INCOME TAXES

Rowan plc, the parent company, is domiciled in the U.K. and is subject to the U.K. statutory rate of 23% for the period January 1 through March 31, 2014; 21% for the financial year beginning April 1, 2014; 20% for the financial year beginning April 1, 2015; and 19% for the financial year beginning April 1, 2017. On September 15, 2016, the U.K. enacted tax law to reduce the tax rate to 17% for the financial year beginning April 1, 2020. The U.K. statutory tax rate for 2016 is 20%.

The significant components of income taxes attributable to continuing operations are presented below (in millions):



	2016			2015			2014
Current:
U.S.	$	10.0		$	7.4		$	(62.3	)
Non - U.S.	32.9			50.8			53.5
State	—			0.1			0.1
Current expense (benefit)	42.9			58.3			(8.7		)
Deferred:
U.S.	(20.9		)	(6.3		)	(140.3		)
Non - U.S.	(17.0		)	12.4			(1.7		)
Deferred provision (benefit)	(37.9		)	6.1			(142.0		)
Total provision (benefit)	$	5.0		$	64.4		$	(150.7	)

Differences between our provision for income taxes and the amount determined by applying the U.K. statutory rate to income before income taxes are set forth below (dollars in millions):



	2016			2015			2014
U.K. statutory rate	20.00		%	20.25		%	21.50		%
Tax at statutory rate	$	65.1		$	31.9		$	(58.0	)
Increase (decrease) due to:
Capitalized interest transactions	—			(5.7		)	(20.1		)
Tax audit settlements	—			—			10.4
Foreign rate differential	(92.7		)	(30.0		)	38.2
Deferred intercompany gain/loss	(20.1		)	(33.8		)	(86.6		)
Foreign asset basis difference	405.9			—			—
Luxembourg restructuring operating loss	(1,180.2		)	—			—
Change in valuation allowance	814.7			106.0			(3.6		)
Prior period adjustments	(4.1		)	(6.9		)	7.5
Unrecognized tax benefits	7.1			9.7			(35.8		)
U.S. tax on RCI non-U.S. subsidiaries	6.3			—			—
Termination of local country activity	—			(6.3		)	—
Foreign tax credits/deductions	(1.5		)	(2.2		)	(4.9		)
Other, net	4.5			1.7			2.2
Total provision (benefit)	$	5.0		$	64.4		$	(150.7	)

In 2016, organizational restructuring resulted in a Luxembourg net operating loss of $4,534 million resulting in a deferred tax asset of $1,180 million with an offsetting deferred tax liability for book over tax asset basis difference of $409 million and a valuation allowance of $747 million for the net deferred tax asset that is not expected to be realized.

Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31 were as follows (in millions):



	2016			2015
Deferred tax assets:
Accrued employee benefit plan costs	$	81.1		$	137.9
U.S. net operating loss	111.2			27.5
U.K. net operating loss	2.8			2.8
Trinidad net operating loss	6.5			7.7
Luxembourg net operating loss	1,180.2			—
Suriname net operating loss	3.9			—
Interest expense limitation carryforward	—			42.1
Other NOLs and tax credit carryforwards	36.8			33.1
Other	31.2			30.6
Total deferred tax assets	1,453.7			281.7
Less: valuation allowance	(889.8		)	(128.3		)
Deferred tax assets, net of valuation allowance	563.9			153.4

Deferred tax liabilities:
Property and equipment	712.8			296.6
Other	12.3			52.6
Total deferred tax liabilities	725.1			349.2
Net deferred tax asset (liability)	$	(161.2	)	$	(195.8	)

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. The significant negative evidence evaluated was the limited Luxembourg forecasted taxable income based on information as of December 31, 2016. Such evidence limits our ability to consider other positive evidence. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $747 million was established against the Luxembourg deferred tax assets created in the current period.

Management continues to assess positive and negative evidence that the U.S. deferred tax assets will be realized. There have been no changes on the prior assessment of the realization of the deferred tax assets and the U.S. will continue to have a valuation allowance for the period ended December 31, 2016. During the period ended December 31, 2016, we increased our valuation allowance on U.S. deferred tax assets by $12 million to $132 million, primarily due to the changes in the deferred tax assets related to net operating loss, interest limitations and depreciation.

As of December 31, 2015, an additional valuation allowance of $62 million on the U.S. 2014 and prior years’ deferred tax assets and an additional valuation allowance of $43 million on the U.S. deferred tax asset was recorded in 2015 to recognize only the portion of the deferred tax assets that is more likely to be realized.

The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to evidence such as our projections for growth. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets.

