Note 14 – Taxes

Taxes on Income

The tax effects of significant items comprising our net deferred income taxes are as follows:


	As of December 31,
	2013						2012
	Foreign			United States And Other			Foreign			United States And Other
	(in thousands)
Deferred tax assets:
Operating loss carryforwards	$	58,051		$	2,928		$	54,231		$	4,498
Stock-based compensation		—			8,056			—			8,091
Accrued compensation		—			598			—			739
Oil and gas properties		1,606			1,015			—			—
Alternative minimum tax credit		—			4,501			—			2,261
Other		—			145			—			861

Total deferred tax assets		59,657			17,243			54,231			16,450

Deferred tax liabilities:
Tax on unremitted earnings of foreign subsidiaries		—			(89,900	)		—			—
Accrued income		—			—			(1,005	)		—
Prepaids		—			(198	)		—			(373	)
Other liabilities		—			(82	)		—			(35	)
Fixed assets		—			(12	)		—			(28	)

Total deferred tax liabilities		—			(90,192	)		(1,005	)		(436	)

Net deferred tax asset (liability)		59,657			(72,949	)		53,226			16,014
Valuation allowance		(59,576	)		—			(52,427	)		(15,992	)

Net deferred tax asset (liability) after valuation allowance	$	81		$	(72,949	)	$	799		$	22

After assessing the possible actions which management may take in 2014 and the next few years, as discussed further below, during the year ended December 31, 2013, we recognized a deferred tax liability of $89.9 million related to income tax on undistributed earnings for foreign subsidiaries.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets (“DTAs”). A significant piece of objective negative evidence evaluated was the cumulative losses incurred in our foreign operating entities over the three-year period ended December 31, 2013. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. We have therefore placed a valuation allowance (“VA”) on all of our foreign DTAs with the exception of $0.1 million related to NOL carryforwards in Venezuela which would be realized upon settlement of uncertain tax positions.

Management also reviewed the earnings history of our U.S. operations and determined that, while the Company does not have domestic production, it is expected to have sufficient taxable income in the U.S. related to the expected sale of the remaining equity interest in Harvest Holding. This is expected to allow the Company the ability to utilize the benefits related to its deferred tax assets which previously had a valuation allowance. As such, the Company has released the valuation allowances on the U.S. deferred tax assets.

The components of loss from continuing operations before income taxes are as follows:


	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Loss before income taxes
United States	$	(31,072	)	$	(33,841	)	$	(30,309	)
Foreign		(40,725	)		(18,915	)		(58,193	)

Total	$	(71,797	)	$	(52,756	)	$	(88,502	)

The provision (benefit) for income taxes on continuing operations consisted of the following at December 31:


	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Current:
United States	$	2,279		$	(717	)	$	—
Foreign		44			929			3,693

		2,323			212			3,693

Deferred:
United States		72,971			(22	)		—
Foreign		(2,207	)		(799	)		(2,636	)

		70,764			(821	)		(2,636	)

	$	73,087		$	(609	)	$	1,057

A comparison of the income tax expense (benefit) on continuing operations at the federal statutory rate to our provision for income taxes is as follows:


	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Income tax expense (benefit) from continuing operations:
Tax expense (benefit) at U.S. statutory rate	$	(25,129	)	$	(17,938	)	$	(30,805	)
Effect of foreign source income and rate differentials on foreign income		204			239			4,887
Tax gain associated with sale of interest in Harvest Holding		7,474			—			—
Subpart F income		16,615			—			—
Tax on unremitted earnings of foreign subsidiaries		89,900			—			—
Expired losses		1,356			—			—
Other changes in valuation allowance		(10,643	)		10,331			28,169
Change in applicable statutory rate		(404	)		—			—
Other permanent differences		(2,546	)		1,431			—
Return to accrual and other true-ups		2,919			1,257			—
Debt exchange		—			2,758			—
Warrant derivatives		(1,180	)		—			(1,445	)
Liability for uncertain tax positions		(5,553	)		799			237
Other		74			514			14

Total income tax expense – continuing operations		73,087			(609	)		1,057
Income tax expense (benefit) from discontinued operations:
Total income tax expense (benefit) – discontinued operations		—			—			5,748

Total income tax expense (benefit)	$	73,087		$	(609	)	$	6,805

Rate differentials for foreign income result from tax rates different from the U.S. tax rate being applied in foreign jurisdictions.

