| Income Taxes | 13. Income Taxes In April 2021, we reorganized under Chapter 11 of the U.S. Bankruptcy Code in a transaction treated as a tax free reorganization under section 368(a)(1)(G) of the Internal Revenue Code of 1986, as amended (or the IRC). We realized approximately $ 1.3 billion of cancellation of indebtedness (or COD) income for U.S. tax purposes in 2021. Under exceptions applying to COD income resulting from a bankruptcy reorganization, we were not required to recognize this COD income currently as taxable income. Instead, our tax attribute carryforwards, including net operating losses, other noncurrent assets and the stock of our foreign corporate subsidiaries, were reduced under the operative tax statute and applicable regulations, affecting the balance of deferred taxes where appropriate. The total reduction of tax attributes under these rules amounted to approximately $ 1.3 billion, which impacted net operating losses and, without giving rise to deferred tax consequences, reduced the tax basis of foreign subsidiaries’ stock. The tax attribute reduction occurs on the first day of a company's tax year following the tax year in which COD income was realized, or, in our case, January 1, 2022. In the event of a change in ownership, IRC sections 382 and 383 provide an annual limitation with respect to a corporation’s ability to utilize its tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. Our emergence from the Chapter 11 Cases resulted in a change in ownership for purposes of IRC section 382. The limitation under the IRC is based on the value of the company as of the emergence date. To achieve business and administrative efficiencies, we undertook an internal restructuring in conjunction with emergence from bankruptcy, resulting in realignment of substantially all our assets and operations under a wholly owned foreign subsidiary, DFAC. In December 2023, we organized a new subsidiary, Diamond Offshore (Switzerland) GmbH (or DOSG), under the laws of Switzerland and DOSG acquired all the issued and outstanding DFAC shares. Effective December 31, 2023, DOSG now owns directly or indirectly all the shares of various foreign subsidiaries that own and operate our fleet of rigs. Our management has determined that we will permanently reinvest foreign earnings of foreign subsidiaries. The potential unrecognized deferred tax liability related to these undistributed earnings was not practicable to estimate at December 31, 2023. Our income tax expense is a function of the mix between our domestic and international pre-tax earnings or losses, the mix of international tax jurisdictions in which we operate and recognition of valuation allowances for deferred tax assets for which the tax benefits are not likely to be realized. The components of income tax (benefit) expense are as follows (in thousands):
Successor Predecessor
Year Ended Period from Period from
April 24, 2021 through January 1, 2021 through
2023 2022 December 31, 2021 April 23, 2021
Federal – current $ 8,375 $ 1,267 $ 3,645 $ 171
State – current 10 10 — —
Foreign – current 27,215 ( 4,151 ) 1,491 ( 3,681 )
Total current 35,600 ( 2,874 ) 5,136 ( 3,510 )
Federal – deferred 6,580 4,538 ( 6,742 ) ( 30,955 )
Foreign – deferred ( 11,197 ) ( 4,059 ) 3,260 ( 4,939 )
Total deferred ( 4,617 ) 479 ( 3,482 ) ( 35,894 )
Total $ 30,983 $ ( 2,395 ) $ 1,654 $ ( 39,404 ) The difference between actual income tax expense and the tax provision computed by applying the statutory federal income tax rate to income before taxes is attributable to the following (in thousands):
Successor Predecessor
Year Ended Period from Period from
April 24, 2021 through January 1, 2021 through
2023 2022 December 31, 2021 April 23, 2021
(Loss) income before income tax expense:
U.S. $ 443 $ ( 7,054 ) $ ( 1,048 ) $ 686,202
Foreign ( 14,166 ) ( 98,552 ) ( 174,642 ) ( 2,687,595 )
$ ( 13,723 ) $ ( 105,606 ) $ ( 175,690 ) $ ( 2,001,393 )
Expected income tax benefit at federal statutory rate $ ( 2,882 ) $ ( 22,177 ) $ ( 36,895 ) $ ( 420,292 )
Withholding taxes $ 486 — — —
Effect of tax rate changes — — 9,871 —
Reorganization items — — 266 ( 225,563 )
Post-petition interest expense — — — ( 6,771 )
Disallowed officers' compensation and restricted stock unit awards ( 459 ) 2,205 — —