At December 31, 2016, the Company had approximately $428 million of net operating loss carryforwards (NOLs) in the U.S., which expire at various times between 2034 and 2041 and which is subject to a valuation allowance as discussed in the preceding paragraphs; $49 million of NOLs in the U.S. attributable to the Company’s non-U.S. subsidiaries expiring in 2032 and which is subject to a valuation allowance of $36 million at December 31, 2016; $4.5 billion of non-expiring NOLs in Luxembourg of which $2.9 billion is subject to a valuation allowance; $17 million of non-expiring NOLs in the U.K., of which $17 million is subject to a valuation allowance; and $26 million of non-expiring NOLs in Trinidad, of which $14 million is subject to a valuation allowance. In addition, at December 31, 2016, the Company had $15 million of non-expiring NOLs in other foreign jurisdictions, of which $15 million is subject to a valuation allowance. The U.S. foreign tax credit of $29 million is intended to be carried back and does not have a valuation allowance. Due to the uncertainty of realization, we have a tax-effected valuation allowance as of December 31, 2016, in the amount of $890 million against our foreign tax credits, NOL carryforwards, and other deferred tax assets that may not be realizable, primarily relating to countries where we no longer operate or do not expect to generate sufficient future taxable income. Management has determined that no other valuation allowances were necessary at December 31, 2016, as anticipated future tax benefits relating to all recognized deferred income tax assets are expected to be fully realized when measured against a more likely than not standard.

The federal and foreign NOL carryforwards included unrecognized tax benefits taken in prior years. The NOLs for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740 are presented net of these unrecognized tax benefits.

The Company has not provided deferred income taxes on certain undistributed earnings of its non-U.K. subsidiaries. Generally, the earnings of non-U.K. subsidiaries in which RCI does not have a direct or indirect ownership interest can be distributed to Rowan plc without the imposition of either U.K. or local country tax. It is generally the Company’s policy and intention to permanently reinvest earnings of non-U.S. subsidiaries of RCI outside the U.S. However, we have recognized taxes related to the earnings of certain subsidiaries that are not permanently reinvested or that will not be permanently reinvested in the future.

As of December 31, 2016, RCI's portion of the unremitted earnings of its non-U.S. subsidiaries that could be includable in taxable income of RCI, if distributed, was approximately $376 million. If facts and circumstances cause us to change our expectations regarding future tax consequences, the resulting tax impact could have a material effect on our consolidated financial statements. Should the non-U.S. subsidiaries of RCI make a distribution from these earnings, we may be subject to additional income taxes. It is not practicable to estimate the amount of deferred tax liability related to the undistributed earnings, and RCI's non-U.S. subsidiaries have no plan to distribute earnings in a manner that would cause them to be subject to U.S., U.K., or other local country taxation.

At December 31, 2016, 2015 and 2014, we had approximately $59 million, $62 million and $48 million, respectively, of net unrecognized tax benefits attributable to continuing operations. At December 31, 2016, $59 million would reduce the Company’s income tax provision if recognized.

The following table sets forth the changes in the Company’s gross unrecognized tax benefits for the years ended December 31 (in millions):



	2016			2015			2014
Gross unrecognized tax benefits - beginning of year	$	65.1		$	54.7		$	81.9
Gross increases - tax positions in prior period	46.2			4.4			19.9
Gross decreases - tax positions in prior period	(0.6		)	(3.7		)	(10.6		)
Gross increases - current period tax positions	10.9			9.7			9.5
Settlements	(1.5		)	—			(37.8		)
Lapse of statute of limitations	—			—			(8.2		)
Gross unrecognized tax benefit - end of year	$	120.1		$	65.1		$	54.7

Interest and penalties relating to income taxes are included in income tax expense. At December 31, 2016, 2015 and 2014, accrued interest was $11.8 million, $7.9 million and $5.5 million, respectively, and accrued penalties were $3.1 million, $2.8 million and $2.6 million, respectively. Accrued interest and penalties relating to uncertain tax positions that are not actually assessed will be reversed in the year of the resolution.

We have been advised by the U.S. Internal Revenue Service of proposed unfavorable tax adjustments of $85 million including applicable penalties for the open tax years 2009 through 2012. The unfavorable tax adjustments primarily related to the following items: 2009 tax benefits recognized as a result of applying the facts of a third-party tax case that provided favorable tax treatment for certain foreign contracts entered into in prior years to the Company’s situation; transfer pricing; and domestic production activity deduction. The IRS does not agree with our protest and they have submitted the proposed unfavorable tax adjustments to be reviewed by the IRS Appeals group. In years subsequent to 2012, we have similar positions that could be subject to adjustments for the open years. We have provided for amounts that we believe will be ultimately payable under the proposed adjustments and intend to vigorously defend our positions; however, if we determine the provisions for these matters to be inadequate due to new information or we are required to pay a significant amount of additional U.S. taxes and applicable penalties and interest in excess of amounts that have been provided for these matters, our consolidated results of operations and cash flows could be materially and adversely affected.

The Company’s U.S. federal tax returns for 2009 through 2012 are currently under audit by the IRS. Various state tax returns for 2009 and subsequent years remain open for examination. In the Company’s non-U.S. tax jurisdictions, returns for 2006 and subsequent years remain open for examination. We are undergoing other routine tax examinations in various U.S. and non-U.S. taxing jurisdictions in which the Company has operated. These examinations cover various tax years and are in various stages of finalization. The Company believes that any income taxes ultimately assessed by any taxing authorities will not materially exceed amounts for which the Company has already provided.

The components of income (loss) from continuing operations before income taxes were as follows (in millions):



	2016			2015			2014
U.S.	$	(180.2	)	$	(174.1	)	$	(198.3	)
Non-U.S.	505.8			331.8			(71.3		)
Total	$	325.6		$	157.7		$	(269.6	)