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Income Taxes | 12 Months Ended
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Dec. 31, 2021
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] |
Income Taxes | INCOME TAXESWe generated profits of $253.4 million and $373.1 million, losses of $51.0 million and profits of $39.0 million before income taxes in the U.S. for the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor), the years ended December 31, 2020 and 2019 (Predecessor), respectively. We generated losses of $245.2 million, $4.8 billion, $5.1 billion and $102.8 million before income taxes in non-U.S. jurisdictions for the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor), the years ended December 31, 2020 and 2019 (Predecessor), respectively. The components of our provision for income taxes are summarized as follows (in millions):
| Successor |  |  | Predecessor
| Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020 |  | Year Ended December 31, 2019
Current income tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | $ | 5.5 |  |  |  | $ | — |  |  | $ | (135.3) |  |  | $ | 31.3 |
Non-U.S. | 53.2 |  |  |  | 34.4 |  |  | (18.4) |  |  | 73.2 |
| 58.7 |  |  |  | 34.4 |  |  | (153.7) |  |  | 104.5 |
Deferred income tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | (6.6) |  |  |  | — |  |  | (92.9) |  |  | 19.7 |
Non-U.S. | (14.7) |  |  |  | (18.2) |  |  | (12.8) |  |  | 4.2 |
| (21.3) |  |  |  | (18.2) |  |  | (105.7) |  |  | 23.9 |
Total income tax expense (benefit) | $ | 37.4 |  |  |  | $ | 16.2 |  |  | $ | (259.4) |  |  | $ | 128.4 |
U.S. Tax Reform and CARES Act The U.S. Tax Cuts and Jobs Act ("U.S. tax reform") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law, effective January 1, 2018. Due to the timing of the enactment of U.S. tax reform and the complexity involved in applying its provisions, t he 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. The U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted on March 27, 2020 and introduced various corporate tax relief measures into law. Among other things, the CARES Act allows net operating losses ("NOLs") generated in 2019 and 2020 to be carried back to each of the five preceding years. During 2020, we recognized a tax benefit of $122.1 million associated with the carryback of NOLs to recover taxes paid in prior years. Deferred Taxes The components of deferred income tax assets and liabilities are summarized as follows (in millions):
|  | Successor |  |  | Predecessor
|  | December 31, 2021 |  |  |  | December 31, 2020
Deferred tax assets: |  |  |  |  |  |
Net operating loss carryforwards |  | $ | 2,293.5 |  |  |  |  | $ | 2,272.2 |
Property and equipment |  | 1,361.6 |  |  |  |  | — |
Foreign tax credits |  | 105.7 |  |  |  |  | 171.2 |
Interest limitation carryforwards |  | 74.8 |  |  |  |  | 221.2 |
Employee benefits, including share-based compensation |  | 51.2 |  |  |  |  | 81.6 |
Premiums on long-term debt |  | 9.7 |  |  |  |  | 115.7 |
Other |  | 15.4 |  |  |  |  | 6.8 |
Total deferred tax assets |  | 3,911.9 |  |  |  |  | 2,868.7 |
Valuation allowance |  | (3,829.0) |  |  |  |  | (2,787.7) |
Net deferred tax assets |  | 82.9 |  |  |  |  | 81.0 |
Deferred tax liabilities: |  |  |  |  |  |
Property and equipment |  | — |  |  |  |  | (40.9) |
Other |  | (14.5) |  |  |  |  | (11.2) |
Total deferred tax liabilities |  | (14.5) |  |  |  |  | (52.1) |
Net deferred tax asset |  | $ | 68.4 |  |  |  |  | $ | 28.9 |
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, 2021 (Successor), we had gross deferred tax assets of $2.3 billion relating to $10.0 billion of NOL carryforwards, $105.7 million of U.S. foreign tax credits (“FTCs”), and $74.8 million of U.S. and Luxembourg interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. NOL carryforwards, which were generated in various jurisdictions worldwide, include $9.1 billion that do not expire and $807.5 million that will expire, if not utilized, between 2022 and 2040. Deferred tax assets for NOL carryforwards as of December 31, 2021 (Successor) include $1.4 billion, $599.2 million, $76.4 million, and $56.4 million pertaining to NOL carryforwards in Luxembourg, the United States, Switzerland, and the U.K., respectively. The U.S. FTCs expire between 2022 and 2026. Interest limitation carryforwards generally do not expire. Additionally, as a result of our emergence from bankruptcy, the utilization of certain U.S. deferred tax assets including, but not limited to, NOL carryforwards, FTCs, and interest limitation carryforwards is limited to $0.5 million annually. We have recognized a $3.8 billion valuation allowance as of December 31, 2021 on deferred tax assets relating to those assets for which we are not more likely than not to realize due to the inability to generate sufficient taxable income in the period and/or of the character necessary to use the benefit of the deferred tax assets. Certain components of deferred tax assets and liabilities as of December 31, 2021 (Successor) have changed significantly from December 31, 2020 (Predecessor) due to the impacts of fresh start accounting, Switzerland tax reform, and other tax attribute reductions resulting from