INCOME TAXES

We generated losses of $151.6 million, $578.2 million and $460.3 million from continuing operations before income taxes in the U.S. and profits of $1.1 billion 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, 2016, 2015 and 2014, respectively.

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, 2016 (in millions):



	2016			2015			2014
Current income tax (benefit) expense:
U.S.	$	(6.6	)	$	18.7		$	114.8
Non-U.S.	86.4			125.4			149.2
	79.8			144.1			264.0
Deferred income tax expense (benefit):
U.S.	15.9			(180.4		)	(86.7		)
Non-U.S.	12.8			22.4			(36.8		)
	28.7			(158.0		)	(123.5		)
Total income tax expense (benefit)	$	108.5		$	(13.9	)	$	140.5

Deferred Taxes

The following table summarizes significant components of deferred income tax assets (liabilities) as of December 31, 2016 and 2015 (in millions):



	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	197.9		$	228.7
Foreign tax credits	91.7			84.1
Premiums on long-term debt	57.4			86.0
Deferred revenue	55.7			77.7
Employee benefits, including share-based compensation	30.6			40.5
Other	32.5			20.5
Total deferred tax assets	465.8			537.5
Valuation allowance	(238.8		)	(266.4		)
Net deferred tax assets	227.0			271.1
Deferred tax liabilities:
Property and equipment	(103.3		)	(97.1		)
Intercompany transfers of property	(18.9		)	(21.2		)
Deferred costs	(11.4		)	(15.3		)
Other	(23.6		)	(25.8		)
Total deferred tax liabilities	(157.2		)	(159.4		)
Net deferred tax asset	$	69.8		$	111.7

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, 2016, we had deferred tax assets of $91.7 million for U.S. foreign tax credits (“FTC”) and $197.9 million related to $802.1 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 2036. NOL carryforwards, which were generated in various jurisdictions worldwide, include $406.9 million that do not expire and $395.2 million that will expire, if not utilized, beginning in 2017 through 2026. Due to the uncertainty of realization, we have a $221.7 million valuation allowance on FTC and NOL carryforwards.

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. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income.

Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Further, we may continue to incur income tax expense in periods in which we operate at a loss.

Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2016, differs from the U.K. statutory income tax rate as follows:



	2016		2015		2014
U.K. statutory income tax rate	20.0	%	20.2	%	21.5	%
Non-U.K. taxes	(7.9	)	(12.3	)	(1.3	)
Debt repurchases	(4.1	)	—		—
Goodwill and asset impairments	—		(4.0	)	(25.3	)
Valuation allowance	2.6		(1.5	)	(1.1	)
Other	.3		(1.5	)	.7
Effective income tax rate	10.9	%	.9	%	(5.5	)%

Our 2016 consolidated effective income tax rate includes the impact of various discrete tax items, including a $16.9 million tax expense resulting from net gains on the repurchase of various debt during the year, the recognition of an $8.4 million net tax benefit relating to the sale of various rigs, a $5.5 million tax benefit resulting from a net reduction in the valuation allowance on U.S. foreign tax credits and a net $5.3 million tax benefit associated with liabilities for unrecognized tax benefits and other adjustments relating to prior years.

Our consolidated effective income tax rate for 2015 includes the impact of various discrete tax items, primarily related to a $192.5 million tax benefit associated with rig impairments and an $11.0 million tax benefit resulting from the reduction of a valuation allowance on U.S. 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.

Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2016, 2015 and 2014 were 20.3%, 16.0% and 10.7%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three-year period 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 differences in tax rates in such taxing 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, 2016, we had $122.0 million of unrecognized tax benefits, of which $116.3 million was included in other liabilities on our consolidated balance sheet and the remaining $5.7 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, 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. If recognized, $108.6 million of the $122.0 million unrecognized tax benefits as of December 31, 2016 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, 2016 and 2015 is as follows (in millions):



	2016			2015
Balance, beginning of year	$	140.6		$	134.4
Settlements with taxing authorities	(27.6		)	(.6		)
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years	(.5		)	(2.1		)
Lapse of applicable statutes of limitations	(.2		)	(5.6		)
Increases in unrecognized tax benefits as a result of tax positions taken during prior years	4.9			15.7
Increases in unrecognized tax benefits as a result of tax positions taken during the current year	7.6			6.6
Impact of foreign currency exchange rates	(2.8		)	(7.8		)
Balance, end of year	$	122.0		$	140.6

Accrued interest and penalties totaled $26.6 million and $30.4 million as of December 31, 2016 and 2015, respectively, and were included in other liabilities on our consolidated balance sheets. We recognized a net benefit of $3.8 million and a net expense of $3.9 million and $9.2 million associated with interest and penalties during the years ended December 31, 2016, 2015 and 2014, 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 2016, 2015 and 2014, resulting in net income tax benefits, inclusive of interest and penalties, of $0.6 million, $7.6 million and $2.4 million, respectively.

Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2017. Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next 12 months by $1.1 million, inclusive of $0.7 million of accrued interest and penalties, of which up to $1.1 million would impact our consolidated effective income tax rate if recognized.

Intercompany Transfer of Drilling Rigs

During the three-year period ended December 31, 2016, we transferred ownership of certain drilling rigs among our subsidiaries, including five jackups and one drillship during 2016, one semisubmersible rig during 2015 and three jackups during 2014. 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, 2016 and 2015, the unamortized balance associated with deferred charges for income taxes incurred in connection with intercompany transfers of drilling rigs totaled $33.0 million and $37.1 million, respectively, and was included in other assets, net, on our consolidated balance sheets. Current income tax expense for the years ended December 31, 2016, 2015 and 2014 included $4.1 million, $2.6 million and $2.6 million, respectively, of amortization of income taxes incurred in connection with intercompany transfers of drilling rigs.

As of December 31, 2016 and 2015, the unamortized balance associated with the deferred tax liability for reversing temporary differences of transferred drilling rigs totaled $18.9 million and $21.2 million, respectively, and was included in other liabilities on our consolidated balance sheets. Deferred income tax benefit for the years ended December 31, 2016, 2015 and 2014 included benefits of $2.3 million, $1.8 million and $1.8 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, which allows us to continue to maintain our policy of reinvesting the undistributed earnings indefinitely.

As of December 31, 2016, the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $1.0 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, 2016.