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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Taxes [Abstract] |
Income Taxes | 8. INCOME TAXES VAALCO and its domestic subsidiaries file a consolidated U.S. income tax return. Certain subsidiaries’ operations are also subject to foreign income taxes. On December 22, 2017, the U. S. 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 impacts of this legislation are outlined below:
| · |  | Beginning January 1, 2018, the U.S. corporate income tax rate is 21%. The Company recognized the impacts of this rate change on its deferred tax assets and liabilities in the period enacted, i.e. during the year ended December 31, 2017. As the Company has a full valuation allowance on its net deferred tax asset as of December 31, 2017, the deferred tax recognized due to the change in rate was offset with a change in the valuation allowance. Therefore, there was no overall impact to the Financial Statements in 2017 due to this change in rate.
| · |  | The Tax Reform Act also repealed the corporate AMT for tax years beginning on or after January 1, 2018 and provided for existing alternative minimum tax credit carryovers to be refunded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 was released in 2017 and a deferred tax asset of $1.3 million was reflected as of December 31, 2017 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 Tax Reform Act created a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The Company did not have any amounts related to potential GILTI tax.
Other provisions in the legislation, such as interest deductibility and changes to executive compensation plans have not had a material implications to the Company’s Financial Statements. 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 is now 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 analysis will be needed under proposed IRS regulations 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 years ended December 31, 2018, 2017, and 2016 are attributable to foreign taxes payable in Gabon as well as income taxes in the U.S. The Company has not recorded any measurement period adjustments under ASU 2018-05 during the year ended December 31, 2018. Provision for income taxes related to income (loss) from continuing operations consists of the following: ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Year Ended December 31,
﻿(in thousands) |  | 2018 |  | 2017 |  | 2016
﻿U.S. Federal: |  |  |  |  |  |  |  |  |
﻿Current |  | $ | (674) |  | $ | — |  | $ | —
﻿Deferred |  |  | (15,910) |  |  | (1,260) |  |  | —
﻿Foreign: |  |  |  |  |  |  |  |  |
﻿Current |  |  | 14,327 |  |  | 11,638 |  |  | 9,248
﻿Deferred |  |  | (40,997) |  |  | — |  |  | —
﻿Total |  | $ | (43,254) |  | $ | 10,378 |  | $ | 9,248
﻿ |  |  |  |  |  |  |  |  |
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 PSC. In accordance with the Etame PSC, the Consortium maintains a “Cost Account” which accumulates capital costs and operating expenses 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. See Note 9 for further discussion of the PSC Extension. 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 Oil 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. Future 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 in September 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 $57.6 million. The PSC extension payment was not recoverable for Gabon tax purposes, which resulted in the recording of a deferred tax liability of $18.6 million with an offsetting gross-up to oil and natural gas properties. Additionally, a reduction of $16.1 million was recorded in relation to current year activity and other changes resulting in an ending Gabon net deferred tax asset of $22.9 million. We also evaluated the amount of the valuation allowance needed on 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, 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 $16.5 million of the valuation allowance based on estimated future earnings. The total change in the valuation allowance related to U.S. net deferred tax assets was a decrease of $37.8 million. As a result of the above mentioned Gabon deferred tax asset, we recorded the corresponding deferred tax liability of $8.6 million attributable to the U.S. federal income tax impact. The deferred tax asset was further reduced by $8.9 million for current year activity and $4.3 million for expiring foreign tax credits. The items above along with other items of $0.1 million resulted in a net deferred tax asset for U.S. federal income tax purposes of $17.2 million. The primary differences between the financial statement and tax bases of assets and liabilities resulted in deferred tax assets associated with continuing operations at December 31, 2018 and 2017 are as follows: ﻿
﻿ |  |  |  |  |  |
﻿ |  | As of December 31,
﻿(in thousands) |  | 2018 |  | 2017
﻿Deferred tax assets: |  |  |  |  |  |