restructurings due to and in connection with the emergence from bankruptcy. During the eight months ended December 31, 2021, we recognized a $9.8 million deferred tax benefit associated with changes in deferred tax asset valuation allowances. Given current industry conditions and recent historical losses, we do not project reliable future income other than from existing drilling contracts and other known sources of future income. If industry conditions improve, which is generally evidenced by increased contract backlog and increased contract day rates, we may rely on projected taxable income from future drilling contracts for the recognition of deferred tax assets. Effective Tax Rate Valaris Limited, the Successor Company and our parent company, is domiciled and resident in Bermuda. 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-Bermuda subsidiaries is not subject to Bermuda taxation as there is not an income tax regime in Bermuda. Valaris plc, the Predecessor Company and our former parent company, was domiciled and resident in the U.K. The income of our non-U.K. subsidiaries was generally not subject to U.K. taxation. Income tax rates and taxation systems in the jurisdictions in which our subsidiaries conduct operations vary and our subsidiaries are frequently subjected to minimum taxation regimes. In some jurisdictions, tax liabilities are based on gross revenues, statutory deemed profits or other factors, rather than on net income, and our subsidiaries are frequently unable to realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss. 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. Our consolidated effective income tax rate for the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor), the year ended December 31, 2020 (Predecessor) and the year ended December 31, 2019 (Predecessor), respectively, differs from the Bermuda and U.K. statutory income tax rates as follows:
| Successor |  |  | Predecessor
| Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020 |  | Year Ended December 31, 2019
Bermuda (Successor)/ U.K. (Predecessor) statutory income tax rate | — | % |  |  | 19.0 | % |  | 19.0 | % |  | 19.0 | %
Asset impairments | — |  |  |  | (3.2) |  |  | (12.5) |  |  | (31.0) |
Non-Bermuda (Successor) taxes | 376.0 |  |  |  | — |  |  | — |  |  | — |
Non-U.K. (Predecessor) taxes | — |  |  |  | 1.0 |  |  | (2.8) |  |  | (280.9) |
Resolution of prior year items | 387.9 |  |  |  | (0.4) |  |  | 1.8 |  |  | 12.3 |
Switzerland Tax Reform | (188.3) |  |  |  | — |  |  | — |  |  | — |
Valuation allowance | (119.5) |  |  |  | (1.8) |  |  | (1.5) |  |  | (145.1) |
U.S. tax reform and U.S. CARES Act | — |  |  |  | — |  |  | 2.4 |  |  | (21.6) |
Bargain purchase gain | — |  |  |  | — |  |  | — |  |  | 189.7 |
Debt repurchases | — |  |  |  | — |  |  | — |  |  | 48.7 |
Other | — |  |  |  | (15.0) |  |  | (1.3) |  |  | 7.6 |
Effective income tax rate | 456.1 | % |  |  | (0.4) | % |  | 5.1 | % |  | (201.3) | %
Our eight months ended December 31, 2021 (Successor) consolidated effective income tax rate includes $15.3 million associated with the impact of various discrete items, including $30.7 million income tax expense associated with changes in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset by $15.4 million of tax benefit related to deferred taxes associated with Switzerland tax reform. Our four months ended April 30, 2021 (Predecessor) consolidated effective income tax rate included $2.2 million associated with the impact of various discrete items, including $21.5 million of income tax expense associated with changes in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset by $19.3 million of tax benefit related to fresh start accounting adjustments. Our 2020 consolidated effective income tax rate includes a $322.4 million tax benefit associated with the impact of various discrete tax items, including restructuring transactions, impairments of rigs and other assets, implementation of the U.S. CARES Act, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales, reorganization items and the resolution of other prior period tax matters. 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. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income rates for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor) were 387.7% and (12.9)%, respectively. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2020 and 2019 (Predecessor) were (7.6)% and (14.6)%, 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. As discussed in "Note 9 - Debt", 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 4.875% 2022 Notes, 2042 Notes, 7.375% 2025 Notes, 4.75% 2024 Notes and 5.85% 2044 Notes. We recognized a tax benefit of $66.0 million during the year ended December 31, 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, 2021 (Successor), we had $234.3 million of unrecognized tax benefits, of which $212.2 million was included in Other liabilities on our Consolidated Balance Sheet, $21.1 million, which is associated with tax positions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets and $1.0 million was presented as a reduction of long-term income tax receivable. As of December 31, 2020 (Predecessor), we had $237.7 million of unrecognized tax benefits, of which $213.0 million was included in Other liabilities on our Consolidated Balance Sheet, $20.7 million, which is associated with tax positions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets and $4.0 million was presented as a reduction of long-term income tax receivable. If recognized, $208.9 million of the $234.3 million unrecognized tax benefits as of December 31, 2021 (Successor) would impact our consolidated effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor) and the year ended December 31, 2020 (Predecessor), respectively (in millions):
