Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 12— Income Taxes

As described in “Note 2— Chapter 11 Emergence,” in accordance with the Plan, the Predecessor’s Legacy Notes were cancelled and exchanged for Successor’s Ordinary Shares and Warrants. The cancellation of indebtedness income resulting from such restructuring transactions has significantly reduced the Company’s US tax attributes, including but not limited to net operating loss carryforwards. As a result of the emergence from bankruptcy, on the Effective Date, the Company experienced an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), which is anticipated to subject certain remaining tax attributes to an annual limitation under Section 382 of the Code.

On the Effective Date, the Company had net deferred tax liabilities in total of $21.5 million inclusive of a valuation allowance of $4.7 million. Because of the impact the cumulative operating losses have on the determination of the recoverability of deferred tax assets through future earnings and the negative evidence associated with the bankruptcy reorganization, the Company assessed the realizability of its deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, the Company established a new valuation allowance upon emergence of $4.7 million for a portion of its deferred tax assets.

At September 30, 2021, the Company had a deferred tax asset of $8.7 million net of valuation allowance. Additionally, the Company also had deferred tax liabilities of $13.6 million inclusive of a valuation allowance of $4.5 million.

At September 30, 2021, the reserves for uncertain tax positions totaled $50.9 million (net of related tax benefits of $0.3 million). At December 31, 2020, the reserves for uncertain tax positions totaled $42.5 million (net of related tax benefits of $0.4 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.

During the period ended on February 5, 2021, our income tax provision included a tax benefit of $1.7 million related to non-US reserve release, tax expense of $2.5 million related to fresh start and reorganization adjustments, and other recurring tax expenses of approximately $2.6 million.

On the Effective Date, our income tax provision included tax expenses of $2.5 million associated with reorganization and fresh start adjustments.

As a result of the Pacific Drilling Merger, the Company recorded a net decrease of $18.4 million to Pacific Drilling’s historical tax reserve balance and a net adjustment of $2.9 million to other tax balances.

During the period from February 6, 2021 to September 30, 2021, our tax provision included tax benefits of $24.2 million related to US and non-US reserve releases, $12.6 million related to a US tax refund, and $1.2 million related primarily to deferred tax adjustments. Such tax benefits were partially offset by tax expenses of $12.6 million related to various recurring items and $18.6 million related to non-US tax reserves.