﻿Basis difference in fixed assets |  | $ | 38,479 |  | $ | 46,929
﻿Foreign tax credit carryforward |  |  | 43,760 |  |  | 48,071
﻿Alternative minimum tax credit carryover |  |  | 674 |  |  | 1,349
﻿U.S. federal net operating losses |  |  | 20,616 |  |  | 22,490
﻿Foreign net operating losses |  |  | 19,989 |  |  | 26,371
﻿Asset retirement obligations |  |  | 3,111 |  |  | 4,234
﻿Basis difference in accrued liabilities |  |  | 3,816 |  |  | 3,716
﻿Basis difference in receivables |  |  | 387 |  |  | 1,331
﻿Other |  |  | 180 |  |  | (26)
﻿Total deferred tax assets |  |  | 131,012 |  |  | 154,465
﻿Valuation allowance |  |  | (90,935) |  |  | (153,205)
﻿Net deferred tax assets |  | $ | 40,077 |  | $ | 1,260
﻿ |  |  |  |  |  |
Foreign tax credits will expire between the years 2019 and 2025. Foreign tax credits of $4.3 million expired during the year. The alternative minimum tax credits do not expire, and foreign net operating losses (“NOLs”) are not subject to expiry dates. The NOL for our United Kingdom subsidiary can be carried forward indefinitely, while the NOLs for our Gabon subsidiaries are included in the respective subsidiaries’ cost oil accounts, which will be offset against future taxable revenues. We plan to liquidate the United Kingdom subsidiary and the Gabon branch which carries the NOL’s, and therefore the realization of deferred tax assets for these entities is remote. Accordingly, the related deferred tax assets of $8.7 million and $15.9 million, respectively, were written off during the year with a corresponding offset to the valuation allowance. All of the Company’s U.S. federal NOLs were incurred prior to 2018 and will expire between 2035 and 2037. U.S. federal NOLs incurred after 2017 do not expire. The ability to utilize NOLs and other tax attributes could be subject to a limitation if the Company were to undergo an ownership change as defined in Section 382 of the Tax Code. Management assesses the available positive and negative evidence to estimate if existing deferred tax assets will be utilized. We do not anticipate utilization of the foreign tax credits prior to expiration and have recorded a full valuation allowance on these deferred tax assets. 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. As a result of further guidance by the Internal Revenue Service, the $0.1 million reserve for possible sequestration of the credits was reversed in 2018. On the basis of the evaluations discussed above, valuation allowances of $90.9 million, $153.2 million and $211.8 million have been recorded as of December 31, 2018, 2017 and 2016, respectively. Valuation allowances reduce the deferred tax assets to the amount that is more likely than not to be realized. 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, 2018 and 2017. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Income (loss) from continuing operations before income taxes is attributable as follows: ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Year Ended December 31,
﻿(in thousands) |  | 2018 |  | 2017 |  | 2016
﻿U.S. |  | $ | (5,672) |  | $ | (9,453) |  | $ | (9,893)
﻿Foreign |  |  | 61,146 |  |  | 30,103 |  |  | 874
﻿ |  | $ | 55,474 |  | $ | 20,650 |  | $ | (9,019)
The reconciliation of income tax expense (benefit) attributable to income (loss) from continuing operations to income tax on income (loss) from continuing operations at the U.S. statutory rate is as follows: ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Year Ended December 31,
﻿(in thousands) |  | 2018 |  | 2017 |  | 2016
﻿Tax provision computed at U.S. statutory rate |  | $ | 11,650 |  | $ | 7,228 |  | $ | (3,156)
﻿Foreign taxes not offset in U.S. by foreign tax credits |  |  | 24,840 |  |  | 6,775 |  |  | 6,319
﻿Impact of Tax Reform Act |  |  | — |  |  | 52,449 |  |  | —
﻿Recognition of foreign deferred tax assets, net of U.S. impact |  |  | (45,751) |  |  | — |  |  | —
﻿Unrealizable foreign deferred tax assets |  |  | 24,176 |  |  |  |  |  |
﻿Effect of change in foreign statutory rates |  |  | — |  |  | — |  |  | 2,394
﻿Permanent differences |  |  | (104) |  |  | 309 |  |  | 4,505
﻿Foreign tax credit expirations |  |  | 4,311 |  |  | 2,394 |  |  | —
﻿Increase/(decrease) in valuation allowance |  |  | (62,270) |  |  | (58,777) |  |  | (802)
﻿Other |  |  | (106) |  |  | — |  |  | (12)
﻿Total income tax expense (benefit) |  | $ | (43,254) |  | $ | 10,378 |  | $ | 9,248
﻿ |  |  |  |  |  |  |  |  |
For the years ended December 31, 2018, 2017 and 2016, we were subject to foreign and U.S. federal taxes only, with no allocations made to state and local taxes. The following table summarizes the tax years that remain subject to examination by major tax jurisdictions: ﻿ ﻿ ﻿ ﻿ ﻿
﻿ |  |
﻿ |  |
﻿Jurisdiction |  | Years
﻿U.S. |  | 2009-2018
﻿Gabon |  | 2014-2018
﻿ ﻿

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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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