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Income Taxes | 12 Months Ended
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Dec. 31, 2015
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] |
Income Taxes | INCOME TAXES We generated losses of $578.2 million and $460.3 million from continuing operations before income taxes in the U.S. and losses of $893.0 million and $2.1 billion from continuing operations before income taxes in non-U.S. countries for the years ended December 31, 2015 and 2014, respectively. We generated income of $173.4 million from continuing operations before income taxes in the U.S. and income of $1.5 billion from continuing operations before income taxes in non-U.S. countries for the year ended December 31, 2013. The following table summarizes components of our provision for income taxes from continuing operations for each of the years in the three-year period ended December 31, 2015 (in millions):
| 2015 |  | 2014 |  | 2013
Current income tax expense: |  |  |  |  |  |  |  |
U.S. | $ | 18.7 |  |  | $ | 114.8 |  |  | $ | 94.4 |
Non-U.S. | 125.4 |  |  | 149.2 |  |  | 98.6 |
| 144.1 |  |  | 264.0 |  |  | 193.0 |
Deferred income tax (benefit) expense: |  |  |  |  |  |  |  |
U.S. | (180.4 | ) |  | (86.7 | ) |  | 19.2 |
Non-U.S. | 22.4 |  |  | (36.8 | ) |  | (9.1 | )
| (158.0 | ) |  | (123.5 | ) |  | 10.1 |
Total income tax (benefit) expense | $ | (13.9 | ) |  | $ | 140.5 |  |  | $ | 203.1 |
Deferred Taxes The following table summarizes significant components of deferred income tax assets (liabilities) as of December 31, 2015 and 2014 (in millions):
|  | 2015 |  | 2014
Deferred tax assets: |  |  |  |  |
Net operating loss carryforwards |  | $ | 228.7 |  |  | $ | 204.5 |
Premium on long-term debt |  | 86.0 |  |  | 99.2 |
Foreign tax credits |  | 84.1 |  |  | 98.6 |
Deferred Revenue |  | 77.7 |  |  | 103.0 |
Employee benefits, including share-based compensation |  | 40.5 |  |  | 39.5 |
Other |  | 20.5 |  |  | 16.7 |
Total deferred tax assets |  | 537.5 |  |  | 561.5 |
Valuation allowance |  | (266.4 | ) |  | (271.3 | )
Net deferred tax assets |  | 271.1 |  |  | 290.2 |
Deferred tax liabilities: |  |  |  |  |  |
Property and equipment |  | (97.1 | ) |  | (314.2 | )
Intercompany transfers of property |  | (21.2 | ) |  | (23.0 | )
Deferred costs |  | (15.3 | ) |  | (20.2 | )
Other |  | (25.8 | ) |  | (14.1 | )
Total deferred tax liabilities |  | (159.4 | ) |  | (371.5 | )
Net deferred tax asset (liability) |  | $ | 111.7 |  |  | $ | (81.3 | )
The realization of substantially all of our deferred tax assets is dependent on generating sufficient taxable income during future periods in various jurisdictions in which we operate. Realization of certain of our deferred tax assets is not assured. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The amount of deferred tax assets considered realizable could increase or decrease in the near-term if our estimates of future taxable income change. As of December 31, 2015, we had deferred tax assets of $84.1 million for U.S. foreign tax credits (“FTC”) and $228.7 million related to $979.2 million of net operating loss (“NOL”) carryforwards, which can be used to reduce our income taxes payable in future years. The FTC expire between 2022 and 2023. NOL carryforwards, which were generated in various jurisdictions worldwide, include $599.0 million that do not expire and $380.2 million that will expire, if not utilized, beginning in 2016 through 2020. Due to the uncertainty of realization, we have a $259.8 million valuation allowance on FTC and NOL carryforwards, primarily relating to countries where we no longer operate or do not expect to generate future taxable income. Effective Tax Rate Ensco plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is generally not subject to U.K. taxation. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in the overall level of our income and changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another. Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2015, differs from the U.K. statutory income tax rate as follows:
| 2015 |  | 2014 |  | 2013
U.K. statutory income tax rate | 20.2 | % |  | 21.5 | % |  | 23.3 | %
Non-U.K. taxes | (12.3 | ) |  | (1.3 | ) |  | (13.2 | )
Goodwill and asset impairments | (4.0 | ) |  | (25.3 | ) |  | — |
Valuation allowance | (1.5 | ) |  | (1.1 | ) |  | 1.0 |
Other | (1.5 | ) |  | .7 |  |  | 1.3 |
Effective income tax rate | .9 | % |  | (5.5 | )% |  | 12.4 | %
Our 2015 consolidated effective income tax rate includes the impact of various discrete tax items, primarily related to a $192.5 million tax benefit associated with rig impairments and $11.0 million tax benefit resulting from the reduction of a valuation allowance on US foreign tax credits. Our consolidated effective income tax rate for 2014 includes the impact of various discrete tax items, including the recognition of a net $18.4 million tax expense associated with liabilities for unrecognized tax benefits and other adjustments relating to prior years and a $16.4 million tax benefit associated with rig impairments. In addition, we recognized a net $41.4 million tax benefit in connection with the utilization of foreign tax credits that were previously subject to a valuation allowance. The majority of discrete tax expense recognized during 2013 was attributable to the recognition of a $7.4 million liability for taxes associated with a $30.6 million reimbursement from the resolution of a dispute with the Mexican tax authority and a $7.0 million increase in the valuation allowance on U.S. foreign tax credits resulting from a restructuring transaction. Excluding the impact of the aforementioned