Parker Wellbore Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

Note 8 - Income Taxes

On December 22, 2017 the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to U.S. corporate income tax laws, the most notable of which was a reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent, effective for tax years beginning January 1, 2018, and a one-time mandatory tax on previously deferred earnings of certain foreign subsidiaries associated with the transition from a worldwide to a modified territorial tax regime.

In accordance with the reduction to the U.S. corporate income tax rate from 35.0 percent to 21.0 percent, the Company remeasured certain U.S. deferred tax assets and liabilities as of December 31, 2017. However, as a result of the Company’s net deferred tax position, inclusive of valuation allowances, no net income tax expense was recorded related to this remeasurement. The Company did not incur any income tax expense related to the one-time mandatory tax on previously deferred earnings of certain foreign subsidiaries associated with the transition from a worldwide to a modified territorial tax regime.

Income (loss) before income taxes is summarized below:



	Year Ended December 31,
Dollars in thousands	2018			2017			2016
United States	$	(145,954	)	$	(89,233	)	$	(131,106	)
Foreign	(11,947		)	(20,428		)	(25,538		)
Income (loss) before income taxes	$	(157,901	)	$	(109,661	)	$	(156,644	)

Income tax expense (benefit) is summarized as follows:



	Year Ended December 31,
Dollars in thousands	2018			2017			2016
Current tax expense
Federal	$	(14	)	$	80		$	(1,921	)
State	229			54			(9		)
Foreign	8,010			9,130			7,038
Total current tax expense	$	8,225		$	9,264		$	5,108

Deferred tax expense (benefit)
Federal	$	—		$	167		$	64,066
State	—			—			(47		)
Foreign	(429		)	(391		)	5,043
Total deferred tax expense (benefit)	$	(429	)	$	(224	)	$	69,062

Total income tax expense (benefit)	$	7,796		$	9,040		$	74,170

Total income tax expense differs from the amount computed by multiplying income before income taxes by the U.S. federal income tax statutory rate. The reasons for this difference are as follows:



	Year Ended December 31,
	2018					2017					2016
Dollars in thousands	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Computed expected tax expense	$	(33,160	)	21.0	%	$	(38,381	)	35.0	%	$	(54,825	)	35.0	%
Foreign taxes	7,321			(4.6	)%	13,084			(11.9	)%	12,688			(8.1	)%
Tax effect different from statutory rates	(68		)	—	%	(2,048		)	1.9	%	(3,629		)	2.3	%
State taxes, net of federal benefit	(2,552		)	1.6	%	35			—	%	(849		)	0.5	%
Foreign tax credits	—			—	%	3			—	%	20			—	%
Change in valuation allowance (excluding impact of Tax Act)	28,353			(18.0	)%	30,704			(28.0	)%	117,707			(75.1	)%
Uncertain tax positions	(221		)	0.1	%	194			(0.2	)%	(726		)	0.5	%
Permanent differences	8,008			(5.1	)%	2,970			(2.7	)%	1,442			(0.9	)%
Prior year return to provision adjustments	50			—	%	2,442			(2.3	)%	2,078			(1.3	)%
Other	65			0.1	%	37			—	%	264			(0.2	)%
Impact of Tax Act
Effect of tax rate reduction on deferred tax	—			—	%	45,329			(41.3	)%	—			—	%
Effect of tax rate on deferred tax valuation	—			—	%	(45,329		)	41.3	%	—			—	%
Income tax expense (benefit)	$	7,796		(4.9	)%	$	9,040		(8.2	)%	$	74,170		(47.3	)%

The components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are shown below:



	December 31,
Dollars in thousands	2018			2017
Deferred tax assets
Deferred tax assets:
Federal net operating loss carryforwards	$	109,002		$	95,867
State net operating loss carryforwards	13,168			11,089
Excess interest	6,230			—
Other state deferred tax asset, net	1,201			626
Foreign tax credits	46,913			46,913
FIN 48	887			953
Foreign tax	40,190			36,699
Accruals not currently deductible for tax purposes	3,119			2,926
Deferred compensation	816			1,204
Other	1,297			74
Total deferred tax assets	222,823			196,351
Valuation allowance	(186,267		)	(157,914		)
Net deferred tax assets, net of valuation allowance	$	36,556		$	38,437

