Note 11— Income Taxes

Noble-UK is a company which is a tax resident in the UK and, as such, will be subject to UK corporation tax on its taxable profits and gains. A UK tax exemption is available in respect of qualifying dividends income and capital gains related to the sale of qualifying participations. We operate in various countries throughout the world, including the United States. The income or loss of the non-UK subsidiaries is not expected to be subject to UK corporation tax. Prior to the redomiciliation, Noble-Swiss was the group holding company and was exempt from Swiss cantonal and communal income tax on its worldwide income or loss, and was also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying participations. It is expected that the participation relief will result in a full exemption of participation income from Swiss federal income tax. We do not expect the redomiciliation from Switzerland to the UK to have a material impact on our effective tax rate.

Consequently, we have taken account of those tax exemptions and provided for income taxes based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries have a taxable presence for income tax purposes.

On December 22, 2017, the President of the United States signed the Act into law. The Act makes significant changes to various areas of U.S. federal income tax law by, among other things, lowering corporate income tax rates, implementing the territorial tax system, and rules limiting base erosion, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries of U.S parent shareholders.

During the fourth quarter of 2017, the Act resulted in the write-down of our U.S. net deferred tax liabilities. In accordance with the guidance issued in SAB No. 118, during the third quarter of 2018, we finalized our provisional amounts recorded as we completed our technical analysis, computations and tax law interpretations and filed our 2017 U.S. tax return. As a result, we recognized an additional tax benefit of $24.9 million.

The Company has considered new provisions of The Act that became effective in 2018. Two such provisions, which had an impact on the Company’s financial results for the current period, are as follows:


•	The Act limits the deduction of interest paid or accrued on indebtedness. This limitation results in a deferral for U.S. federal income tax purposes and requires the recording of a deferred tax asset for the benefit of the interest deduction carryforward. The interest deduction carryforward has an indefinite life.


•	The Act eliminates the U.S. federal income tax carryback provision for net operating losses (“NOLs”) and limits the taxpayer’s ability to utilize NOL carryforwards to 80 percent of taxable income. The NOL carryforward has an indefinite life.

The Act also introduces a new anti-deferral provision, which subjects a U.S. parent shareholder to current tax on certain income, referred to as Global Intangible Low-Taxed Income, of its foreign subsidiaries. The Company has adopted a policy to treat tax due on future U.S. inclusions in taxable income as period costs when incurred.

The Company continues to monitor developments in regulations.

The components of the net deferred taxes are as follows:



	2018			2017
Deferred tax assets
United States
Net operating loss carry forwards	$	95,577		$	—
Disallowed interest deduction carryforwards	51,423			—
Deferred pension plan amounts	11,887			10,758
Accrued expenses not currently deductible	9,688			11,585
Other	1,936			2,150
Non-U.S.
Net operating loss carry forwards	26,441			—
Disallowed interest deduction carryforwards	6,254			—
Deferred pension plan amounts	670			134
Other	—			14,085
Deferred tax assets	203,876			38,712
Less: valuation allowance	(12,306		)	—
Net deferred tax assets	$	191,570		$	38,712
Deferred tax liabilities
United States
Excess of net book basis over remaining tax basis	$	(254,669	)	$	(182,401	)
Other	(6,482		)	(6,652		)
Non-U.S.
Excess of net book basis over remaining tax basis	(1,066		)	—
Other	(1,596		)	(402		)
Deferred tax liabilities	(263,813		)	(189,455		)
Net deferred tax liabilities	$	(72,243	)	$	(150,743	)

Income (loss) from continuing operations before income taxes consists of the following:



	Year Ended December 31,
	2018			2017			2016
United States	$	(136,083	)	$	(81,329	)	$	(428,087	)
Non-U.S.	(1,101,093		)	(368,485		)	(538,942		)
Total	$	(1,237,176	)	$	(449,814	)	$	(967,029	)

The income tax provision (benefit) for continuing operations consists of the following:



	Year Ended December 31,
	2018			2017			2016
Current- United States	$	(56,574	)	$	(227,707	)	$	61,928
Current- Non-U.S.	18,348			29,010			18,813
Deferred- United States	(67,371		)	257,432			(189,880		)
Deferred- Non-U.S.	(1,044		)	(16,106		)	(17		)
Total	$	(106,641	)	$	42,629		$	(109,156	)

The following is a reconciliation of our reserve for uncertain tax positions, excluding interest and penalties. In 2016, we released an uncertain tax position in Libya in the gross amount of $40 million coupled with a related tax benefit of $13 million.