At December 31, 2013, we have the following net operating losses available for carryforward (in thousands):


United States	$	8,364	Available for up to 20 years from 2012
Indonesia		54,435	Available for up to 5 years from 2011
Gabon		23,268	Available for up to 3 years from 2010
Oman		25,174	Available for up to 5 years from 2009
The Netherlands		109,634	Available for up to 9 years from 2007
Venezuela		3,043	Available for up to 3 years from 2010
Colombia		1,214	Available indefinitely

As a result of the first closing sale to Petroandina, the Company realized a tax gain of $47.5 million which is included in U.S. taxable income pursuant to the provisions of the Internal Revenue Code. The Company utilized $10.8 million of available losses from prior years as well as a current year tax loss of $36.7 million to offset income resulting from the sale resulting in no regular tax for the year ended December 31, 2013 leaving $8.4 million of losses available to offset taxable income in future periods. However, as a result of the alternative minimum tax provisions, we did incur AMT of $2.1 million increasing the amount of the AMT credit carryforward.

During the year, the Company released $5.6 million from our reserve for uncertain tax positions. This was primarily related to resolution of a Dutch tax issue regarding treatment of certain costs charged to our Dutch affiliate. However, a portion of this amount was offset by an adjustment to the valuation allowance, resulting in a net impact of $2.2 million.

If the U.S. operating loss carryforwards are ultimately realized, there would be no amounts credited to additional paid in capital for tax benefits associated with deductions for income tax purposes related to stock options and convertible debt.

Accumulated Undistributed Earnings of Foreign Subsidiaries

As of December 31, 2013, the book-tax outside basis difference in our foreign subsidiary resulting from unremitted earnings was approximately $334.8 million. Prior to 2013, no U.S. taxes had been recorded on these earnings as it was our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations.

Under ASC 740-30-25-17, no deferred tax liability must be recorded if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings or that the earnings will be remitted in a tax-free manner. Management must consider numerous factors in determining timing and amounts of possible future distribution of these earnings to the parent company and whether a U.S. deferred tax liability should be recorded for these earnings. These factors include the future operating and capital requirements of both the parent company and the subsidiaries, remittance restrictions imposed by foreign governments or financial agreements and tax consequences of the remittance, including possible application of U.S. foreign tax credits and limitations on foreign tax credits that may be imposed by the Internal Revenue Code and regulations.

During the fourth quarter of 2013, management evaluated numerous factors related to the timing and amounts of possible future distribution of these earnings to the parent company, with consideration of the pending sale of the remaining equity interest in Harvest Holding as well as possible sales of other non-U.S. assets. While we will continue to invest the undistributed earnings to the extent possible and operate the Company’s business in the normal course, management is also considering distributions to the Company’s shareholders which could include the distribution of proceeds from the sales of assets by the Company’s foreign subsidiaries to the U.S. parent company resulting in U.S. taxable income. Because management is pursuing various alternatives, a determination was made that it was appropriate to record a deferred tax liability associated with the unremitted earnings of our foreign subsidiaries of $89.9 million in the fourth quarter of 2013. This liability includes $51.1 million which could become payable currently upon the sale of the remaining interest in Harvest Holding and is therefore reflected as a current deferred tax liability.

Accounting for Uncertainty in Income Taxes

The FASB issued ASC 740-10 (prior authoritative literature: Financial Interpretation No. [“FIN”] 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 [“FIN 48”]) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2009. Our primary income tax jurisdictions and their respective open audit years are:


Tax Jurisdiction		Open Audit Years
United States		2010 – 2013
The Netherlands		2010 – 2013
Singapore		2009 – 2013
United Kingdom		2012 – 2013
Venezuela		2009 – 2013
Colombia		2013

In January 2014, the IRS began an audit of our tax returns for 2011 and 2012.

A reconciliation of the beginning amount, and current year additions, of unrecognized tax benefits follows:


	Year Ended December 31,
	2013			2012
	(in thousands)
Balance at beginning of year	$	5,871		$	5,072
Additions for tax positions of prior years		—			799
Reductions for tax positions of prior years		(5,553	)		—

Balance at end of year	$	318		$	5,871

The release of the reserve for uncertain tax positions of $5.6 million during the year ended December 31, 2013 is primarily related to the resolution of a Dutch tax matter regarding treatment of certain costs charged to our Dutch affiliate. However, a portion of this amount was offset by an adjustment to the valuation allowance resulting in a net tax benefit of $2.2 million. If the above tax benefits were recognized, the full amount would affect the effective tax rate. We have accrued interest of $0.0 million, and penalty of $0.1 million. We believe that it is likely that remaining amount for the uncertain tax position will be resolved within the next twelve months, and the amount of unrecognized tax benefits will significantly decrease.