NOTE 9—INCOME TAXES

The provision for income taxes consisted of:


	Year Ended December 31,
	2012		2011		2010
	(In thousands)
Other than U.S.:
Current	$	125,402	$	85,474	$	39,352
Deferred		3,802		1,650		1,830

Total provision for income taxes	$	129,204	$	87,124	$	41,182

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


	Year Ended December 31,
	2012			2011			2010
	(In thousands)
U.S.	$	(82,035	)	$	(187,426	)	$	(132,673	)
Other than U.S.		425,165			438,717			436,467

Income before provision for income taxes	$	343,130		$	251,291		$	303,794

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


	Year Ended December 31,
	2012			2011			2010
Panama federal statutory rate		25.0	%		25.0	%		27.5	%
Non-Panama operations		(5.2	)		(24.7	)		(32.8	)
Effect of change in tax rates		0.0			0.3			12.0
Valuation allowance for deferred tax assets		14.2			30.7			2.9
Audit settlements and reserves		2.9			0.7			2.8
Other		0.8			2.7			1.2

Effective tax rate attributable to continuing operations		37.7	%		34.7	%		13.6	%

Effective January 1, 2011 the Panama tax rate was reduced to 25%.

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,
	2012			2011
	(In thousands)
Deferred tax assets:
Pension liability	$	5,779		$	4,030
Accrued liabilities for incentive compensation		13,630			8,762
Net operating loss carryforward		172,073			128,654
State tax credits and net operating loss carryforward		23,231			18,888
Long-term contracts		10,791			31,857
Other		8,606			5,316

Total deferred tax assets		234,110			197,507
Valuation allowance for deferred tax assets		(208,061	)		(160,266	)

Deferred tax assets	$	26,049		$	37,241

Deferred tax liabilities:
Property, plant and equipment	$	14,072		$	14,223
Prepaid drydock		6,633			8,018
Investments in joint ventures and affiliated companies		8,988			14,810
Unrealized exchange gains and other		3,424			3,410

Total deferred tax liabilities	$	33,117		$	40,461

Net deferred tax liability	$	(7,068	)	$	(3,220	)


	December 31,
	2012			2011
	(In thousands)
Deferred tax assets and liabilities in the accompanying consolidated balance sheets include:
Current deferred tax assets	$	9,765		$	11,931
Noncurrent deferred tax assets	$	4,180		$	6,227

Total	$	13,945		$	18,158

Current deferred tax liabilities	$	10,758		$	13,187
Noncurrent deferred tax liabilities		10,255			8,191

Total	$	21,013		$	21,378

Net deferred tax liability	$	(7,068	)	$	(3,220	)

At December 31, 2012, we had a valuation allowance of $208.1 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 $277.8 million available to offset future taxable income in foreign jurisdictions. Of the foreign net operating loss carryforwards, $12.4 million is scheduled to expire in years 2013 to 2015. The foreign net operating losses have a valuation allowance of $67.1 million against the related deferred taxes. We have U.S. federal net operating loss carryforwards of approximately $316.0 million, which includes $16.2 million for which the benefit will be recorded in APIC when realized, and carry an $104.9 million valuation allowance against the related deferred taxes. The U.S. federal net operating loss carryforwards are scheduled to expire in years 2023 to 2032. We have state net operating losses of $446.8 million available to offset future taxable income in states where we operate. The state net operating loss carryforwards begin to expire in 2013. We are carrying a valuation allowance of $23.2 million against the deferred tax asset related to the state loss carryforwards. We also have an approximate $12.9 million valuation allowance against other deferred tax assets.

We have provided $10.7 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, 2012, the undistributed earnings of these subsidiaries were $213.7 million. Unrecognized deferred income tax liabilities, including withholding taxes, of approximately $3.9 million would be payable upon distribution of these earnings.

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 and the United States. With few exceptions, we are no longer subject to tax examinations for years prior to 2008. 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 2008.

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


	Year Ended December 31,
	2012			2011			2010
Balance at beginning of period	$	31,664		$	26,412		$	59,113
Increases based on tax positions taken in the current year		10,830			8,197			3,511
Increases based on tax positions taken in prior years		158			2,590			920
Decreases based on tax positions taken in prior years		(1,465	)		(473	)		(875	)
Unrecognized tax benefits transferred to discontinued operations		—			—			(35,920	)
Decreases due to settlements with tax authorities		—			(2,697	)		(95	)
Decreases due to lapse of applicable statute of limitation		(671	)		(2,365	)		(242	)

Balance at end of period	$	40,516		$	31,664		$	26,412

The entire balance of unrecognized tax benefits at December 31, 2012 would reduce our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2012, we recorded liabilities of approximately $15.3 million for the payment of tax-related interest and penalties. At December 31, 2011 and 2010, we had recorded liabilities of approximately $15.3 million and $16.4 million, respectively, for the payment of tax-related interest and penalties.