	2018			2017			2016
Gross balance at January 1,	$	174,437		$	159,826		$	169,687
Additions based on tax positions related to current year	97			14,187			15,665
Additions for tax positions of prior years	25			1,284			18,662
Reductions for tax positions of prior years	(12,806		)	(860		)	(43,701		)
Expiration of statutes	(497		)	—			(487		)
Tax settlements	—			—			—
Gross balance at December 31,	161,256			174,437			159,826
Related tax benefits	(1,008		)	(1,008		)	(1,008		)
Net reserve at December 31,	$	160,248		$	173,429		$	158,818

The liabilities related to our reserve for uncertain tax positions are comprised of the following:



	2018		2017
Reserve for uncertain tax positions, excluding interest and penalties	$	160,248	$	173,429
Interest and penalties included in “Other liabilities”	23,538		18,431
Reserve for uncertain tax positions, including interest and penalties	$	183,786	$	191,860

At December 31, 2018, the reserves for uncertain tax positions totaled $183.8 million (net of related tax benefits of 1.0 million). If a portion or all of the December 31, 2018 reserves are not realized, the provision for income taxes could be reduced by up to $183.8 million. At December 31, 2017, the reserves for uncertain tax positions totaled $191.9 million (net of related tax benefits of 1.0 million).

It is reasonably possible that our existing liabilities related to our reserve for uncertain tax positions may fluctuate in the next 12 months primarily due to the completion of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of changes in our existing liabilities due to various uncertainties, such as the unresolved nature of various audits.

We include, as a component of our “Income tax provision,” potential interest and penalties related to recognized tax contingencies within our global operations. Interest and penalties resulted in an income tax expense of $5.1 million in 2018, an income tax expense of $4.7 million in 2017 and an income tax benefit of $2.7 million in 2016.

During the year ended December 31, 2018, our income tax provision included non-cash items of $35.6 million related to the impairment of three rigs and certain capital spares. See “Note 6— Loss on Impairment” for additional information.

We conduct business globally and, as a result, we file numerous income tax returns in U.S. and in non-U.S. jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including in jurisdictions such as Brazil, Brunei, Bulgaria, Canada, Cyprus, Egypt, Hungary, Malta, Mexico, Nigeria, Norway, Saudi Arabia, Argentina, Australia, Denmark, Gabon, Luxembourg, Malaysia, the Netherlands, Oman, Qatar, Tanzania, Singapore, Suriname, Switzerland, the United Kingdom and the United States. We are no longer subject to U.S. Federal income tax examinations for years before 2010 and non-U.S. income tax examinations for years before 2000.

Noble-UK conducts substantially all of its business through Noble-Cayman and its subsidiaries. The income or loss of our non-UK subsidiaries is not subject to UK income tax. Earnings are taxable in the United Kingdom at the UK statutory rate of 19 percent. The ongoing consultative process in the United Kingdom and a possible change in law could materially impact our tax rate on operations in the United Kingdom continental shelf. A reconciliation of tax rates outside of the United Kingdom and the Cayman Islands to our Noble-UK effective rate for continuing operations is shown below:



	Year Ended December 31,
	2018		2017		2016
Effect of:
Tax rates which are different than the UK and Cayman Island rates	4.0	%	23.4	%	8.4	%
Tax impact of asset impairment	2.9	%	11.7	%	3.9	%
Tax impact of tax restructuring	—	%	(76.1	)%	—	%
Tax impact of the Act	2.1	%	33.4	%	—	%
Reserve for (resolution of) tax authority audits	(0.4	)%	(1.9	)%	(1.0	)%
Total	8.6	%	(9.5	)%	11.3	%

Due to foreign tax credit limitation constraints, in 2018, 2017 and 2016, the Company has made the determination to take foreign tax expense as a deduction against U.S. taxable income.

At December 31, 2018, the Company asserted that the investment in foreign subsidiaries is permanent in nature, and estimated that there are no net cumulative earnings in its foreign subsidiaries.

For interim and annual reporting periods beginning after December 15, 2017, ASU No. 2016-16 will be applied on a modified retrospective basis to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. As the result of the application of this standard, we recorded deferred charges of $148.4 million in to “Retained earnings” on our Consolidated Balance Sheets.