TAX SHARING AGREEMENT
BETWEEN
TRANSOCEAN HOLDINGS INC.
AND
TODCO
TABLE OF CONTENTS
SECTION 1. DEFINITION OF TERMS . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2. ALLOCATION OF INCOME TAX LIABILITIES. . . . . . . . . . . . . . 8
2.1 Federal Income Taxes. . . . . . . . . . . . . . . . . . . . . . . 8
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2.2 State Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . 9
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2.3 Foreign Income Taxes. . . . . . . . . . . . . . . . . . . . . . . 10
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2.4 Other Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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2.5 Special Rules.. . . . . . . . . . . . . . . . . . . . . . . . . . 11
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2.6 Tax Payments and Intercompany Xxxxxxxx. . . . . . . . . . . . . . 13
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SECTION 3. PREPARATION AND FILING OF TAX RETURNS . . . . . . . . . . . . . 13
3.1 Combined Returns and Consolidated Returns.. . . . . . . . . . . . 13
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3.2 Separate Returns and Other Returns. . . . . . . . . . . . . . . . 13
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3.3 Special Rules Relating to the Preparation of Tax Returns. . . . . 14
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SECTION 4. TAX BENEFITS, REFUNDS, AND CARRYBACKS . . . . . . . . . . . . . 15
4.1 Compensation by Holdings for TODCO's Post-IPO Tax Assets. . . . . 15
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4.2 Compensation by TODCO for Pre-IPO Tax Assets. . . . . . . . . . . 15
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4.3 Claims for Refund from Carrybacks.. . . . . . . . . . . . . . . . 19
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4.4 Tax Benefits Resulting from Exercise of Employee Stock Options. . 19
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SECTION 5. TAX PAYMENTS AND INTERCOMPANY XXXXXXXX. . . . . . . . . . . . . 20
5.1 Consolidated and Combined Returns . . . . . . . . . . . . . . . . 20
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5.2 Payment of Refunds, Tax Benefits, and Tax Assets. . . . . . . . . 20
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5.3 Initial Determinations and Subsequent Adjustments . . . . . . . . 21
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5.4 Indemnification Payments. . . . . . . . . . . . . . . . . . . . . 22
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5.5 Payments by or to Other Members of the Groups . . . . . . . . . . 22
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5.6 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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5.7 Tax Consequences of Payments. . . . . . . . . . . . . . . . . . . 23
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5.8 Subordination Agreement . . . . . . . . . . . . . . . . . . . . . 23
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SECTION 6. ASSISTANCE AND COOPERATION. . . . . . . . . . . . . . . . . . . 23
SECTION 7. TAX RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.1 Retention of Tax Records. . . . . . . . . . . . . . . . . . . . . 24
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7.2 Access to Tax Records . . . . . . . . . . . . . . . . . . . . . . 24
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SECTION 8. TAX CONTESTS. . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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8.2 Control of Tax Contests . . . . . . . . . . . . . . . . . . . . . 24
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8.3 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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SECTION 9. RESTRICTION ON CERTAIN POST-IPO ACTIONS OF TODCO. . . . . . . . 25
SECTION 10. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 25
10.1 Survival of Obligations . . . . . . . . . . . . . . . . . . . . . 25
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10.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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10.3 Breach of Agreement . . . . . . . . . . . . . . . . . . . . . . . 26
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10.4 Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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10.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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10.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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10.7 Binding Effect; Assignment. . . . . . . . . . . . . . . . . . . . 27
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10.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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10.9 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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10.10 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . 27
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10.11 Change in Law . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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10.12 Authorization, Etc. . . . . . . . . . . . . . . . . . . . . . . . 27
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10.13 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . 27
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TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (this "Agreement") is entered into as of
February 4, 2004, between Transocean Holdings Inc., a Delaware corporation
("Holdings"), and TODCO (formerly named R&B Falcon Corporation), a Delaware
corporation. Capitalized terms used in this Agreement are defined herein. Unless
otherwise indicated, all "Section" references in this Agreement are to sections
of this Agreement.
