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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] |
Income Taxes | INCOME TAXES We generated profits of $39.0 million, losses of $115.1 million and profits of $6.3 million from continuing operations before income taxes in the U.S. and losses of $102.8 million, $423.8 million and $202.3 million from continuing operations before income taxes in non-U.S. jurisdictions for the years ended December 31, 2019, 2018 and 2017, 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, 2019 (in millions):
| 2019 |  | 2018 |  | 2017
Current income tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | $ | 31.3 |  |  | $ | (19.9 | ) |  | $ | (2.2 | )
Non-U.S. | 73.2 |  |  | 52.9 |  |  | 56.4 |
| 104.5 |  |  | 33.0 |  |  | 54.2 |
Deferred income tax expense: |  |  |  |  |  |  |  |
U.S. | 19.7 |  |  | 52.9 |  |  | 36.0 |
Non-U.S. | 4.2 |  |  | 3.7 |  |  | 19.0 |
| 23.9 |  |  | 56.6 |  |  | 55.0 |
Total income tax expense | $ | 128.4 |  |  | $ | 89.6 |  |  | $ | 109.2 |
U.S. Tax Reform U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law, including a reduction in the statutory income tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed repatriation of deferred foreign income, a base erosion anti-abuse tax that effectively imposes a minimum tax on certain payments to non-U.S. affiliates, new and revised rules relating to the current taxation of certain income of foreign subsidiaries and revised rules associated with limitations on the deduction of interest. Due to the timing of the enactment of U.S. tax reform and the complexity involved in applying its provisions, we made reasonable estimates of its effects and recorded such amounts in our consolidated financial statements as of December 31, 2017 on a provisional basis. Throughout 2018, we continued to analyze applicable information and data, interpret rules and guidance issued by the U.S. Treasury Department and Internal Revenue Service, and make adjustments to the provisional amounts as provided for in Staff Accounting Bulletin No. 118. The U.S. Treasury Department continued finalizing rules associated with U.S. tax reform during 2018 and 2019. During 2019, we recognized a tax expense of $13.8 million associated with final rules issued related to U.S. tax reform. During 2018, we recognized a tax benefit of $11.7 million associated with the one-time transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries. We recognized a net tax expense of $16.5 million during 2017 in connection with enactment of U.S. tax reform, consisting of a $38.5 million tax expense associated with the one-time transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries, a $17.3 million tax expense associated with revisions to rules over the taxation of income of foreign subsidiaries, a $20.0 million tax benefit resulting from the re-measurement of our deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced tax rate and a $19.3 million tax benefit resulting from adjustments to the valuation allowance on deferred tax assets. Deferred Taxes The following table summarizes significant components of deferred income tax assets and liabilities as of December 31, 2019 and 2018 (in millions):
|  | 2019 |  | 2018
Deferred tax assets: |  |  |  |  |
Net operating loss carryforwards |  | $ | 1,546.7 |  |  | $ | 148.4 |
Net capital loss carryforwards |  | 998.0 |  |  | — |
Foreign tax credits |  | 142.9 |  |  | 123.6 |
Interest limitation carryforwards |  | 41.5 |  |  | 40.2 |
Premiums on long-term debt |  | — |  |  | 23.8 |
Employee benefits, including share-based compensation |  | 73.9 |  |  | 15.4 |
Deferred revenue |  | 0.1 |  |  | 10.3 |
Other |  | 11.6 |  |  | 14.5 |
Total deferred tax assets |  | 2,814.7 |  |  | 376.2 |
Valuation allowance |  | (2,588.7 | ) |  | (316.0 | )
Net deferred tax assets |  | 226.0 |  |  | 60.2 |
Deferred tax liabilities: |  |  |  |  |  |
Property and equipment |  | (156.0 | ) |  | (54.5 | )
Net discounts on long-term debt |  | (49.5 | ) |  | — |
Deferred U.S. tax on foreign income |  | (36.7 | ) |  | (31.5 | )
Other |  | (23.7 | ) |  | (9.0 | )
Total deferred tax liabilities |  | (265.9 | ) |  | (95.0 | )
Net deferred tax asset (liability) |  | $ | (39.9 | ) |  | $ | (34.8 | )
