NOTE 9—INCOME TAXES

The provision for income taxes consisted of:


	Year Ended December 31,
	2011		2010		2009
	(In thousands)
Other than U.S.:
Current	$	85,474	$	39,352	$	55,309
Deferred		1,650		1,830		5,252

Total provision for income taxes⁽¹⁾	$	87,124	$	41,182	$	60,561

(1)

We have no income tax provision applicable to U.S. federal, state or local jurisdictions.

The geographic sources of income before income taxes are as follows:


	Year Ended December 31,
	2011			2010			2009
	(In thousands)
U.S.	$	(187,426	)	$	(132,673	)	$	(66,688	)
Other than U.S.		438,717			436,467			336,801

Income before provision for income taxes	$	251,291		$	303,794		$	270,113

The following is a reconciliation of the Panama statutory federal tax rate to the consolidated effective tax rate:


	Year Ended December 31,
	2011			2010			2009
Panama federal statutory rate		25	%		27.5	%		30	%
Non-Panama operations		(24.7	)		(32.8	)		(27.4	)
Effect of change in tax rates		0.3			12.0			—
Valuation allowance for deferred tax assets		30.7			2.9			19.2
Audit settlements		0.7			2.8			2.6
Other		2.7			1.2			(2.0	)

Effective tax rate attributable to continuing operations		34.7	%		13.6	%		22.4	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, as well as operating loss and tax credit carryforwards.

Significant components of deferred tax assets and liabilities were as follows:


	December 31,
	2011			2010
	(In thousands)
Deferred tax assets:
Pension liability	$	4,030		$	3,093
Accrued liabilities for incentive compensation		8,762			23,664
Net operating loss carryforward		128,654			60,172
State tax credits and net operating loss carryforward		18,888			25,439
Long-term contracts		31,857			9,820
Other		5,316			5,629

Total deferred tax assets		197,507			127,817
Valuation allowance for deferred tax assets		(160,266	)		(95,734	)

Deferred tax assets	$	37,241		$	32,083

Deferred tax liabilities:
Property, plant and equipment	$	14,223		$	16,326
Prepaid drydock		8,018			7,859
Investments in joint ventures and affiliated companies		14,810			10,630
Unrealized exchange gains and other		3,410			2,993

Total deferred tax liabilities	$	40,461		$	37,808

Net deferred tax liability	$	(3,220	)	$	(5,725	)


	December 31,
	2011			2010
	(In thousands)
Deferred tax assets and liabilities in the accompanying consolidated balance sheets include:
Current deferred tax assets	$	11,931		$	10,323
Noncurrent deferred tax assets		6,227			—

Total	$	18,158		$	10,323

Current deferred tax liabilities	$	13,187		$	12,849
Noncurrent deferred tax liabilities		8,191			3,199

Total	$	21,378		$	16,048

Net deferred tax liability	$	(3,220	)	$	(5,725	)

At December 31, 2011, we had a valuation allowance of $160.3 million for deferred tax assets that we expect cannot be realized through carrybacks, future reversals of existing taxable temporary differences or based on our estimate of future taxable income. We believe that our remaining deferred tax assets will more likely than not be realized through carrybacks, future reversals of existing taxable temporary differences and future taxable income. Any changes to our estimated valuation allowance could be material to our consolidated financial statements.

We have foreign net operating loss carryforwards of $221.4 million available to offset future taxable income in foreign jurisdictions. Of the foreign net operating loss carryforwards $69.9 million is scheduled to expire in the years 2012 to 2014. The foreign net operating losses have a valuation allowance of $47.3 million against the related deferred taxes. We have U.S. federal net operating loss carryforwards of $245.9 million, which include $13.6 million for which the benefit will be recorded in APIC when realized, and carry an $81.3 million valuation allowance against the related deferred taxes. The U.S. federal net operating loss carryforwards are scheduled to expire in the years 2023 to 2031. We have state net operating losses of $363.2 million available to offset future taxable income in states where we operate. The state net operating loss carryforwards begin to expire in 2012. We are carrying a valuation allowance of $18.9 million against the deferred tax asset related to the state loss carryforwards. We also have an approximate $13 million valuation allowance against other deferred tax assets.

We have provided $16.0 million of taxes on earnings we intend to remit. All other earnings are considered permanently reinvested. We would be subject to withholding taxes if we were to distribute these permanently reinvested earnings from our U.S. subsidiaries and certain foreign subsidiaries. At December 31, 2011, the undistributed earnings of these subsidiaries were $223.9 million. Unrecognized deferred income tax liabilities, including withholding taxes, of approximately $5 million would be payable upon distribution of these earnings. U.S. state income tax returns are generally subject to examination for a period of three to five years after filing the respective returns. We do not have any U.S. state returns under examination for years prior to 2007.

We conduct business globally and, as a result, we or one or more of our subsidiaries file income tax returns in a number of jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Indonesia, Singapore, Saudi Arabia, Kuwait, India, Qatar, Azerbaijan, Russia and the United States. With few exceptions, we are no longer subject to tax examinations for years prior to 2007.

A reconciliation of unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
	2011			2010			2009
Balance at beginning of period	$	26,412		$	59,113		$	57,484
Increases based on tax positions taken in the current year		8,197			3,511			9,895
Increases based on tax positions taken in prior years		2,590			920			1,322
Decreases based on tax positions taken in prior years		(473	)		(875	)		(775	)
Unrecognized tax benefits transferred to discontinued operations		—			(35,920	)		—
Decreases due to settlements with tax authorities		(2,697	)		(95	)		(8,813	)
Decreases due to lapse of applicable statute of limitation		(2,365	)		(242	)		—

Balance at end of period	$	31,664		$	26,412		$	59,113

(1)

2009 amounts include discontinued operations.

The entire balance of unrecognized tax benefits at December 31, 2011 would reduce our effective tax rate if recognized.

During the year ended December 31, 2011, we made additional accruals of $1.3 million offset by a reduction of $2.4 million related to payments, lapses and currency exchange resulting in recorded liabilities of approximately $15.3 million for the payment of tax-related interest and penalties. At December 31, 2010 and 2009, we had recorded liabilities of approximately $16.4 million and $15.6 million, respectively, for the payment of tax-related interest and penalties. The additional accrual of $5.1 million during 2010 was offset by a reduction of $4.3 million related to the spin-off of B&W.