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Income Taxes | 12 Months Ended
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Dec. 31, 2023
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] |
Income Taxes | INCOME TAXES We generated profits of $30.7 million $39.7 million, $253.4 million and $373.1 million before income taxes in the U.S. for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively. We generated profits of $53.5 million and $185.2 million, and losses of $240.6 million and $4.8 billion before income taxes in non-U.S. jurisdictions for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively. The components of our provision for income taxes are summarized as follows (in millions):
| Successor |  |  | Predecessor
| Year Ended December 31, 2023 |  | Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021
Current income tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | $ | (30.3) |  |  | $ | 12.4 |  |  | $ | 5.5 |  |  |  | $ | — |
Non-U.S. | 34.1 |  |  | 22.8 |  |  | 52.2 |  |  |  | 34.4 |
| 3.8 |  |  | 35.2 |  |  | 57.7 |  |  |  | 34.4 |
Deferred income tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | 1.9 |  |  | 8.5 |  |  | (6.6) |  |  |  | — |
Non-U.S. | (788.3) |  |  | (0.6) |  |  | (14.7) |  |  |  | (18.2) |
| (786.4) |  |  | 7.9 |  |  | (21.3) |  |  |  | (18.2) |
Total income tax expense (benefit) | $ | (782.6) |  |  | $ | 43.1 |  |  | $ | 36.4 |  |  |  | $ | 16.2 |
Deferred Taxes The components of deferred income tax assets and liabilities are summarized as follows (in millions):
|  | December 31, 2023 |  | December 31, 2022
Deferred tax assets: |  |  |  |
Net operating loss carryforwards |  | $ | 3,308.9 |  |  | $ | 3,028.7 |
Property and equipment |  | 1,535.1 |  |  | 1,454.8 |
Interest limitation carryforwards |  | 123.4 |  |  | 193.4 |
Foreign tax credits |  | 44.7 |  |  | 60.7 |
Employee benefits, including share-based compensation |  | 41.6 |  |  | 43.1 |
Premiums on long-term debt |  | 6.0 |  |  | 8.1 |
Other |  | 14.4 |  |  | 20.1 |
Valuation allowance |  | (4,192.4) |  |  | (4,720.3) |
Total deferred tax assets |  | 881.7 |  |  | 88.6 |
Deferred tax liabilities |  | (26.8) |  |  | (19.4) |
Net deferred tax asset |  | $ | 854.9 |  |  | $ | 69.2 |
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. We rely on projected taxable income from both current and future drilling contracts for the recognition of deferred tax assets. 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, 2023, we had gross deferred tax assets of $3.3 billion relating to $14.2 billion of net operating loss ("NOL") carryforwards, $44.7 million of U.S. foreign tax credits (“FTCs”), and $123.4 million of U.S., Luxembourg and U.K. 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 $13.2 billion that do not expire and $1.0 billion that will expire, if not utilized, between 2024 and 2040. Deferred tax assets for NOL carryforwards as of December 31, 2023 include $2.4 billion, $607.5 million, $88.6 million, and $78.0 million pertaining to NOL carryforwards in Luxembourg, the United States, Switzerland, and the U.K., respectively. The U.S. FTCs expire between 2024 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 had a $4.2 billion and a $4.7 billion valuation allowance as of December 31, 2023 and 2022, respectively, 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 prior to expiration and/or of the character necessary to use the benefit of the deferred tax assets. During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor), we recognized a deferred tax benefit of $802.9 million, a deferred tax expense of $1.5 million and a deferred tax benefit of $9.8 million, respectively, associated with changes in deferred tax asset valuation allowances. The deferred tax benefit in 2023 primarily relates to a $799.5 million reduction of our valuation allowance recognized in the fourth quarter of 2023 due changes in the balance of relevant positive and negative evidence considered when assessing the realization of our deferred tax assets in certain operating jurisdictions. After considering the balance of evidence, which included historical financial results, projected earnings, contract backlog, day rates and market outlook, we determined that sufficient positive evidence exists to conclude that this portion of the valuation allowance on deferred tax assets is no longer needed. This reduction in our valuation allowance was partially offset by a net increase of $275.0 million in 2023, primarily relating to deferred tax asset activity during the year attributable to NOLs and future deductible temporary differences for which we are not more than likely not to realize. We intend to continue maintaining a valuation allowance on a substantial portion of our deferred tax assets until there is sufficient evidence to support a reversal of such allowances. The timing and amount of future valuation allowance reductions are subject to future levels of contracting and profitability achieved. Effective Tax Rate Valaris Limited 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. Legacy Valaris 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 years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively, differs from the Bermuda and U.K. statutory income tax rates as follows:
| Successor |  |  | Predecessor
| Year Ended December 31, 2023 |  | Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021
Bermuda (Successor)/ U.K. (Predecessor) statutory income tax rate | — | % |  | — | % |  | — | % |  |  | 19.0 | %
Non-Bermuda (Successor) taxes | 74.0 |  |  | 22.8 |  |  | 376.0 |  |  |  | — |
Valuation allowance | (953.6) |  |  | 0.6 |  |  | (119.5) |  |  |  | (1.8) |
Resolution of prior year items | (49.9) |  |  | (7.0) |  |  | 216.2 |  |  |  | (0.4) |
Switzerland Tax Reform | — |  |  | — |  |  | (188.3) |  |  |  | — |
Asset impairments | — |  |  | — |  |  | — |  |  |  | (3.2) |
Other | — |  |  | 2.8 |  |  | — |  |  |  | (14.0) |
Effective income tax rate | (929.5) | % |  | 19.2 | % |  | 284.4 | % |  |  | (0.4) | %
Our 2023 consolidated effective income tax rate includes discrete tax benefit of $42.0 million primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years. Our 2022 consolidated effective income tax rate includes $10.3 million associated with the impact of various discrete items, including $17.2 million income tax benefit associated with changes in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset primarily by tax expense attributable to income associated with a contract termination. Our eight months ended December 31, 2021 (Successor) consolidated effective income tax rate includes $14.3 million associated with the impact of various discrete items, including $29.7 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. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income rates for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) were (872.3)%, 73.6%, 213.9% and (12.9)%, 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, 2023, we had $201.4 million of unrecognized tax benefits, of which $171.7 million was included in Other liabilities on our Consolidated Balance Sheet, and $29.7 million, which is associated with tax positions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. As of December 31, 2022, we had $217.6 million of unrecognized tax benefits, of which $187.2 million was included in Other liabilities on our Consolidated Balance Sheet, $30.2 million, which is associated with tax positions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets and $0.2 million was presented as a reduction of long-term income tax receivable. If recognized, $171.2 million of the $201.4 million unrecognized tax benefits as of December 31, 2023 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, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions) were as follows:
|  | Successor |  |  | Predecessor
|  | Year Ended December 31, 2023 |  | Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021
Balance, beginning of period |  | $ | 217.6 |  |  | $ | 235.1 |  |  | $ | 235.4 |  |  |  | $ | 237.7 |
Increase as a result of tax positions taken during prior years |  | 88.6 |  |  | 3.0 |  |  | 34.6 |  |  |  | 2.9 |
Lapse of applicable statutes of limitations |  | (73.6) |  |  | (4.5) |  |  | (20.2) |  |  |  | (0.2) |
Settlements with taxing authorities |  | (41.8) |  |  | (16.5) |  |  | (6.6) |  |  |  | — |
Increases as a result of tax positions taken during the current year |  | 13.4 |  |  | 11.2 |  |  | 6.9 |  |  |  | 12.6 |
Impact of foreign currency exchange rates |  | 0.6 |  |  | (9.7) |  |  | (10.5) |  |  |  | (17.6) |
Decreases as a result of tax positions taken during prior years |  | (3.4) |  |  | (1.0) |  |  | (4.5) |  |  |  | — |
Balance, end of period |  | $ | 201.4 |  |  | $ | 217.6 |  |  | $ | 235.1 |  |  |  | $ | 235.4 |
Accrued interest and penalties totaled $52.3 million and $87.8 million as of December 31, 2023 and 2022, respectively, and were included in Other liabilities on our Consolidated Balance Sheets. We recognized a net benefit of $35.4 million and $12.5 million, and net expense of $20.3 million and $13.5 million associated with interest and penalties during the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively. Interest and penalties are included in Current income tax expense in our Consolidated Statements of Operations. Three of our subsidiaries file or previously filed U.S. tax returns and the tax returns of one or more of these subsidiaries is under exam for years 2014 and subsequent years. None of these examinations are expected to have a significant 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 years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), resulting in net income tax benefits, inclusive of interest and penalties, of $77.3 million, $4.5 million, $17.9 million and $0.2 million, respectively. Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2024, but we do not expect these to have a material impact to our unrecognized tax benefits or effective income tax rate. Tax Assessments In December 2023, one of our Luxembourg subsidiaries received tax assessments for fiscal years 2019, 2020, 2021 and 2023 and a demand of payment from the Luxembourg tax authorities for an aggregate of approximately €115.0 million (approximately $127.0 million converted at current period-end exchange rates), including interest. In February 2024, we subsequently received notice from the Luxembourg tax authorities reducing the amount attributable to the 2023 payment demand by approximately €55.0 million resulting in a revised aggregate tax demand of approximately €60.0 million. We have recorded a liability for uncertain tax positions of approximately €60.0 million (approximately $66.0 million converted at current period-end exchange rates) in the fourth quarter of 2023 related to the assessments for the 2019-2021 tax years. We are vigorously contesting these assessments, including the validity and amount; however, the outcome of such challenges and related administrative proceedings and appeals cannot be predicted with certainty. An unfavorable outcome could result in a material impact on our financial position, operating results and cash flows. During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101.0 million (approximately $69.0 million converted at the current period-end exchange rate) 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$42.0 million payment (approximately $29.0 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have an $18.8 million liability for uncertain tax positions relating to these assessments as of December 31, 2023. 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, 2023, the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $298.2 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, 2023. Tax Legislation The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15% applied on a country-by-country basis intended to be effective on January 1, 2024. Numerous jurisdictions are actively considering changes to existing tax laws or have proposed or enacted new laws to align with the recommendations and guidelines under Pillar Two. There remains uncertainty as to the final Pillar Two model rules and we will continue to monitor global legislative action related to this initiative. Additionally, Bermuda recently enacted the Corporate Income Tax Act 2023 on December 27, 2023 (the “CIT Act”) which stipulates a tax on 15% of the net income of certain Bermuda constituent entities (as determined in accordance with the CIT Act, including after adjusting for any relevant foreign tax credits applicable to the Bermuda constituent entities). No tax is chargeable under the CIT Act until tax years starting on or after January 1, 2025. While we are still closely monitoring developments of these rules and evaluating the potential impact on future periods, we do not expect they will have a significant impact on our financial results in the near term.

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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 -Topic 946 -SubTopic 20 -Name Accounting Standards Codification -Section 50 -Paragraph 13 -Publisher FASB -URI https://asc.fasb.org//1943274/2147480990/946-20-50-13 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 235 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480678/235-10-S99-1 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//740/tableOfContent Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 14 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-14 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 21 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-21 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 270 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482526/740-270-50-1 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 17 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-17 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -Publisher FASB -URI https://asc.fasb.org//1943274/2147479360/740-10-S99-1 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -Publisher FASB -URI https://asc.fasb.org//1943274/2147479360/740-10-S99-2 Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 30 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org//1943274/2147482603/740-30-50-2 + Details
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