Interest and penalties reported as income tax expense 831 3,318 — —
Effect of foreign operations 32,384 12,639 79,600 163,236
Valuation allowance ( 20,527 ) ( 23,135 ) ( 45,919 ) 515,421
Uncertain tax positions, settlements and adjustments relating to prior years 21,039 25,692 ( 7,220 ) ( 67,626 )
Other 111 ( 937 ) 1,951 2,191
Income tax (benefit) expense $ 30,983 $ ( 2,395 ) $ 1,654 $ ( 39,404 ) Deferred Income Taxes. Significant components of our deferred income tax assets and liabilities are as follows (in thousands):
December 31,
2023 2022
Deferred tax assets:
Net operating loss carryforwards, or NOLs $ 252,732 $ 412,152
Foreign tax credits 28,769 27,223
Disallowed interest deduction 66,632 69,604
Worker’s compensation and other current accruals 5,808 6,273
Deferred deductions 7,078 7,661
Deferred revenue 1,467 33
Operating lease liability 19,744 22,011
Property, plant and equipment 332,981 129,938
Other 5,617 7,234
Total deferred tax assets 720,828 682,129
Valuation allowance ( 629,665 ) ( 650,193 )
Net deferred tax assets 91,163 31,936
Deferred tax liabilities:
Right-of-use assets ( 18,964 ) ( 21,374 )
'Property, plant and equipment ( 56,409 )
Other ( 1,197 ) ( 652 )
Total deferred tax liabilities ( 76,570 ) ( 22,026 )
Net deferred tax asset $ 14,593 $ 9,910 Net Operating Loss Carryforwards . As of December 31, 2023, we recorded a deferred tax asset of $ 252.7 million for the benefit of NOL carryforwards, comprised of $ 57.7 million related to our U.S. losses and $ 195.0 million related to our international operations. Approximately $ 139.1 million of this deferred tax asset relates to NOL carryforwards that have an indefinite life. The remaining $ 273.0 million relates to NOL carryforwards in several foreign jurisdictions, as well as in the U.S. Unless utilized, these NOL carryforwards will expire between 2024 and 2037 . As a result of our emergence from bankruptcy, we have significant limitations on our ability to utilize certain U.S. deferred tax assets. Foreign Tax Credits. As of December 31, 2023, we recorded a deferred tax asset of $ 28.7 million for the benefit of foreign tax credits in the U.S. Of this balance, $ 2.6 million relates to a foreign tax credit carryback, which is expected to generate a cash tax benefit. The remaining credits will expire, unless utilized, between 2023 and 2028 . Valuation Allow ances. We record a valuation allowance on a portion of our deferred tax assets not expected to be ultimately realized. In determining the need for a valuation allowance, we consider current and historical financial results, expectations for future taxable income and the availability of tax planning strategies that can be implemented, if necessary, to realize deferred tax assets. As of Dece mber 31, 2022, valuation allowances aggregating $ 629.7 million have been recorded for our net operating losses, forei gn tax credits and other deferred tax assets for which the tax benefits are not likely to be realized. We intend to maintain a valuation allowance on our net federal and foreign deferred tax assets until there is sufficient evidence to support the reversal of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability achieved. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future U.S. taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company's projections for growth and/or tax planning strategies. Unrecognized Tax Benefits. Our income tax returns are subject to review and examination in the various jurisd ictions in which we operate, and we are currently contesting various tax assessments. We accrue for income tax contingencies, or uncertain tax positions, that we believe are not likely to be realized. A roll forward of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
Successor Predecessor
Year Ended For the Period For the Period
April 24, 2021 January 1, 2021
through through
2023 2022 December 31, 2021 April 23, 2021
Balance, beginning of period $ ( 21,540 ) $ ( 21,148 ) $ ( 26,678 ) $ ( 214,626 )
Additions for current year tax positions ( 7,391 ) ( 5,993 ) ( 3,553 ) —
Additions for prior year tax positions ( 705 ) ( 504 ) ( 1,424 ) ( 1,282 )
Reductions for prior year tax positions 1,141 4,345 1,730 187,389
Reductions related to statute of limitation expirations 3,878 1,760 8,777 1,841