discrete tax items and goodwill and asset impairments, our consolidated effective income tax rates for the years ended December 31, 2015, 2014 and 2013 were 16.0%, 10.7% and 12.2%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three years result primarily from changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and the differences in the tax rates in such tax jurisdictions. Unrecognized Tax Benefits Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2015, we had $140.6 million of unrecognized tax benefits, of which $119.3 million was included in other liabilities on our consolidated balance sheet and the remaining $21.3 million, which is associated with a tax position taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. As of December 31, 2014, we had $134.4 million of unrecognized tax benefits, of which $115.9 million was included in other liabilities on our consolidated balance sheet and the remaining $18.5 million, which is associated with a tax position taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. If recognized, $108.3 million of the $140.6 million unrecognized tax benefits as of December 31, 2015 would impact our consolidated effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2015 and 2014 is as follows (in millions):
|  | 2015 |  | 2014
Balance, beginning of year |  | $ | 134.4 |  |  | $ | 151.7 |
Increases in unrecognized tax benefits as a result of tax positions taken during prior years |  | 15.7 |  |  | 16.3 |
Increases in unrecognized tax benefits as a result of tax positions taken during the current year |  | 6.6 |  |  | 5.5 |
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years |  | (2.1 | ) |  | (15.5 | )
Settlements with taxing authorities |  | (0.6 | ) |  | (14.2 | )
Lapse of applicable statutes of limitations |  | (5.6 | ) |  | (.7 | )
Impact of foreign currency exchange rates |  | (7.8 | ) |  | (8.7 | )
Balance, end of year |  | $ | 140.6 |  |  | $ | 134.4 |
Accrued interest and penalties totaled $30.4 million and $26.5 million as of December 31, 2015 and 2014, respectively, and were included in other liabilities on our consolidated balance sheets. We recognized net expense of $3.9 million and $9.2 million and benefits of $1.6 million associated with interest and penalties during the years ended December 31, 2015, 2014 and 2013, respectively. Interest and penalties are included in current income tax expense in our consolidated statements of operations. Our 2011 and subsequent years U.S. Federal tax returns remain subject to examination. Tax years as early as 2005 remain subject to examination in the other major tax jurisdictions in which we operated. Statutes of limitations applicable to certain of our tax positions lapsed during 2015, 2014 and 2013, resulting in net income tax benefits, inclusive of interest and penalties, of $7.6 million, $2.4 million and $3.1 million, respectively. Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2016. Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next 12 months by $64.9 million, inclusive of $9.5 million of accrued interest and penalties, of which up to $62.2 million would impact our consolidated effective income tax rate if recognized. Intercompany Transfer of Drilling Rigs During the three-year period ended December 31, 2015, we transferred ownership of certain drilling rigs among our subsidiaries, including one semisubmersible rig during 2015, three jackup rigs during 2014 and two semisubmersible rigs during 2013. There were no income tax liabilities or reversing temporary differences associated with the intercompany transfers of drilling rigs during these periods. As of December 31, 2015 and 2014, the unamortized balance associated with deferred charges for income taxes incurred in connection with intercompany transfers of drilling rigs totaled $37.1 million and $39.7 million, respectively, and was included in other assets, net, on our consolidated balance sheets. Current income tax expense for the years ended December 31, 2015, 2014 and 2013 included $2.6 million, $2.6 million and $4.1 million, respectively, of amortization of income taxes incurred in connection with intercompany transfers of drilling rigs. As of December 31, 2015 and 2014, the unamortized balance associated with the deferred tax liability for reversing temporary differences of transferred drilling rigs totaled $21.2 million and $23.0 million, respectively, and was included in deferred income taxes on our consolidated balance sheets. Deferred income tax benefit for the years ended December 31, 2015, 2014 and 2013 included benefits of $1.8 million, $1.8 million and $1.9 million, respectively, of amortization of deferred reversing temporary differences associated with intercompany transfers of drilling rigs. Undistributed Earnings Dividend income received by Ensco plc from its subsidiaries is exempt from U.K. taxation. We do not provide deferred taxes on undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Each of the subsidiaries for which we maintain such policy has sufficient net assets, liquidity, contract backlog and/or other financial resources available to meet operational and capital investment requirements and otherwise allow us to continue to maintain our policy of reinvesting the undistributed earnings indefinitely. As of December 31, 2015 and 2014, the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $2.3 billion. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we would be subject to additional income taxes. The unrecognized deferred tax liability related to these undistributed earnings was not practicable to estimate as of December 31, 2015.

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