|  | Successor |  |  | Predecessor
|  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020
Balance, beginning of period |  | $ | 235.4 |  |  |  | $ | 237.7 |  |  | $ | 296.7 |
Increase in unrecognized tax benefits as a result of tax positions taken during prior years |  | 33.8 |  |  |  | 2.9 |  |  | 22.4 |
Lapse of applicable statutes of limitations |  | (20.2) |  |  |  | (0.2) |  |  | (13.2) |
Impact of foreign currency exchange rates |  | (10.5) |  |  |  | (17.6) |  |  | 9.0 |
Increases in unrecognized tax benefits as a result of tax positions taken during the current year |  | 6.9 |  |  |  | 12.6 |  |  | 12.8 |
Settlements with taxing authorities |  | (6.6) |  |  |  | — |  |  | (0.7) |
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years |  | (4.5) |  |  |  | — |  |  | (89.3) |
Balance, end of period |  | $ | 234.3 |  |  |  | $ | 235.4 |  |  | $ | 237.7 |
Accrued interest and penalties totaled $108.0 million and $73.1 million as of December 31, 2021 (Successor) and 2020 (Predecessor), respectively, and were included in Other liabilities on our Consolidated Balance Sheets. We recognized a net expense of $21.3 million, $13.5 million, $13.8 million and $5.7 million associated with interest and penalties during the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor), the years ended December 31, 2020 and 2019 (Predecessor), 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 2015, 2017 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 the eight months ended December 31, 2021 (Successor), the four months ended April 30, 2021 (Predecessor), the years ended December 31, 2020 and 2019 (Predecessor), resulting in net income tax benefits, inclusive of interest and penalties, of $17.9 million, $0.2 million, $4.3 million and $5.3 million, respectively. Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2022. Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next 12 months by $4.0 million, inclusive of $1.4 million of accrued interest and penalties, all of which would impact our consolidated effective income tax rate if recognized. Tax Assessments Predecessor During 2019, the Luxembourg tax authorities issued aggregate tax assessments totaling approximately €142.0 million (approximately $161.5 million converted using the current period-end exchange rates) related to tax years 2014, 2015 and 2016 for several of Rowan's Luxembourg subsidiaries. We recorded a liability for uncertain tax positions of €93.0 million (approximately $105.7 million converted using the current period-end exchange rates) in purchase accounting related to these assessments. During the first quarter of 2020, in connection with the administrative appeals process, the tax authority withdrew assessments of €142.0 million (approximately $161.5 million converted using the current period-end exchange rates), accepting the associated tax returns as previously filed. Accordingly, we de-recognized previously accrued liabilities for uncertain tax positions and net wealth taxes of €79.0 million (approximately $89.8 million converted using the current period-end exchange rates) and €2.0 million (approximately $2.3 million converted using the current period-end exchange rates), respectively. The de-recognition of amounts related to these assessments was recognized as a tax benefit during the three-month period ended March 31, 2020 and is included in Changes in operating assets and liabilities on the Consolidated Statements of Cash Flows for the year ended December 31, 2020 (Predecessor). On December 31, 2021, we de-recognized the remaining liability for uncertain tax position balance of €14.0 million (approximately $15.9 million converted using the current period-end exchange rates) upon the lapse of the applicable statute of limitations. During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101 million (approximately $73.4 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 an $18.0 million liability for unrecognized tax benefits relating to these assessments as of December 31, 2021 (Successor). 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 predicted 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 Limited from its subsidiaries is exempt from Bermuda taxation. We do not provide deferred taxes on undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. As of December 31, 2021 (Successor), the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $279.5 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, 2021 (Successor).

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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