12. Income Taxes

Kosmos Energy Ltd. is a Bermuda company that is not subject to taxation at the corporate level. We provide for income taxes based on the laws and rates in effect in the countries in which our operations are conducted. The relationship between our pre‑tax income or loss from continuing operations and our income tax expense or benefit varies from period to period as a result of various factors which include changes in total pre‑tax income or loss, the jurisdictions in which our income (loss) is earned and the tax laws in those jurisdictions.

The components of income (loss) before income taxes were as follows:


	Years Ended December 31,
	2016		2015		2014
	(In thousands)
Bermuda	$	(63,749)	$	(62,372)	$	(31,787)
United States		5,083		10,652		15,684
Foreign—other		(235,898)		137,156		594,371
Income (loss) before income taxes	$	(294,564)	$	85,436	$	578,268

The components of the provision for income taxes attributable to our income (loss) before income taxes consist of the following:


	Years Ended December 31,
	2016		2015		2014
	(In thousands)
Current:
Bermuda	$	—	$	—	$	—
United States		12,675		15,199		27,167
Foreign—other		102		29,287		55,322
Total current		12,777		44,486		82,489
Deferred:
Bermuda		—		—		—
United States		(3,594)		8,241		(14,403)
Foreign—other		(19,967)		102,545		230,812
Total deferred		(23,561)		110,786		216,409
Income tax expense (benefit)	$	(10,784)	$	155,272	$	298,898

Our reconciliation of income tax expense (benefit) computed by applying our Bermuda statutory rate and the reported effective tax rate on income (loss) from continuing operations is as follows:


	Years Ended December 31,
	2016			2015			2014
	(In thousands)
Tax at Bermuda statutory rate	$	—		$	—		$	—
Foreign income (loss) taxed at different rates		(57,898)			94,184			266,993
Change in valuation allowance and the expiration of fully valued deferred tax assets		29,263			40,600			16,401
Non-deductible and other items		12,347			1,885			8,957
Tax shortfall on equity-based compensation		5,504			18,603			6,547
Total tax expense (benefit)	$	(10,784)		$	155,272		$	298,898
Effective tax rate(1)		4	%		182	%		52	%

(1)

The effective tax rate during the years ended December 31, 2016, 2015 and 2014 were impacted by losses of $121.4 million, $153.5 million and $159.9 million, respectively, incurred in jurisdictions in which we are not subject to taxes and therefore do not generate any income tax benefits.

The effective tax rate for the United States is approximately 179%, 220% and 81% for the years ended December 31, 2016, 2015 and 2014, respectively. The effective tax rate in the United States is impacted by the effect of equity-based compensation tax shortfalls equal to the excess income tax benefit recognized for financial statement purposes over the income tax benefit realized for tax return purposes. The effective tax rate for Ghana is approximately 23%, 35% and 36% for the years ended December 31, 2016, 2015 and 2014, respectively. The effective tax rate in Ghana is impacted by non-deductible expenditures associated with the damage to the turret bearing, which we expect to recover from insurance proceeds. Any such insurance recoveries would not be subject to income tax. Our operations in other foreign jurisdictions have a 0% effective tax rate because they reside in countries with a 0% statutory rate or we have incurred losses in those countries and have full valuation allowances against the corresponding net deferred tax assets.

Deferred tax assets and liabilities, which are computed on the estimated income tax effect of temporary differences between financial and tax bases in assets and liabilities, are determined using the tax rates expected to be in effect when taxes are actually paid or recovered. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:


	December 31,
	2016		2015
	(In thousands)
Deferred tax assets:
Foreign capitalized operating expenses	$	69,804	$	101,823
Foreign net operating losses		36,352		14,719
Equity compensation		30,752		26,095
Other		33,744		22,656
Total deferred tax assets		170,652		165,293
Valuation allowance		(87,517)		(116,541)
Total deferred tax assets, net		83,135		48,752
Deferred tax liabilities:
Depletion, depreciation and amortization related to property and equipment		(526,945)		(425,183)
Unrealized derivative gains		(584)		(92,549)
Total deferred tax liabilities		(527,529)		(517,732)
Net deferred tax liability	$	(444,394)	$	(468,980)

The Company has recorded a full valuation allowance against the net deferred tax assets in countries where we only have exploration operations. The net decrease in the valuation allowance of $29.0 million is due to the write-off of previously capitalized foreign operating expenses and tax losses in Morocco related to the relinquishment of three licenses and the utilization of deferred tax assets to offset the tax impact of a payment from a joint license holder related to their withdrawal from three licenses, together totaling $58.2 million. The decrease in valuation allowance was partially offset by the tax effect of 2016 losses and foreign capitalized operating expenses of $29.2 million.

The Company has entered into various petroleum contracts in Morocco. These petroleum contracts provide for a tax holiday, at a 0% tax rate, for a period of 10 years beginning on the date of first production, if any.

The Company has foreign net operating loss carryforwards of $116.7 million. Of these losses, we expect $0.9 million, $13.4 million, $0.5 million, $0.5 million and $0.6 million to expire in 2019, 2020, 2021, 2022 and 2023, respectively, and $100.8 million do not expire. The Ghana tax loss of $53.3 million is expected to be fully utilized in 2017. The remaining $63.4 million in tax losses currently have offsetting valuation allowances.

A subsidiary of the Company files a U.S. federal income tax return and a Texas margin tax return. In addition to the United States, the Company files income tax returns in the countries in which we operate. The Company is open to U.S. federal income tax examinations for tax years 2013 through 2016 and to Texas margin tax examinations for the tax years 2011 through 2016. In addition, the Company is open to income tax examinations for years 2011 through 2016 in its significant other foreign jurisdictions, primarily Ghana.

As of December 31, 2016, the Company had no material uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to income tax matters in income tax expense.