RECITALS
WHEREAS, TODCO is a direct wholly owned subsidiary of Holdings, which
in turn is a direct wholly owned subsidiary of Transocean Inc., a company
organized under the laws of the Cayman Islands ("Transocean"); and
WHEREAS, the Board of Directors of Transocean has determined that it
would be appropriate and desirable for Transocean to separate the TODCO Tax
Group from the Transocean Tax Group and, in that connection, for each Group to
acquire certain assets from and assume certain liabilities of the other Group;
and
WHEREAS, the Board of Directors of each of TODCO and Transocean
Holdings has also approved such transactions; and
WHEREAS, TODCO intends to acquire a portion or all of its outstanding
debt held by Transocean in exchange for newly issued shares of TODCO common
stock, and it is expected that as a result of such exchange TODCO will cease to
be a member of the Holdings Consolidated Group; and
WHEREAS, Transocean, Holdings and TODCO currently contemplate that
TODCO will make an initial public offering ("IPO") of shares of TODCO Class A
Common Stock held by Transocean and Holdings pursuant to a registration
statement on Form S-1 filed pursuant to the Securities Act of 1933; and
WHEREAS, Transocean wishes to retain the flexibility so that, if
following the IPO Transocean's direct and indirect ownership of the voting power
of all of the outstanding shares of Voting Stock is at least 80%, Transocean may
distribute to the holders of its ordinary shares (including any distribution in
exchange for Transocean ordinary shares or other securities), by means of a
distribution or exchange offer, shares of Voting Stock it then owns in a
transaction intended to qualify as a tax-free distribution under Section 355 of
the Code or any corresponding provision of any successor statute; and
WHEREAS, the parties set forth in a Master Separation Agreement the
principal arrangements between them regarding the separation of the TODCO Tax
Group from the Transocean Tax Group, the IPO and any distribution; and
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WHEREAS, the parties desire to provide for and agree upon the
allocation between the parties of liabilities for Taxes arising prior to, as a
result of, and subsequent to the IPO, and to provide for and agree upon other
matters relating to Taxes.
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements set forth below, the parties hereto agree as follows:
SECTION 1. DEFINITION OF TERMS. For purposes of this Agreement
(including the recitals hereof), the following terms have the following
meanings:
"Agreement" means this Tax Sharing Agreement.
"Applicable Discount Rate" means, with respect to any year, the
fraction designated in Schedule 1.1.
"Carryback" means any net operating loss, net capital loss, tax credit
or other similar Tax Item which may or must be carried from one Tax Year to a
prior Tax Year under applicable Tax Law.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from
time to time, or any successor law.
"Combined Return" means any State or Foreign Income Tax Return which
is filed by one or more members of the Transocean Tax Group and which includes,
to any extent, one or more members of the TODCO Tax Group or in which income,
deductions, or credits of any member of the Transocean Tax Group may be combined
with, or offset against, income, deductions, or credits of any member of the
TODCO Tax Group.
"Combined Year" means, with respect to any State Income Tax or Foreign
Income Tax, as applicable, any Tax Year for which a Combined Return is filed;
provided, however, that Combined Year means only that portion of such Tax Year
in which one or more members of the TODCO Tax Group are included in the Combined
Return.
"Company" means Holdings or TODCO or one of their Subsidiaries, as the
context requires.
"Consolidated Return" means any Federal Income Tax Return which is
filed on a consolidated basis by Holdings (or any other member of the Transocean
Tax Group), as common parent, and its eligible Subsidiaries (as determined under
Section 1504(a) of the Code or any successor provision) and which includes, to
any extent, TODCO and its eligible Subsidiaries (as determined under Section
1504(a) of the Code or any successor provision).