Deferred tax liabilities:
Deferred tax liabilities:
Property, plant and equipment	$	(28,440	)	$	(30,648	)
Foreign tax local	(510		)	(78		)
Other state deferred tax liability, net	(5,096		)	(5,174		)
Intangibles	(877		)	(1,331		)
Total deferred tax liabilities	(34,923		)	(37,231		)
Net deferred tax asset	$	1,633		$	1,206

As part of the process of preparing the consolidated financial statements, the Company is required to determine its provision for income taxes. This process involves measuring temporary and permanent differences resulting from differing treatment of items for tax and accounting purposes. These differences and the operating loss and tax credit carryforwards result in deferred tax assets and liabilities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or a portion 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 of appropriate character in each taxing jurisdiction during the periods in which those temporary differences become deductible. Management considers the weight of available evidence, both positive and negative, including the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. To the extent the Company believes that it does not meet the test that recovery is more likely than not, it establishes a valuation allowance. To the extent that the Company establishes a valuation allowance or changes this allowance in a period, it adjusts the tax provision or tax benefit in the consolidated statement of operations. We use our judgment in determining provisions or benefits for income taxes, and any valuation allowance recorded against previously established deferred tax assets. We have measured the value of our deferred tax assets for the year ended December 31, 2018 based on the cumulative weight of positive and negative evidence that exists as of the date of the consolidated financial statements. Should the cumulative weight of all available positive and negative evidence change in the forecast period, the expectation of realization of deferred tax assets existing as of December 31, 2018 and prospectively may change.

The 2018 results include an increase in our valuation allowance of $28.4 million primarily related to U.S. and certain foreign net operating losses and other deferred tax assets. Valuation allowances are established based on the weight of available evidence, both positive and negative, including results of recent and current operations and our estimates of future taxable income or loss by jurisdiction in which we operate. In order to determine the amount of deferred tax assets or liabilities, as well as the valuation allowances, we must make estimates and assumptions regarding future taxable income, where rigs will be deployed and other business considerations. Changes in these estimates and assumptions, including changes in tax laws and other changes impacting our ability to recognize the underlying deferred tax assets, could require us to adjust the valuation allowances.

The 2017 results include an increase in our valuation allowance of $14.6 million primarily related to U.S. and certain foreign net operating losses and other deferred tax assets.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



Dollars in thousands
Balance at January 1, 2018	$	(5,395	)
Reductions based on tax positions taken during a prior period	190
Additions based on tax positions taken during the current period	(523		)
Balance at December 31, 2018	$	(5,728	)

In many cases, our uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2018:



Kazakhstan	2008-present
Mexico	2014-present
Russia	2014-present
United States — Federal	2009-present
United Kingdom	2015-present

As of December 31, 2018, we had a liability for unrecognized tax benefits of $5.7 million (all of which, if recognized, would favorably impact our effective tax rate), on which no payments were made during 2018.

The Company recognized interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018 and December 31, 2017 we had approximately $2.1 million and $2.1 million of accrued interest and penalties related to uncertain tax positions, respectively. We recognized a $0.1 million increase in interest and $0.1 million decrease in penalties on unrecognized tax benefits for the year ended December 31, 2018.

As of December 31, 2018, the Company has permanently reinvested accumulated undistributed earnings of foreign subsidiaries and, therefore, has not recorded a deferred tax liability related to subject earnings. Upon distribution of additional earnings in the form of dividends or otherwise, we could be subject to income taxes and withholding taxes. It is not practicable to determine precisely the amount of taxes that may be payable on the eventual remittance of these earnings due to many factors, including application of foreign tax credits, levels of accumulated earnings and profits at the time of remittance, and the sources of earnings remitted. The Company generally does not provide for taxes related to its undistributed earnings because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Taxes that would be incurred if the undistributed earnings of other subsidiaries were distributed to their ultimate parent company would not be material.