|12 Months Ended|
Dec. 31, 2019
|Income Taxes [Abstract]|
8. INCOME TAXES
VAALCO and its domestic subsidiaries file a consolidated U.S. income tax return. Certain subsidiaries’ operations are also subject to foreign income taxes.
On December 22, 2017, the U. S. government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax Reform Act included significant changes to the U.S. income tax system including but not limited to: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; repeal of the Alternative Minimum Tax (“AMT”); full expensing provisions related to business assets; creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which resulted in a one time U.S. tax liability on those earnings that had not previously been repatriated to the U.S. (the “Transition Tax”). The Company has appropriately accounted for the Tax Reform Act provisions in its financial statements. However, the Company continues to monitor new regulations and legislation that has resulted due to the Tax Reform Act and will further analyze the implications as they arise.
Income taxes attributable to continuing operations for the years ended December 31, 2019, 2018, and 2017 are attributable to foreign taxes payable in Gabon as well as income taxes in the U.S.
Provision for income taxes related to income (loss) from continuing operations consists of the following:
As of December 31, 2019 and 2018, the Company had deferred tax assets of $108.8 million and $131.0 million, respectively primarily attributable to U.S. federal taxes related to basis differences in fixed assets, foreign tax credit carryforwards, and net operating loss carryforwards as well as foreign net operating losses for foreign jurisdictions. In assessing the realizability of the deferred tax assets, the Company considers all available positive and negative evidence, and the Company makes a determination whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future income in periods in which the deferred tax assets can be utilized. Numerous judgments and assumptions are inherent in this assessment including the determination of future taxable income, which is affected by a number of factors, including future operating conditions (particularly as related to prevailing crude oil prices) and changing tax laws.
As of December 31, 2019 and 2018, the Company anticipated it will only be able to partially utilize its deferred tax assets. On the basis of this evaluation, a valuation allowance of $84.6 million and $90.9 million were recorded as of December 31, 2019 and 2018, respectively. Valuation allowances reduce the deferred tax assets to the amount that is more likely than not to be realized.
Taxes paid in Gabon with respect to earnings from the Etame Marin block are determined under the provisions of the Etame PSC. In accordance with the Etame PSC, the Consortium maintains a “Cost Account,” which accumulates capital costs and operating expenses that are deductible against revenues, net of royalties, in determining taxable profits. For each calendar year, the Consortium is entitled to receive a percentage of the production (“Cost Recovery Percentage”) remaining after deducting royalties so long as there are amounts remaining in the Cost Account. Prior to the PSC Extension, the Cost Recovery Percentage was 70%. As a result of the PSC Extension, the Cost Recovery Percentage has been increased to 80% for the period from September 17, 2018 through September 16, 2028. See Note 9 for further discussion of the PSC Extension. After September 16, 2028, the Cost Recovery Percentage returns to 70%. The difference between revenues, net of royalties, and the costs recovered for the period is “Profit Oil.” As payment of corporate income taxes, the Consortium pays the government an allocation of the remaining Profit Oil production from the contract area ranging from 50% to 60%. The percentage of Profit Oil paid to the government as tax is a function of production rates. When the Cost Account is less than the entitled recovery percentage (either 70% or 80%, depending on the period), Profit Oil as a percentage of revenues increases and Gabon taxes paid increase as a percentage of revenues. We also record as income tax expense the increase or decrease in the value of the government’s allocation of Profit Oil which results due to change in value from the time the allocation is originally produced to the time the allocation is actually lifted.
Prior to the PSC Extension, the Cost Recovery Percentage was 70%, and the exploitation periods ended beginning in June 2021. Future proved reserves did not extend beyond 2021. Opportunities for increasing reserves by drilling wells were limited, and while oil prices had improved since 2016, they were not at the levels needed to recover VAALCO’s Cost Account. As a result of these factors, the ability to recognize the benefit from the potential deferred tax asset related to the difference between VAALCO’s Cost Account and the book basis of the Etame Marin block assets was deemed to be remote, and the deferred tax asset was not recognized. As a result of the PSC Extension in September 2018, the Cost Recovery Percentage increased to 80% and the exploitation periods were extended to at least September 16, 2028, and if the two option periods are elected, the period would extend to September 16, 2038. In addition to the benefits under the PSC Extension, the Company expected higher future crude oil prices based
on current Brent futures strip pricing over the next few years, and the Company expects future production from the drilling of two wells in 2019. Expectations related to future crude oil prices, drilling activities and other factors are evaluated quarterly in order to estimate the future taxable income which is considered in the evidence used to determine the realizability of deferred tax assets.
The primary differences between the financial statement and tax bases of assets and liabilities resulted in deferred tax assets associated with continuing operations at December 31, 2019 and 2018 are as follows:
Foreign tax credits will expire between the years and . Foreign tax credits of $9.6 million expired during the year. The alternative minimum tax credits do not expire, and foreign net operating losses (“NOLs”) are not subject to expiry dates. The NOLs for the Gabon subsidiaries are included in the respective subsidiaries’ cost oil accounts, which will be offset against future taxable revenues. The Company liquidated the United Kingdom subsidiary and plans to liquidate the Gabon branch associated with its Mutamba operations, both of which carried NOLs. Accordingly, the related deferred tax assets of $8.7 million and $15.9 million, respectively, were written off in 2018 with a corresponding offset to the valuation allowance. All of the Company’s U.S. federal NOLs that were incurred prior to 2018 will expire between and . U.S. federal NOLs incurred after 2017 do not expire. The ability to utilize NOLs and other tax attributes could be subject to a limitation if the Company were to undergo an ownership change as defined in Section 382 of the Tax Code. In assessing the realizability of the deferred tax assets, we consider all available positive and negative evidence in determining whether it is more likely than not that some or all of the deferred tax assets will not be realized. Numerous judgments and assumptions are inherent in this assessment including the determination of future taxable income, which is affected by a number of factors including future operating conditions (particularly as related to prevailing crude oil prices) and changing tax laws. The Company does not anticipate utilization of the foreign tax credits prior to expiration and have recorded a full valuation allowance on these deferred tax assets.
As a result of the 2017 tax legislation enacted in the U.S., the Company expects to realize the benefit from the AMT credit carryforwards.
The Company recognizes the financial statement benefit of a tax position only after determining that they are more likely than not to sustain the position following an audit. The Company believes that its income tax positions and deductions will be sustained on audit and therefore no reserves for uncertain tax positions have been established. Accordingly, no interest or penalties have been accrued as of December 31, 2019 and 2018. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Income (loss) from continuing operations before income taxes is attributable as follows:
The reconciliation of income tax expense (benefit) attributable to income (loss) from continuing operations to income tax on income (loss) from continuing operations at the U.S. statutory rate is as follows:
For the years ended December 31, 2019, 2018 and 2017, the Company is subject to foreign and U.S. federal taxes only, with no allocations made to state and local taxes. The following table summarizes the tax years that remain subject to examination by major tax jurisdictions:
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef