Transocean, owner of the world's largest offshore oil rig fleet, said the latest assessment received this month for 2008 and 2009 related to accounting between subsidiaries, for both engineering services performed between them and transfer pricing for rig charters.
"If the authorities were to continue to pursue these positions with respect to subsequent years and were successful in such assertions, our effective tax rate on worldwide earnings with respect to years following 2009 could increase substantially," said Transocean, which booked an overall 2011 income tax expense of $395 million.
The $473 million of proposed adjustments exclude interest, but the company said in the filing released this week that it believed its tax returns were correct and planned to defend against the claims.
The company declined to comment further on Wednesday.
Problems with transfer pricing, generally, have grown with globalization of the world economy. The issue involves how to tax the earnings of foreign affiliates that transfer goods and services between themselves.
By setting internal transfer prices higher or lower than market value, foreign affiliates can shift profits from high-tax countries to low-tax countries, reducing the parent company's overall tax burden with the Internal Revenue Service (IRS).
"You can be a reasonable pig, but when you turn into a hog, the IRS comes after you," said Larry Langdon, a former IRS commissioner for large & mid-size business who is now at law firm Mayer Brown.
This is an especially important issue for rig contractors, since most of their assets are not fixed in one place.
Following President Barack Obama's 2008 election, Transocean moved to Switzerland from the Cayman Islands to secure a low-tax domicile. Noble Corp made the same shift soon after, and Ensco Plc then went to Britain in a move that Rowan Cos Inc said on Tuesday it would mimic.
In Norway last year, authorities indicted two Transocean-owned companies and some advisers over suspicions of tax fraud, alleging underpaid taxes of up to $1.8 billion.
The company has also faced other U.S. tax disputes in the past, including claims related to transfer pricing in 2004, though Transocean said a U.S. tax judge ruled in its favor on January 12 in that case and the adjustments were withdrawn.
The U.S. tax authorities also withdrew previously proposed adjustments for 2005, apart from about $50 million related to rig charter transfer pricing between its subsidiaries.
Langdon of Mayer Brown described that as a "win" for Transocean. "It established what the rules should be for them going forward," he said.
The company is still fighting a 2010 U.S. tax assessment of $278 million for 2006 and 2007 involving accounting between units, $295 million related to capital gains adjustments for 2006 to 2009 and a total of $248 million more for witholding taxes and penalties.
Transocean had enjoyed a good start to this week after reporting better-than-expected results and booking a lower-than-expected $1 billion charge related to the 2010 Gulf of Mexico disaster that destroyed one of its rigs.
Separately, Transocean said that Quantum, its partner in the joint venture which owns two ultra-deepwater rigs working for Reliance Industries off India, had exercised its option to exchange its stake for cash or Transocean shares.
The price will be negotiated for half of the JV, which has debts of $978 million, and Quantum must choose by March 29 whether to receive cash or shares, the latter based on a price of $49.69 each, Transocean said in a statement on Wednesday.
(Reporting by Braden Reddall in San Francisco and Kevin Drawbaugh in Washington; Editing by Bernard Orr, Tim Dobbyn and Bob Burgdorfer)
By Braden Reddall