"Consolidated Year" means, with respect to any Federal Income Tax, any
Tax Year for which a Consolidated Return is filed; provided, however, that
Consolidated
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Year means only that portion of such Tax Year in which TODCO and its eligible
Subsidiaries are included in the Consolidated Return.
"Deconsolidation Date" means the last day, occurring on or after the
Effective Date but before the IPO Closing Date, on which TODCO is a member of
the affiliated group, within the meaning of Section 1504(a) of the Code, of
which Holdings is the common parent.
"Effective Date" means the date recited above on which the parties
entered into this Agreement.
"Federal Income Tax" means any Income Tax imposed by the United States
federal government (including, without limitation, the Taxes imposed by Sections
11, 55, 59A and 1201(a) of the Code).
"Federal Income Tax Return" means any report of Federal Income Taxes
due, any claims for refund of Federal Income Taxes paid, any information return
with respect to Federal Income Taxes, or any other similar report, statement,
declaration, or document required to be filed under U.S. federal income Tax Law,
including any attachments, exhibits, or other materials submitted with any of
the foregoing, and including any amendments or supplements to any of the
foregoing.
"Foreign Country" means any country other than the United States.
"Foreign Income Tax" means any Income Tax imposed by any Foreign
Country or any possession of the United States or by any political subdivision
of any Foreign Country or possession of the United States.
"Group" means the Transocean Tax Group or the TODCO Tax Group, as the
context requires.
"Holdings" has the meaning set forth in the recital hereto.
"Holdings Consolidated Group" means Holdings and its eligible
Subsidiaries (as determined under Section 1504(a) of the Code or any successor
provision) that file a Federal Income Tax Return on a consolidated basis.
"Income Tax" means all Taxes (i) based upon, measured by, or
calculated with respect to, net income, net profits or deemed net profits
(including, without limitation, any capital gains Tax, minimum Tax based upon,
measured by, or calculated with respect to, net income, net profits or deemed
net profits, any Tax on items of Tax preference and depreciation recapture or
clawback, but not including sales, use, real or personal property, gross or net
receipts, gross profits, transfer and similar Taxes), (ii) imposed by a Foreign
Country which qualifies under Section 903 of the Code or (iii) based upon,
measured by, or calculated with respect to multiple bases (including, but not
limited to, corporate franchise and occupation Taxes) if such Tax may be based
upon, measured by, or calculated with respect to one or more bases described in
clause (i) above. Notwithstanding the above, the Taxes described in clause
(iii) shall be considered
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Income Taxes only to the extent that such Taxes exceed the hypothetical amount
of such Taxes that would have been imposed had all of the bases described in
clause (i) on which such Taxes are based, measured, or calculated been equal to
zero.
"IPO" has the meaning set forth in the recital hereto.
"IPO Closing Date" means the first date on which the proceeds of any
sale of TODCO Class A Common Stock to the underwriters in the IPO are received
by Transocean or any of its Subsidiaries.
"Master Separation Agreement" means the Master Separation Agreement
entered into by Transocean and TODCO on February 4, 2004.
"Other Return" means any Tax Return which is not a Federal, State, or
Foreign Income Tax Return.
"Other Tax" means any Tax that is not an Income Tax.
"Payment Date" means (x) with respect to any Consolidated Return, the
due date for any required installment of estimated taxes determined under Code
Section 6655, the due date (determined without regard to extensions) for filing
the return determined under Code Section 6072, and the date the return is filed,
and (y) with respect to any Combined Return, Separate Return, or Other Return
the corresponding dates determined under the applicable Tax Law.
"Post-IPO Tax Asset" means a Tax Asset created after the IPO Closing
Date as determined under the principles of Section 4.2(b) of this Agreement.
"Pre-IPO Tax Asset" means a Tax Asset created on or before the IPO
Closing Date as determined under the principles of Section 4.2(b) of this
Agreement.
"Separate Return" means any Federal, State, or Foreign Income Tax
Return which is not a Consolidated Return or Combined Return.
