the reserves of $25.7 million are not realized, this would favorably impact the worldwide effective tax rate. As of December 31, 2018, 2017 and 2016, we had approximately $6.7 million, $9.7 million and $9.2 million, respectively, of interest and penalties related to uncertain tax positions. During 2018, 2017 and 2016, we accrued and recognized estimated interest and penalties related to uncertain tax positions of approximately $1.0 million, $0.5 million and $0.6 million, respectively. We include potential interest and penalties related to uncertain tax positions within our global operations in the income tax expense (benefit) line item in our consolidated statements of income (loss).

It is reasonably possible that our existing liabilities related to our reserve for uncertain tax positions may increase or decrease in the next twelve 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 conduct business globally and, as a result, we file numerous income tax returns in the U.S. and non-U.S. jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as Algeria, Canada, Mexico, Saudi Arabia and the United States. We are no longer subject to U.S. Federal income tax examinations for years before 2015 and non-U.S. income tax examinations for years before 2007.