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Income Taxes | 9 Months Ended
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Sep. 30, 2018
Income Taxes [Abstract] |
Income Taxes | 12. INCOME TAXES VAALCO and its domestic subsidiaries file a consolidated United States income tax return. Certain subsidiaries’ operations are also subject to foreign income taxes. On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax Reform Act includes significant changes to the U.S. income tax system including but not limited to: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; repeal of the Alternative Minimum Tax (“AMT”); full expensing provisions related to business assets; creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The provisional impacts of this legislation are outlined below:
| · |  | Beginning January 1, 2018, the U.S. corporate income tax rate will be 21%. The Company is required to recognize the impacts of this rate change on its deferred tax assets and liabilities in the period enacted. A s the Company ha d a full valuation allowance on its net deferred tax asset as of December 31, 2017, there was no overall impact to the financial statements in 2017 due to this change in rate. However, as discussed further below, during the three months ended September 30, 2018, t he Company reversed a portion of its valuation allowance on its net deferred tax asset attributable to U.S. taxable income. As a result of the reduction in the corporate income tax rate, the benefit from this reversal was $19.9 million l ess than it would have been at the previous 35% corporate income tax rate.
| · |  | The Tax Reform Act also repealed the corporate AMT for tax years beginning on or after January 1, 2018 and provides for existing alternative minimum tax credit carryovers to be refunded beginning in 2018. The Company has approximately $1.4 million in refundable credits, and it expects that a substantial portion will be refunded between 2018 and 2021. As such, most of the valuation allowance in place at the end of 2017 related to these credits has been released and a deferred tax asset of $1.3 million is reflected related to the expected benefit in future years.
| · |  | The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on the Company’s reasonable estimate of the Transition Tax, there is no provisional Transition Tax expense. The Company has not completed its accounting for the income tax effects of the transition tax and is continuing to evaluate this provision of the Tax Act.
| · |  | The Tax Reform Act creates a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. In addition, we are waiting for further interpretive guidance in connection to the GILTI tax. For these reasons, the Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the accounting treatment whether to record deferred taxes attributable to the GILTI tax. The Company has not recorded any amounts related to potential GILTI tax in the Company’s financial statements.
Other provisions in the legislation, such as interest deductibility and changes to executive compensation plans are not expected to have material implications to the Company’s financial statements. The income tax effects recorded in the Company’s financial statements as a result of the Tax Reform Act are provisional in accordance with ASU 2018-05 as the Company has not yet completed its evaluation of the impact of the new law. ASU 2018-05 allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts. The Company does not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of operations. Additionally, the Tax Reform Act may further limit the Company’s ability to utilize foreign tax credits in the future. The Tax Reform Act introduces a new credit limitation basket for foreign branch income. Income from foreign branches would now be allocated to this specific tax credit limitation basket which cannot offset income in other baskets of foreign income. Under the Tax Reform Act, foreign taxes imposed on the foreign branch profits will not offset U.S. non-branch related foreign source income. Additional guidance is needed to determine how this will impact the Company and any future utilization of foreign tax credit carryforwards. Income taxes attributable to continuing operations for the three months ended September 30, 2018 and 2017 are attributable to foreign taxes payable in Gabon. The Company has not recorded any measurement period adjustments under ASU 2018-05 during the three and nine months ended September 30, 2018. Provision (benefit) for income taxes related to income (loss) from continuing operations consists of the following: ﻿
﻿ |  |  |  |  |  |  |  |  |  |  |  |
﻿ |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
﻿(in thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
﻿ |  | (in thousands)
﻿U.S. Federal: |  |  |  |  |  |  |  |  |  |  |  |
﻿Current |  | $ | (406) |  | $ | — |  | $ | (406) |  | $ | —
﻿Deferred |  |  | (19,677) |  |  | — |  |  | (19,677) |  |  | —
﻿Foreign: |  |  |  |  |  |  |  |  |  |  |  |
﻿Current |  |  | 4,373 |  |  | 2,749 |  |  | 11,997 |  |  | 9,039
﻿Deferred |  |  | (46,514) |  |  | — |  |  | (46,514) |  |  | —
﻿Total |  | $ | (62,224) |  | $ | 2,749 |  | $ | (54,600) |  | $ | 9,039