The realization of substantially all of our deferred tax assets is dependent upon 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, 2019, we had deferred tax assets of $142.9 million for U.S. foreign tax credits (“FTCs”), $1.5 billion related to $6.4 billion of net operating loss (“NOL”) carryforwards and $41.5 million for U.S. interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. The FTCs expire between 2022 and 2029. NOL carryforwards, which were generated in various jurisdictions worldwide, include $5.6 billion that do not expire and $773.0 million that will expire, if not utilized, between 2020 and 2037. Deferred tax assets for NOL carryforwards at December 31, 2019 includes $1.3 billion acquired in the Rowan Transaction, substantially all of which pertains to NOL in Luxembourg. U.S. interest limitation carryforwards do not expire. Due to the uncertainty of realization, we have a $1.5 billion valuation allowance on FTC, NOL carryforwards and U.S. interest limitation carryforwards. During 2019, we completed certain restructuring transactions that generated substantial U.S. capital gains and losses. As of December 31, 2019, we had recognized a deferred tax asset of $998 million associated with the net capital loss arising from these transactions. Based on our current assessment, this deferred tax asset is subject to a full valuation allowance because we more-likely-than-not will be unable to realize a future benefit from it. Effective Tax Rate Valaris 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 will 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, 2019, differs from the U.K. statutory income tax rate as follows:
| 2019 |  | 2018 |  | 2017
U.K. statutory income tax rate | 19.0 | % |  | 19.0 | % |  | 19.2 | %
Non-U.K. taxes | (280.9 | ) |  | (18.0 | ) |  | (40.4 | )
Bargain purchase gain | 189.7 |  |  | (.2 | ) |  | 13.8 |
Valuation allowance | (145.1 | ) |  | (16.9 | ) |  | (18.0 | )
Debt repurchases | 48.7 |  |  | (1.6 | ) |  | (2.8 | )
Asset impairments | (31.0 | ) |  | (1.4 | ) |  | (17.1 | )
U.S. tax reform | (21.6 | ) |  | 2.2 |  |  | (8.4 | )
Restructuring transaction | 7.9 |  |  | 1.7 |  |  | — |
Other | 12.0 |  |  | (1.4 | ) |  | (2.0 | )
Effective income tax rate | (201.3 | )% |  | (16.6 | )% |  | (55.7 | )%
Our 2019 consolidated effective income tax rate includes $2.3 million associated with the impact of various discrete tax items, including $28.3 million of tax expense associated with final rules related to U.S. tax reform, gains on repurchase of debt and settlement proceeds, partially offset by $26.0 million of tax benefit related to restructuring transactions, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters and rig sales. Our 2018 consolidated effective income tax includes the impact of various discrete tax items, including $46.0 million of tax benefit associated with the utilization of foreign tax credits subject to a valuation allowance, the transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries and a restructuring transaction, partially offset by $21.0 million of tax expense related to recovery of certain costs associated with an ongoing legal matter, repurchase and redemption of senior notes, unrecognized tax benefits associated with tax positions taken in prior years and rig sales. Our 2017 consolidated effective income tax rate includes $32.2 million associated with the impact of various discrete tax items, including $16.5 million of tax expense associated with U.S. tax reform and $15.7 million of tax expense associated with the exchange offers and debt repurchases, rig sales, a restructuring transaction, settlement of a previously disclosed legal contingency, the effective settlement of a liability for unrecognized tax benefits associated with a tax position taken in prior years and other resolutions of prior year tax matters. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2019, 2018 and 2017 were (14.6)%, (24.8)% and (96.0)%. The changes in our consolidated effective income tax rate, excluding discrete tax items, during the three-year period result primarily from U.S. tax reform and 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. As discussed in Note 7, on February 3, 2020, Rowan and RCI transferred substantially all their assets and liabilities to Valaris plc and Valaris plc became the obligor on the Rowan Notes. We expect to recognize a deferred tax benefit ranging from $40 million to $60 million during the first quarter of 2020 in connection with this transaction. 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, 2019, we had $296.7 million of unrecognized tax benefits, of which $264.2 million was included in other liabilities on our consolidated balance sheet and the remaining $32.5 million, which is associated with a tax position taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. As of December 31, 2018, we had $143.0 million of unrecognized tax benefits, of which $136.5 million was included in other liabilities on our consolidated balance sheet and the remaining $6.5 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, $253.9 million of the $296.7 million unrecognized tax benefits as of December 31, 2019 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, 2019 and 2018 is as follows (in millions):
|  | 2019 |  | 2018
Balance, beginning of year |  | $ | 143.0 |  |  | $ | 147.6 |
Increases in unrecognized tax benefits as a result of the Rowan Transaction |  | 149.9 |  |  | — |
Increases in unrecognized tax benefits as a result of tax positions taken during the current year |  | 17.8 |  |  | 6.5 |
