Note 7—Income Taxes

Tax provision and rate—Transocean Ltd., a holding company and Swiss resident, is exempt from cantonal and communal income tax in Switzerland, but is subject to Swiss federal income tax. For Swiss federal income taxes, qualifying net dividend income and net capital gains on the sale of qualifying investments in subsidiaries are exempt. Consequently, there is not a direct relationship between our Swiss earnings before income taxes and our Swiss income tax expense.

Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures. Generally, our annual marginal tax rate is lower than our annual effective tax rate.

The components of our provision (benefit) for income taxes were as follows (in millions):


	Years ended December 31,
	2016		2015		2014
Current tax expense	$	39	$	254	$	286
Deferred tax expense (benefit)		68		(134)		(194)
Income tax expense	$	107	$	120	$	92

In the years ended December 31, 2016, 2015 and 2014, our effective tax rate was 11.5 percent, 11.9 percent and (5.0) percent, respectively, based on income from continuing operations before income tax expense.

The following is a reconciliation of the differences between the income tax expense for our continuing operations computed at the Swiss holding company federal statutory rate and our reported provision for income taxes (in millions, except statutory tax rate):


	Years ended December 31,
	2016		2015		2014
Income tax expense, calculated at the Swiss federal statutory rate of 7.83 percent	$	72	$	80	$	(141)
Taxes on earnings subject to rates different than the Swiss federal statutory rate		34		36		91
Taxes on impairment losses subject to rates different than the Swiss federal statutory rate		5		(8)		174
Taxes on revaluation of Norwegian assets		18		14		5
Taxes on litigation matters subject to rates different than the Swiss federal statutory rate		(1)		(9)		5
Changes in unrecognized tax benefits, net		(31)		12		(112)
Change in valuation allowance		32		10		93
Benefit from foreign tax credits		(16)		(10)		(23)
Other, net		(6)		(5)		—
Income tax expense	$	107	$	120	$	92

Deferred taxes—The significant components of our deferred tax assets and liabilities were as follows (in millions):


	December 31,
	2016		2015
Deferred tax assets
Net operating loss carryforwards	$	383	$	365
Tax credit carryforwards		33		23
Accrued payroll expenses not currently deductible		110		128
Deferred income		122		138
Loss contingencies		68		72
Professional fees		3		2
United Kingdom charter limitation		33		69
Other		37		36
Valuation allowance		(412)		(380)
Total deferred tax assets		377		453

Deferred tax liabilities
Depreciation and amortization		(239)		(251)
Other		(18)		(20)
Total deferred tax liabilities		(257)		(271)

Net deferred tax assets	$	120	$	182

At December 31, 2016 and 2015, our deferred tax assets included U.S. foreign tax credit carryforwards of $33 million and $23 million, respectively, which will expire between 2017 and 2026. The deferred tax assets related to our net operating losses were generated in various worldwide tax jurisdictions. At December 31, 2016, the net operating losses carryforwards, which were generated in various jurisdictions worldwide, included $200 million that do not expire and $183 million that will expire beginning 2018 and 2036. At December 31, 2015, the net operating losses carryforwards, which were generated in various jurisdictions worldwide, included $170 million that do not expire and $195 million that will expire beginning 2018 and 2035. At December 31, 2016 and 2015, due to uncertainty of realization, we have recorded a valuation allowance of $412 million and $380 million, respectively, on net operating losses and other deferred tax assets.

Our deferred tax liabilities include taxes related to the earnings of certain subsidiaries that are not permanently reinvested or that will not be permanently reinvested in the future. We consider the earnings of certain of our subsidiaries to be indefinitely reinvested, and accordingly, we have not provided for taxes on these unremitted earnings. If we were to make a distribution from the unremitted earnings of these subsidiaries, we would be subject to taxes payable to various jurisdictions. If our expectations were to change regarding future tax consequences, we may be required to record additional deferred taxes that could have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. At December 31, 2016, the amount of indefinitely reinvested earnings was approximately $2.5 billion. If all of these indefinitely reinvested earnings were distributed, we would be subject to estimated taxes of $200 million to $250 million.