Reductions related to settlements with taxing authorities 52 — — —
Balance, end of period $ ( 24,565 ) $ ( 21,540 ) $ ( 21,148 ) $ ( 26,678 ) The $ 7.4 million addition for current year uncertain tax positions recorded in the year ended December 31, 2023 was attri butable principally to transfer pricing for certain related party transactions. The $ 1.1 million reduction of uncertain tax positions recorded in the year ended December 31, 2023, principally reflected the strengthening of the U.S. dollar relative to foreign currencies. The $ 3.9 million reduction of uncertain tax positions recorded in the year ended December 31, 2023 was due to the expiry of applicable statutes of limitation for tax returns filed between 2007 and 2019 in several jurisdictions. The $ 6.0 million addition for current year uncertain tax positions recorded in the year ended December 31, 2022 was attributable principally to transfer pricing for certain related party transactions. The $ 4.3 million reduction of uncertain tax positions recorded in the year ended December 31, 2022, principally reflected the strengthening of the U.S. dollar relative to foreign currencies. At December 31, 2023, $ 2.2 million and $ 46.4 million of the net liability for uncertain tax positions were reflected in “Deferred tax liability” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. At December 31, 2022, $ 0.2 million, $ 1.5 million and $ 34.7 million of the net liability for uncertain tax positions were reflected in “Other assets,” “Deferred tax liability” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. At December 31, 2021, $ 0.3 million, $ 1.7 million and $ 47.6 million of the net liability for uncertain tax positions were reflected in “Other assets,” “Deferred tax liability” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. Of the net unrecognized tax benefits at December 31, 2023, 2022, and 2021,$ 48.6 million, $ 36.0 million and $ 48.9 million, respectively, would affect the effective tax rates if recognized. At Dec ember 31, 2023, the amount of accrued interest and penalties related to uncertain tax positions was $ 2.1 m illion and $ 25.0 million, respectively. At December 31, 2022, the amount of accrued interest and penalties related to uncertain tax positions was $ 3.1 million and $ 12.6 million, respectively. Interest exp ense (benefit) recognized during the Successor periods for the years ended December 31, 2023 and 2022 and the period from April 24, 2021 through December 31, 2021 and the Predecessor period from January 1, 2021 through April 23, 2021 related to uncertain tax positions was $ 0.8 million, $ 0.9 million, $ 1.8 million and $ 0.1 million, respectively. Penalties recognized during the Successor periods for the years ended December 31, 2023 and 2022 and the period from April 24, 2021 through December 31, 2021 and the Predecessor period from January 1, 2021 through April 23, 2021 related to uncertain tax positions were $ 16.6 million, $ 1.0 million, $ 0.04 million and $( 0.4 ) million, respectively. Of the total 2023 penalties, $ 16.4 million relates to a 2023 Egyptian court ruling against us for an additional tax assessment on income for taxable years 2006 through 2008. We expect the statute of limitations for the 2014 tax year to expire in 2024 for our subsidiary operating in Romania. We anticipate that the related unrecognized tax benefit will decrease by $ 0.7 million at that time. Tax Returns and Examinations . We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various foreign jurisdictions. We remain subject to examination by these jurisdictions or are contesting assessments raised upon examinations in respect to the year 2000 and the years 2006 to 2023. We are currently under examination or contesting assessments in Brazil, Egypt, Equatorial Guinea, Malaysia, Romania, and Trinidad and Tobago. In June 2023, we recorded an uncertain tax liability of $ 17.7 million related to an assessment by Egypt’s tax authorities for tax years 2006 through 2008. In January 2024, we received notice that Trinidad and Tobago’s tax authority had rejected our administrative appeal of an assessment for taxable year 2015. We intend to bring an action in the Tax Appeal Board seeking annulment of the assessment and have not recorded any reserve related to this disputed assessment. |
