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, 2015

Income (loss) before income taxes is summarized below:



	Year Ended December 31,
Dollars in thousands	2015			2014		2013
United States	$	(77,368	)	$	37,547	$	32,136
Foreign	5,397			10,990		20,651
	$	(71,971	)	$	48,537	$	52,787

Income tax expense (benefit) is summarized as follows:



	Year Ended December 31,
Dollars in thousands	2015			2014			2013
Current:
United States:
Federal	$	2,485		$	(3,079	)	$	(3,658	)
State	365			5,335			1,968
Foreign	16,754			20,311			14,599

Deferred:
United States:
Federal	(141		)	4,703			10,720
State	(4,769		)	(379		)	2,820
Foreign	7,619			(2,815		)	(841		)
	$	22,313		$	24,076		$	25,608

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,
	2015					2014					2013
Dollars in thousands	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Computed Expected Tax Expense (Benefit)	$	(25,190	)	35.0	%	$	16,988		35.0	%	$	18,476		35.0	%
Foreign Taxes	16,043			(22.3	)%	11,221			23.1	%	12,470			23.6	%
Tax Effect Different From Statutory Rates	(2,729		)	3.8	%	(3,389		)	(7.0	)%	(8,920		)	(16.9	)%
State Taxes, net of federal benefit	(4,544		)	6.3	%	3,117			6.4	%	4,099			7.8	%
Foreign Tax Credits	(5,566		)	7.7	%	(3,043		)	(6.3	)%	(1,484		)	(2.8	)%
Change in Valuation Allowance	40,676			(56.5	)%	2,800			5.8	%	1,975			3.7	%
Uncertain Tax Positions	(81		)	0.1	%	(1,125		)	(2.3	)%	2,472			4.7	%
Permanent Differences	1,696			(2.4	)%	676			1.4	%	4,005			7.6	%
Prior Year Return to Provision Adjustments	1,555			(2.1	)%	(2,618		)	(5.4	)%	(6,268		)	(11.9	)%
Other	453			(0.6	)%	(551		)	(1.1	)%	(1,217		)	(2.3	)%
Unremitted Foreign Earnings-Current Year Adjustment	—			—	%	—			—	%	—			—	%
Actual Tax Expense	$	22,313		(31.0	)%	$	24,076		49.6	%	$	25,608		48.5	%

The components of the Company’s deferred tax assets and liabilities as of December 31, 2015 and 2014 are shown below:



	December 31,
Dollars in thousands	2015			2014
Deferred tax assets
Deferred tax assets:
Federal net operating loss carryforwards	63,607			17,235
State net operating loss carryforwards	5,839			1,130
Other state deferred tax asset, net	3,170			1,658
Foreign Tax Credits	45,751			37,344
FIN 48	1,789			4,870
Foreign tax	27,861			28,656
Asset Impairment	33,723			38,931
Accruals not currently deductible for tax purposes	4,315			7,053
Deferred compensation	3,487			3,210
Other	845			—
Gross long-term deferred tax assets	190,387			140,087
Valuation Allowance	(51,105		)	(9,922		)
Net deferred tax assets, net of valuation allowance	139,282			130,165
Deferred tax liabilities:
Deferred tax liabilities:
Property, Plant and equipment	(59,879		)	(43,637		)
Foreign tax local	(3,169		)	(4,985		)
Other state deferred tax liability, net	(5,606		)	(3,491		)
Other	—			(2		)
Gross deferred tax liabilities	(68,654		)	(52,115		)
Net deferred tax asset	$	70,628		$	78,050

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 estimating the annual effective tax rate and the nature and measurements of 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, 2015 based on the cumulative weight of positive and negative evidence that exists as of the date of the 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, 2015 and prospectively may change.

The 2015 results include income tax benefits of $24.7 million for depreciation and amortization relating to our two arctic-class drilling rigs in Alaska. In addition, we increased our valuation allowance by $40.6 million primarily related to U.S. foreign tax credits and certain foreign net operating losses. We established the valuation allowance 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 2014 results include income tax benefits of $2.2 million related to the settlement of our U.S. Federal Internal Revenue Service refund claim for periods 2008-2011 and $25.0 million for depreciation and amortization relating to our two arctic-class drilling rigs in Alaska. In addition, we increased our valuation allowance by $2.8 million primarily related to foreign net operating losses.

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



Dollars in thousands
Balance at January 1, 2015	$	(8,199	)
Additions based on tax positions taken during a prior period	(638		)
Reductions based on tax positions taken during a prior period	1,000
Balance at December 31, 2015	$	(7,837	)

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, 2015:



Colombia	2011-present
Kazakhstan	2007-present
Mexico	2010-present
Papua New Guinea	2012-present
Russia	2012-present
United States — Federal	2009-present
United Kingdom	2013-present

At December 31, 2015, we had a liability for unrecognized tax benefits of $7.8 million ($3.6 million of which, if recognized, would favorably impact our effective tax rate), on which no payments were made during 2015.

The Company recognized interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and December 31, 2014 we had approximately $3.4 million and $3.3 million of accrued interest and penalties related to uncertain tax positions, respectively. We recognized an increase of $0.4 million of interest and no penalties on unrecognized tax benefits for the year ended December 31, 2015.

As of December 31, 2015, 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 U.S. income taxes and foreign 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.