Unrecognized tax benefits—The changes to our liabilities related to unrecognized tax benefits, excluding interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):


	Years ended December 31,
		2016		2015		2014
Balance, beginning of period	$	287	$	272	$	331
Additions for current year tax positions		42		36		27
Additions for prior year tax positions		13		17		3
Reductions for prior year tax positions		(34)		(27)		(19)
Settlements		(19)		(5)		(47)
Reductions related to statute of limitation expirations		(15)		(6)		(23)
Balance, end of period	$	274	$	287	$	272

The liabilities related to our unrecognized tax benefits, including related interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):


	December 31,
		2016		2015
Unrecognized tax benefits, excluding interest and penalties	$	274	$	287
Interest and penalties		96		118
Unrecognized tax benefits, including interest and penalties	$	370	$	405

In the years ended December 31, 2016, 2015 and 2014, we recognized income of $23 million, $1 million and $57 million, respectively, recorded as a component of income tax expense, related to previously recognized interest and penalties associated with our unrecognized tax benefits. As of December 31, 2016, if recognized, $370 million of our unrecognized tax benefits, including interest and penalties, would favorably impact our effective tax rate.

It is reasonably possible that our existing liabilities for unrecognized tax benefits may increase or decrease in the year ending December 31, 2017, primarily due to the progression of open audits and the expiration of statutes of limitation. However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.

Tax returns—We file federal and local tax returns in several jurisdictions throughout the world. With few exceptions, we are no longer subject to examinations of our U.S. and non‑U.S. tax matters for years prior to 2010. Our tax returns in the major jurisdictions in which we operate, other than the U.S., Norway and Brazil, which are mentioned below, are generally subject to examination for periods ranging from three to six years. We have agreed to extensions beyond the statute of limitations in two major jurisdictions for up to 20 years. Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments. We are defending our tax positions in those jurisdictions. While we cannot predict or provide assurance as to the timing or the outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position or results of operations, although it may have a material adverse effect on our consolidated statement of cash flows.

Norway tax investigations and trial—Norwegian civil tax authorities are challenging certain transactions undertaken by our subsidiaries in 1999, 2001 and 2002. At December 31, 2016, the remaining outstanding civil tax assessment was for NOK 412 million, equivalent to approximately $48 million, plus interest, related to a 2001 dividend payment. On June 26, 2014, the Norwegian district court in Oslo ruled that our subsidiary was liable for the civil tax assessment but waived all penalties and penalty interest. On September 12, 2014, we and the tax authorities each appealed the ruling. On June 27, 2016, the tax authorities withdrew their appeal of penalties and dropped all penalty claims. We intend to take all other appropriate action to continue to support our position that our Norwegian tax returns are materially correct as filed. Although we are unable to predict the outcome of this matter, we do not expect the effect, if any, to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. See Note 23—Subsequent Events.

Brazil tax investigations—Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. In December 2005, the Brazilian tax authorities issued an aggregate tax assessment of BRL 818 million, equivalent to approximately $251 million, including penalties and interest. On January 25, 2008, we filed a protest letter with the Brazilian tax authorities, and we are currently engaged in the appeals process. On May 19, 2014, with respect to our Brazilian income tax returns for the years 2009 and 2010, the Brazilian tax authorities issued an aggregate tax assessment of BRL 139 million, equivalent to approximately $43 million, including penalties and interest. On June 18, 2014, we filed a protest letter with the Brazilian tax authorities. We believe our returns are materially correct as filed, and we are vigorously contesting these assessments. An unfavorable outcome on these proposed assessments could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.

Other tax matters—We conduct operations through our various subsidiaries in a number of countries throughout the world. Each country has its own tax regimes with varying nominal rates, deductions, employee contribution requirements and tax attributes. From time to time, we may identify changes to previously evaluated tax positions that could result in adjustments to our recorded assets and liabilities. Although we are unable to predict the outcome of these changes, we do not expect the effect, if any, resulting from these adjustments to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.