"Separate Return Year" means, with respect to any Federal Income Tax,
State Income Tax or Foreign Income Tax, as applicable, a Tax Year or portion
thereof which is not a Consolidated Year or Combined Year.
"State Income Tax" means any Income Tax imposed by any State of the
United States or by any political subdivision of any such State.
"Straddle Period" means any Tax Year beginning on or before the IPO
Closing Date and ending after the IPO Closing Date.
"Subsidiary" means any entity that directly or indirectly is
"controlled" by the person or entity in question. "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities, by contract or otherwise.
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"Tax" or "Taxes" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, severance, occupation, service, sales, use, license, lease, transfer,
import, export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any Tax Authority and any interest, penalties, additions to
tax, or additional amounts in respect of the foregoing.
"Tax Asset" means any Tax Item that could reduce a Tax, including a
net operating loss, net capital loss, loss deferred under Section 267(f) of the
Code, investment tax credit, foreign tax credit, charitable deduction or credit
related to alternative minimum tax or any other Tax credit, but does not include
the tax basis of any asset.
"Tax Authority" means, with respect to any Tax, the governmental
entity or political subdivision, agency, commission or authority thereof that
imposes such Tax, and the agency, commission or authority (if any) charged with
the assessment, determination or collection of such Tax for such entity or
subdivision.
"Tax Benefit" means a reduction in the Tax liability of a taxpayer.
"Tax Contest" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any member of either Group (including any administrative
or judicial review of any claim for refund).
"Tax Item" means, with respect to any Income Tax, any item of income,
gain, loss, deduction, credit or other attribute that may have the effect of
increasing or decreasing any Tax.
"Tax Law" means the law of any governmental entity or political
subdivision thereof, and any controlling judicial or administrative
interpretations of such law, relating to any Tax.
"Tax Records" means Tax Returns, Tax Return work papers, documentation
relating to any Tax Contests, and any other books of account or records required
to be maintained under applicable Tax Laws (including but not limited to Section
6001 of the Code) or under any record retention agreement with any Tax
Authority.
"Tax Return" means any report of Taxes due, any claims for refund of
Taxes paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under any
applicable Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing, and including any amendments or supplements
to any of the foregoing.
"Tax Year" means, with respect to any Tax, the year, or shorter
period, if applicable, for which the Tax is reported as provided under
applicable Tax Law.
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"TODCO" has the meaning set forth in the recital hereto.
"TODCO Business" has the meaning set forth in the Master Separation
Agreement.
"TODCO Tax Group" means TODCO and all persons that are Subsidiaries of
TODCO immediately after the IPO Closing Date, including without limitation the
Subsidiaries set forth in Schedule 1.2 and persons that become Subsidiaries of
TODCO thereafter. If the Transocean Tax Group transfers any part of the TODCO
Business (including any Subsidiary) to the TODCO Tax Group, or the TODCO Tax
Group transfers any part of the Transocean Business (including any Subsidiary)
to the Transocean Tax Group, after the IPO Closing Date in a transaction
contemplated by Sections 2.7 and 2.8 of the Master Separation Agreement, such
transfer will be deemed to have occurred immediately before the IPO Closing
Date.
"Transocean" has the meaning set forth in the recital hereto.
"Transocean Business" has the meaning set forth in the Master
Separation Agreement.
"Transocean Tax Group" means Transocean and all persons that are
Subsidiaries of Transocean, other than members of the TODCO Tax Group,
immediately after the IPO Closing Date, including without limitation the
Subsidiaries set forth in Schedule 1.3 and persons that become Subsidiaries of
Transocean thereafter. If the Transocean Tax Group transfers any part of the
TODCO Business (including any Subsidiary) to the TODCO Tax Group, or the TODCO
Tax Group transfers any part of the Transocean Business (including any
Subsidiary) to the Transocean Tax Group, after the IPO Closing Date in a
transaction contemplated by Article II of the Master Separation Agreement, such
transfer will be deemed to have occurred immediately before the IPO Closing
Date.