As of December 31, 2017, the Company had deferred tax assets of $154.5 million primarily attributable to U.S. federal taxes related to basis differences in fixed assets, foreign tax credit carryforwards, and net operating loss carryforwards as well as foreign net operating losses for foreign jurisdictions. Management assesses the available positive and negative evidence to estimate if existing deferred tax assets will be utilized. As of December 31, 2017, the Company was in a cumulative three year pre-tax loss position for both the U.S. and Gabon jurisdictions. As of December 31, 2017, we did not anticipate utilization of the foreign tax credits prior to expiration nor did we expect to generate sufficient taxable income to utilize other deferred tax assets. On the basis of this evaluation, valuation allowances of $153.2 million were recorded as of December 31, 2017. Valuation allowances reduce the deferred tax assets to the amount that is more likely than not to be realized. Taxes paid in Gabon with respect to earnings from the Etame Marin block are determined under the provisions of the Etame Marin PSC. In accordance with the Etame Marin PSC, the consortium maintains a “Cost Account” which accumulates capital costs and operating expenses (“Recoverable Costs”) that are deductible against revenues, net of royalties, in determining taxable profits. For each calendar year, the consortium is entitled to receive a percentage of the production (“Cost Recovery Percentage”) remaining after deducting royalties so long as there are amounts remaining in the Cost Account. Prior to the PSC Extension, the Cost Recovery Percentage was 70%. As a result of the PSC Extension, the Cost Recovery Percentage has been increased to 80% for the period from September 17, 2018 through September 16, 2028. After September 16, 2028, the Cost Recovery Percentage returns to 70%. The difference between revenues, net of royalties, and the costs recovered for the period is “Profit Oil.” As payment of corporate income taxes, the consortium pays the government an allocation of the remaining Profit Oil production from the contract area ranging from 50% to 60%. The percentage of Profit O il paid to the government as tax is a function of production rates. When the Cost Account is less than the entitled recovery percentage (either 70% or 80%, depending on the period), Profit Oil as a percentage of revenues increases and Gabon taxes paid increase as a percentage of revenues. At December 31, 2017, there was $97.6 million remaining in the portion of the Cost Account associated with our interest. Prior to the PSC Extension, the Cost Recovery Percentage was 70%, and the exploitation periods ended beginning in June 2021. F uture proved reserves did not extend beyond 2021. Opportunities for increasing reserves by drilling wells were limited, and while oil prices had improved since 2016, they were not at the levels needed to recover VAALCO’s Cost Account. As a result of these factors, the ability to recognize the benefit from the potential deferred tax asset related to the difference between VAALCO’s Cost Account and the book basis of the Etame Marin block assets was deemed to be remote, and the deferred tax asset was not recognized. As a result of the PSC Extension during the three months ended September 30, 2018, the Cost Recovery Percentage increased to 80% and the exploitation periods were extended to at least September 16, 2028, and if the two five-year option periods are elected the period would extend to September 16, 2038. In addition to the benefits under the PSC Extension, we expect higher future oil prices based on current Brent futures strip pricing over the next few years and we expect future production from the planned drilling of two to three wells in 2019. Given these factors, we determined that the potential for a recovery of our Cost Account was no longer remote, and therefore we recorded a deferred tax asset of $46.5 million related to the excess of the Cost Account over the book basis of the Etame Marin block assets. In addition, as a result of recording the deferred tax asset of $46.5 million related to our Cost Account, we recorded the corresponding deferred tax liability of $9.8 million attributable to the U.S. federal income tax impact. We also evaluated the amount of the valuation allowance needed related to deferred tax assets recognized related to U.S. federal income taxes. In making this evaluation, we considered the impact on future taxable income of increased earnings as a result of the PSC Extension as well as increases in oil prices during the year, including current oil prices as well as Brent futures strip pricing over the next few years and the future production from the planned drilling of two to three wells in 2019. We also considered the pattern of earnings over the past three years. On the basis of these factors, we determined that it is more likely than not that we will realize a portion of the benefit from the deferred tax assets related to the fixed asset basis differences as well as the net operating losses. Accordingly, we reversed $29.9 million of the valuation allowance recorded in prior periods. As a result of the 2017 tax legislation enacted in the U.S., we expect to realize the benefit from our AMT credit carryforwards. The valuation allowance recorded related to AMT credits in previous periods was reversed in 2017 with the exception for a reserve for the possible sequestration of the credits. The $1.3 million reversal was recorded as a deferred income tax benefit during the fourth quarter of 2017. The Company recognizes the financial statement benefit of a tax position only after determining that they are more likely than not to sustain the position following an audit. The Company believes that its income tax positions and deductions will be sustained on audit and therefore no reserves for uncertain tax positions have been established. Accordingly, no interest or penalties have been accrued as of December 31, 2017 and 2016. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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