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Income Taxes
12 Months Ended
Dec. 31, 2023
Income Taxes  
Income Taxes

Note 11—Income Taxes

Overview—Transocean Ltd., a holding company and Swiss resident, is subject to Swiss federal, cantonal and communal income tax.  For Swiss income taxes, however, qualifying net dividend income and net capital gains on the sale of qualifying investments in subsidiaries are exempt from taxation.  Consequently, there is not a direct relationship between our Swiss earnings before income taxes and our Swiss income tax expense.

Tax provision and rate—The components of our income tax provision (benefit) were as follows (in millions):

Years ended December 31, 

 

    

2023

    

2022

    

2021

 

Current tax expense (benefit)

 

$

(5)

$

13

$

(7)

Deferred tax expense

18

46

128

Income tax expense

 

$

13

$

59

$

121

In the years ended December 31, 2023, 2022 and 2021, our effective tax rate was (1.4) percent, (10.4) percent and (25.7) percent, respectively, based on loss before income tax expense.  The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures.

A reconciliation of the income tax benefit computed at the Swiss holding company federal statutory rate of 7.83% and our reported consolidated income tax expense was as follows (in millions):

Years ended December 31, 

 

    

2023

    

2022

    

2021

 

Income tax benefit at Swiss federal statutory rate

 

$

(74)

$

(44)

$

(36)

Earnings subject to rates different than the Swiss federal statutory rate

129

52

78

Deemed profits taxes

11

10

17

Withholding taxes

5

12

10

Changes in valuation allowance

(23)

79

1,167

Changes in unrecognized tax benefits, net

(37)

2

(43)

Swiss Federal Act on Tax Reform and AHV Financing

96

(1,095)

Audit settlement

12

Changes due to organizational restructuring

(162)

16

Losses on impairment

5

Other, net

2

2

2

Income tax expense

 

$

13

$

59

$

121

In January 2020, Switzerland made effective the Federal Act on Tax Reform and AHV Financing (“TRAF”).  In March 2020, we entered into discussions with the Swiss tax authorities regarding the manner by which the TRAF applies to certain Swiss subsidiaries, which

allows us to access historic depreciation and costs related to financing assets not previously deducted on Swiss tax returns, which can be apportioned to offset taxable income based on the remaining useful lives of the rigs and financing assets.  In the three months ended December 31, 2021, we reached an agreement with the Swiss Tax authorities regarding the TRAF treatment.  At December 31, 2023 and 2022, we had a deferred tax liability of $264 million and $226 million, respectively, and a deferred tax asset of $1.21 billion and $1.23 billion, respectively, offset with a valuation allowance of $1.10 billion, associated with TRAF.

Deferred taxes—The significant components of our deferred tax assets and liabilities were as follows (in millions):

December 31, 

 

   

2023

   

2022

 

Deferred tax assets

Swiss historic depreciation and financing asset costs

$

1,210

$

1,226

Net operating loss carryforwards

 

1,264

1,115

Interest expense limitation

87

77

United Kingdom charter limitation

53

53

Accrued expenses

47

36

Tax credits

4

11

Deferred income

7

Accrued payroll costs not currently deductible

16

18

Loss contingencies

4

4

Other

54

43

Valuation allowance

(1,884)

(1,910)

Total deferred tax assets, net of allowance

855

680

Deferred tax liabilities

Depreciation

(1,342)

(1,150)

Other

(9)

(10)

Total deferred tax liabilities

(1,351)

(1,160)

Deferred tax assets (liabilities), net

 

$

(496)

$

(480)

We include taxes related to the earnings of all of our subsidiaries since we do not consider the earnings of any of our subsidiaries to be indefinitely reinvested.

At December 31, 2023 and 2022, our deferred tax assets included U.S. tax credits of $4 million and $11 million, respectively, which will expire between 2024 and 2026.  Deferred tax assets related to our net operating losses were generated in various worldwide tax jurisdictions.  At December 31, 2023, our net deferred tax assets related to our net operating loss carryforwards included $585 million, which do not expire, and $855 million, which will expire between 2024 and 2041.

As of December 31, 2023, our consolidated cumulative loss incurred over the recent three-year period represented significant objective negative evidence for the evaluation of the realizability of our deferred tax assets.  Because such evidence has limited our ability to consider other subjective evidence, we evaluate each jurisdiction separately.  We consider objective evidence, such as contract backlog activity, in jurisdictions in which we have profitable contracts, and the ability to carryback losses or utilize losses against potential exposures.  If estimated future taxable income changes during the carryforward periods or if the cumulative loss is no longer present, we may adjust the amount of deferred tax assets that we expect to realize.  At December 31, 2023 and 2022, due to uncertainty of realization, we had a valuation allowance of $1.88 billion and $1.91 billion, respectively, on net operating losses and other deferred tax assets due to the uncertainty of realization.

Unrecognized tax benefits—The changes to unrecognized tax benefits, excluding interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):

Years ended December 31, 

 

   

2023

   

2022

   

2021

 

Balance, beginning of period

 

$

444

$

402

$

378

Additions for current year tax positions

45

28

28

Additions for prior year tax positions

5

62

46

Reductions related to statute of limitation expirations and changes in law

(14)

(13)

(19)

Reductions due to settlements

(5)

(5)

(31)

Reductions for prior year tax positions

(26)

(30)

Balance, end of period

 

$

449

$

444

$

402

Our unrecognized tax benefits, including related interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):

December 31, 

 

2023

   

2022

 

Unrecognized tax benefits, excluding interest and penalties

$

449

$

444

Interest and penalties

9

27

Unrecognized tax benefits, including interest and penalties

$

458

$

471

In the years ended December 31, 2023, 2022 and 2021, we recognized, as a component of our income tax provision, benefit of $18 million, expense of $6 million and expense of $8 million, respectively, related to interest and penalties associated with our unrecognized tax benefits.  As of December 31, 2023, we have unrecognized benefits of $458 million, including interest and penalties, against which we have recorded net operating loss deferred tax assets of $411 million, resulting in net unrecognized tax benefits of $47 million, including interest and penalties, that upon reversal would favorably impact our effective tax rate.  During the year ending December 31, 2024, it is reasonably possible that our existing liabilities for unrecognized tax benefits may increase or decrease, primarily due to the progression of open audits and the expiration of statutes of limitation.  However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.

Tax positions and returns—We conduct operations through our various subsidiaries in countries throughout the world.  Each country has its own tax regimes with varying nominal rates, deductions and tax attributes that are subject to changes resulting from new legislation, interpretation or guidance.  From time to time, as a result of these changes, we may revise previously evaluated tax positions, which could cause us to adjust our recorded tax assets and liabilities.  Tax authorities in certain jurisdictions are examining our tax returns and, in some cases, have issued assessments.  We intend to defend our tax positions vigorously.  Although we can provide no assurance as to the outcome of the aforementioned changes, examinations or assessments, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position or results of operations; however, it could have a material adverse effect on our consolidated statement of cash flows.

Brazil tax investigations—In December 2005, the Brazilian tax authorities began issuing tax assessments with respect to our tax returns for the years 2000 through 2004.  In May 2014, the Brazilian tax authorities issued an additional tax assessment for the years 2009 and 2010.  We filed protests with the Brazilian tax authorities for the assessments and are engaged in the appeals process, and a portion of two cases were favorably closed.  As of December 31, 2023, the remaining aggregate tax assessment, including interest and penalties, was for corporate income tax of BRL 698 million, equivalent to approximately $144 million, and indirect tax of BRL 90 million, equivalent to $19 million.  We believe our returns are materially correct as filed, and we are vigorously contesting these assessments.  An unfavorable outcome on these proposed assessments could have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.