"Treasury Regulations" means the regulations promulgated from time to
time under the Code as in effect for the relevant Tax Year.
"Voting Stock" means the TODCO Class A Common Stock, the TODCO Class B
Common Stock and any other capital stock of TODCO entitled to vote generally in
the election of directors but excluding any class or series of capital stock
only entitled to vote in the event of dividend arrearages thereon, unless at the
time of determination there are any such dividend arrearages.
SECTION 2. Allocation of Income Tax Liabilities.
2.1 Federal Income Taxes. Except as provided in Section 2.5,
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liability for Federal Income Taxes shall be allocated as follows:
(a) Consolidated Years.
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(i) Except as provided in Section 2.1(a)(ii), for
each Consolidated Year, TODCO shall be liable for and pay to Holdings an amount
equal to the Federal Income Taxes attributable to the TODCO Tax Group. Such
amount shall be determined as if TODCO and its eligible Subsidiaries were not
required to join and did not join in the filing of the Consolidated Return for
that Consolidated Year but instead filed their own consolidated Federal Income
Tax Return on which TODCO's tax liability was calculated pursuant to Treasury
Regulations Section 1.1552-1(a)(2)(ii).
(ii) TODCO shall not be liable for any Federal
Income Taxes attributable to the TODCO Tax Group (x) for any Consolidated Year
which ends on or before the IPO Closing Date or (y) in the case of a
Consolidated Year which is a Straddle Period, for the portion thereof which ends
on the IPO Closing Date.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all Federal Income Taxes for all Consolidated Years other than
amounts for which TODCO is liable pursuant to this Section 2.1(a).
(b) Separate Return Years.
(i) Except as provided in Section 2.1(b)(ii), TODCO
shall be liable for all Federal Income Taxes imposed on members of the TODCO Tax
Group with respect to all Separate Return Years.
(ii) TODCO shall not be liable for any Federal
Income Taxes imposed on members of the TODCO Tax Group (x) for any Separate
Return Year which ends on or before the IPO Closing Date or (y) in the case of a
Separate Return Year which is a Straddle Period, for the portion thereof which
ends on the IPO Closing Date. Notwithstanding the immediately preceding
sentence, if any member of the TODCO Tax Group becomes a member of such Group
after the IPO Closing Date (determined after the application of Section 2.5(a)
of this Agreement), TODCO shall be liable for all Federal Income Taxes imposed
on such member for all Separate Return Years.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all Federal Income Taxes for all Tax Years which are not
Consolidated Years other than amounts for which TODCO is liable pursuant to this
Section 2.1(b).
2.2 State Income Taxes. Except as provided in Section 2.5,
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liability for State Income Taxes shall be allocated as follows:
(a) Combined Years.
(i) Except as provided in Section 2.2(a)(ii), for
each Combined Year, TODCO shall be liable for and pay to Holdings (or another
member of the Transocean Tax Group designated by Holdings pursuant to Section
5.5) an amount equal to the State Income Taxes attributable to the TODCO Tax
Group. Such amount shall be determined as if TODCO and its eligible
Subsidiaries were not required to join and did not join in the filing of a
Combined Return for that Combined Year but instead
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filed their own combined State Income Tax Return on which TODCO's tax liability
was calculated consistently with the principles of Treasury Regulations Section
1.1552-1(a)(2)(ii).
(ii) TODCO shall not be liable for any State Income
Taxes attributable to the TODCO Tax Group (x) for any Combined Year which ends
on or before the IPO Closing Date or (y) in the case of a Combined Year which is
a Straddle Period, for the portion thereof which ends on the IPO Closing Date.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all State Income Taxes for all Combined Years other than
amounts for which TODCO is liable pursuant to this Section 2.2(a).
(b) Separate Return Years.
(i) Except as provided in Section 2.2(b)(ii), TODCO
shall be liable for all State Income Taxes imposed on members of the TODCO Tax
Group with respect to all Separate Return Years.