Impact of foreign currency exchange rates |  | (.3 | ) |  | (5.0 | )
Lapse of applicable statutes of limitations |  | (4.4 | ) |  | (4.5 | )
Increase in unrecognized tax benefits as a result of tax positions taken during prior years |  | 1.1 |  |  | 2.5 |
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years |  | (2.4 | ) |  | (3.8 | )
Settlements with taxing authorities |  | (8.0 | ) |  | (.3 | )
Balance, end of year |  | $ | 296.7 |  |  | $ | 143.0 |
Several of our rigs are owned by subsidiaries in Switzerland that are subject to a special finance taxation regime under Swiss income tax rules. Swiss federal and cantonal governments have enacted tax legislation (“Swiss tax reform”) effective January 1, 2020. Under Swiss tax reform, the finance taxation regime has been abolished but our Swiss subsidiaries will remain subject to the finance taxation regime through December 31, 2021 and transition to deriving income tax based on net income beginning January 1, 2022. There are various uncertainties relating to the application of Swiss tax reform to finance taxation regime taxpayers, the most prominent of which is the determination of the Swiss tax basis of property and equipment. After considering these uncertainties and all information currently available, we have concluded the tax basis of the property and equipment of our Swiss subsidiaries will more likely than not approximate its U.S. GAAP basis and, accordingly, we have not recognized deferred taxes. As the Swiss tax authorities further clarify the application of Swiss tax reform to finance taxation regime taxpayers, we may recognize deferred tax adjustments and they may have a material effect on our consolidated financial statements. Accrued interest and penalties totaled $58.9 million and $40.5 million as of December 31, 2019 and 2018, respectively, and were included in other liabilities on our consolidated balance sheets. We recognized a net expense of $5.7 million, $1.9 million and $4.4 million associated with interest and penalties during the years ended December 31, 2019, 2018, and 2017 respectively. Interest and penalties are included in current income tax expense in our consolidated statements of operations. Three of our subsidiaries file U.S. tax returns and the tax returns of one or more of these subsidiaries is under exam for years 2009 to 2012 and for 2014 and subsequent years. None of these examinations are expected to have an impact on the Company's consolidated results of operations and cash flows. 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 2019, 2018 and 2017, resulting in net income tax benefits, inclusive of interest and penalties, of $5.3 million, $5.3 million and $1.1 million, respectively. Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2020. Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next 12 months by $800,000, inclusive of $550,000 of accrued interest and penalties, all of which would impact our consolidated effective income tax rate if recognized. Recent Tax Assessments During 2019, the Luxembourg tax authorities issued aggregate tax assessments totaling approximately €142.0 million (approximately $159.0 million converted using the current period-end exchange rates) related to tax years 2014, 2015 and 2016 for several of Rowan's Luxembourg subsidiaries, which assessments accrue interest at the rate of 7.2% per annum. We may make a payment to the Luxembourg tax authorities in advance of the final resolution of these assessments. Although the outcome of such assessments cannot be predicted with certainty, unfavorable outcomes could have a material adverse effect on our financial position, operating results and cash flows. We have recorded a $104 million liability for these assessments as of December 31, 2019. During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101 million (approximately $70.9 million converted at current period-end exchange rates) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$42 million payment (approximately $29 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have recorded a $15 million liability for these assessments as of December 31, 2019. We believe our tax returns are materially correct as filed, and we are vigorously contesting these assessments. Although the outcome of such assessments and related administrative proceedings cannot be predicated with certainty, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows. Undistributed Earnings Dividend income received by Valaris 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, 2019, the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $289.0 million. 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, 2019.

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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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