(ii) TODCO shall not be liable for any State Income
Taxes imposed on members of the TODCO Tax Group (x) for any Separate Return Year
which ends on or before the IPO Closing Date or (y) in the case of a Separate
Return Year which is a Straddle Period, for the portion thereof which ends on
the IPO Closing Date. Notwithstanding the immediately preceding sentence, if
any member of the TODCO Tax Group becomes a member of such Group after the IPO
Closing Date (determined after the application of Section 2.5(a) of this
Agreement), TODCO shall be liable for all State Income Taxes imposed on such
member for all Separate Return Years.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all State Income Taxes for all Separate Return Years other than
amounts for which TODCO is liable pursuant to this Section 2.2(b).
2.3 Foreign Income Taxes. Except as provided in Section 2.5,
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liability for Foreign Income Taxes shall be allocated as follows:
(a) Combined Years.
(i) Except as provided in Section 2.3(a)(ii), for
each Combined Year, TODCO shall be liable for and pay to Holdings (or another
member of the Transocean Tax Group designated by Holdings pursuant to Section
5.5) an amount equal to the Foreign Income Taxes that are attributable to the
TODCO Tax Group. Such amount shall be determined as if TODCO and its eligible
Subsidiaries were not required to join and did not join in the filing of a
Combined Return for that Combined Year but instead filed their own combined
Foreign Income Tax Return on which TODCO's tax liability was calculated
consistently with the principles of Treasury Regulations Section
1.1552-1(a)(2)(ii).
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(ii) TODCO shall not be liable for any Foreign
Income Taxes attributable to the TODCO Tax Group (x) for any Combined Year which
ends on or before the IPO Closing Date or (y) in the case of a Combined Year
which is a Straddle Period, for the portion thereof which ends on the IPO
Closing Date.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all Foreign Income Taxes for all Combined Years other than
amounts for which TODCO is liable pursuant to this Section 2.3(a).
(b) Separate Return Years.
(i) Except as provided in Section 2.3(b)(ii), TODCO
shall be liable for all Foreign Income Taxes imposed on members of the TODCO Tax
Group with respect to all Separate Return Years.
(ii) TODCO shall not be liable for any Foreign
Income Taxes imposed on the TODCO Tax Group (x) for any Separate Return Year
which ends on or before the IPO Closing Date or (y) in the case of a Separate
Return Year which is a Straddle Period, for the portion thereof which ends on
the IPO Closing Date. Notwithstanding the immediately preceding sentence, if
any member of the TODCO Tax Group becomes a member of such Group after the IPO
Closing Date (determined after the application of Section 2.5(a) of this
Agreement), TODCO shall be liable for all Foreign Income Taxes imposed on such
member for all Separate Return Years.
(iii) Holdings shall indemnify TODCO and its
Subsidiaries for all Foreign Income Taxes for all Separate Return Years other
than amounts for which TODCO is liable pursuant to this Section 2.3(b).
2.4 Other Taxes. Except as provided in Section 2.5, TODCO
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shall be liable for any Other Tax attributable to the TODCO Business, and
Holdings shall indemnify TODCO and its Subsidiaries for any Other Tax that is
not attributable to the TODCO Business.
2.5 Special Rules.
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(a) Separation Transactions Occurring After the IPO
Closing Date. If the Transocean Tax Group transfers any part of the TODCO
Business (including any Subsidiary) to the TODCO Tax Group, or the TODCO Tax
Group transfers any part of the Transocean Business (including any Subsidiary)
to the Transocean Tax Group, after the IPO Closing Date in a transaction
contemplated by Sections 2.7 or 2.8 of the Master Separation Agreement, such
transfer will be deemed to have occurred immediately before the IPO Closing Date
for purposes of computing the Taxes imposed on or attributable to the TODCO Tax
Group and the Transocean Tax Group.
(b) Straddle Periods. For purposes of determining the
Income Taxes attributable to or imposed on the TODCO Tax Group for the portion
of any Straddle Period which ends on the IPO Closing Date, such Straddle Period
shall be
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treated as two Tax Years, one ending on the IPO Closing Date and the other
beginning on the following day, and all calculations shall be made by (x)
closing the books of the TODCO Tax Group at the end of the month preceding the
month in which the IPO Closing Date occurs, (y) closing the books of the TODCO
Tax Group again at the end of the month in which the IPO Closing Date occurs,
and (z) apportioning Tax Items accruing in the month in which the IPO Closing
Date occurs to each hypothetical Tax Year pro rata in proportion to the number
of days in such month that are within each hypothetical Tax Year.
Notwithstanding the immediately preceding sentence, all Tax Items that are
extraordinary items within the meaning of Treasury Regulations Section
1.1502-76(b)(2)(ii)(C) shall be allocated to the hypothetical Tax Year in which
they accrue; provided, however, that all extraordinary items (other than items
resulting from a transaction contemplated by Article II of the Master Separation
Agreement) accruing after the Deconsolidation Date and on or before the IPO
Closing Date will be allocated entirely to the hypothetical Tax Year that begins
on the day following the IPO Closing Date .
(c) Short Years. If a Consolidated or Combined Return is
filed with respect to a Tax Year, and if TODCO and its eligible Subsidiaries are
not included in such Consolidated or Combined Return for that entire Tax Year,
then for purposes of determining the Income Taxes attributable to or imposed on
the TODCO Tax Group for the resulting short Consolidated or Combined Year and
the short Separate Return Year, all calculations shall be made by (x) closing
the books of the TODCO Tax Group at the end of the month preceding the month in
which the first short year ends, (y) closing the books of TODCO Tax Group again
at the end of the month in which the first short year ends, and (z) apportioning
Tax Items accruing in the month in which the first short year ends to each short
year pro rata in proportion to the number of days in such month that are within
each short year. Notwithstanding clause (z) of the immediately preceding
sentence, all Tax Items that are extraordinary items within the meaning of
Treasury Regulations Section 1.1502-76(b)(2)(ii)(C) shall be allocated to the
short year in which they accrue; provided, however, that the principles of
Treasury Regulations Section 1.1502-76(b)(1)(ii)(B) (Next Day Rule) shall apply
in determining the proper allocation of extraordinary items accruing on the last
day of the earlier short Tax Year.
(d) Payments to Foreign Jurisdictions. If at any time after
the Deconsolidation Date any member of the TODCO Tax Group makes a payment to a
foreign Tax Authority for Taxes for which Holdings is otherwise liable under
this Agreement, Holdings shall have no obligation to indemnify such member
unless such member obtains prior written consent from Holdings to make such
payment. If Holdings fails to consent to such payment, it shall indemnify TODCO
and its Subsidiaries for any Taxes resulting from the failure to make such
payment.
(e) Income Taxes Attributable to Trinidad and Tobago. TODCO
shall be liable for all Foreign Income Taxes imposed by the Republic of Trinidad
and Tobago that are attributable to the TODCO Business, regardless of whether
such Taxes relate to a period, or portion thereof, ending on or before the IPO
Closing Date.
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2.6 Tax Payments and Intercompany Xxxxxxxx. Each Company
------------------------------------------
shall pay the Taxes allocated to it by this Section 2 either to the applicable
Taxing Authority or to the other appropriate Company in accordance with Section
5.
SECTION 3. PREPARATION AND FILING OF TAX RETURNS.
3.1 Combined Returns and Consolidated Returns.
---------------------------------------------
(a) Preparation by Transocean and Holdings. Holdings
shall be responsible for preparing all Consolidated Returns and Combined
Returns.
(b) Provision of Information and Assistance by TODCO.
(i) Information with Respect to Final Returns.
TODCO shall, for each Consolidated Return or Combined Return, provide Holdings
with all information relating to members of the TODCO Tax Group which Holdings
needs to prepare such return. TODCO shall use its best efforts to provide such
information no later than the earlier of (x) thirty days prior to the due date
of such Consolidated Return or Combined Return, taking into account any
extensions that Holdings has given written notice to TODCO that it intends to
file, or (y) the first day of the fifth month following the end of the Tax Year
to which such information relates, but in any event shall provide such
information no later than the earlier of (x) fifteen days prior to the due date
of such Consolidated Return or Combined Return, taking into account any
extensions that Holdings has given written notice to TODCO that it intends to
file, and (y) the fifteenth day of the fifth month following the end of such Tax
Year.
(ii) Information with Respect to Estimated Payments
and Extension Payments. TODCO shall provide Holdings with all information
relating to members of the TODCO Tax Group which Holdings needs to determine the
amount of Taxes due on any Payment Date. TODCO shall use its best efforts to
provide such information no later than fifteen days before such Payment Date,
but in any event shall provide such information no later than ten days before
such Payment Date.
(iii) Assistance. At the request of Holdings,
TODCO shall take any action (e.g., filing a ruling request with the relevant Tax
Authority or executing a power of attorney) that is reasonably necessary in
order for Holdings to prepare, file, amend or take any other action with respect
to any Consolidated or Combined Return.
3.2 Separate Returns and Other Returns.
--------------------------------------
(a) Tax Returns to be Prepared by Holdings. Holdings
shall be responsible for preparing all Separate Returns and Other Returns which
either (x) relate solely to one or more members of the Transocean Tax Group for
any Tax Year or (y) relate solely to one or more members of the TODCO Tax Group
for any Tax Year ending on or before the IPO Closing Date or for any Tax Year
which is a Straddle Period. In connection with the preparation of the Tax
Returns specified in this Section 3.2(a), TODCO shall provide information and
assistance as described in Sections 3.1(b)(ii) and
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(iii) in the same manner as if such Tax Returns were Consolidated Returns or
Combined Returns.
(b) Tax Returns to be Prepared by TODCO.
(i) Except as otherwise provided in this Section
3.2(b), TODCO shall be responsible for preparing all Separate Returns and Other
Returns which relate solely to one or more members of the TODCO Tax Group for
any Tax Year ending after the IPO Closing Date and which is not a Straddle
Period. In preparing such Other Returns, TODCO may not take any positions that
it knows, or reasonably should know, would adversely affect any member of the
Transocean Tax Group.
(ii) Holdings will have the right to determine the
items specified in clauses (1), (3), (4) and (5) of Section 3.3(a) with respect
to any Tax Return described in Section 3.2(b)(i) if either (x) such Tax Return
is filed for a Tax Year at any time during which Transocean or Holdings owned
stock possessing greater than 50% of the voting power of all of the outstanding
TODCO stock or (y) such Tax Return is filed for a Tax Year during which there
remains a present or potential obligation under Section 4.2(a) for TODCO to pay
Holdings for the use or deemed use of any Pre-IPO Tax Asset.
(c) Provision of Information. Holdings shall
provide to TODCO, and TODCO shall provide to Holdings, any information about
members of the Transocean Tax Group or the TODCO Tax Group, respectively, which
the party receiving such information needs to comply with Section 3.2(a) or (b).
Such information shall be provided within the time prescribed by Section 3.1(b)
for the provision of information for Consolidated Returns and Combined Returns.
3.3 Special Rules Relating to the Preparation of Tax Returns.
--------------------------------------------------------
(a) General Rule. Except as otherwise provided in this
Agreement, the party responsible for filing a Tax Return pursuant to Sections
3.1 or 3.2 shall have the exclusive right, in its sole discretion, with respect
to such Tax Return to determine (1) the manner in which such Tax Return shall be
prepared and filed, including the elections, methods of accounting, positions,
conventions and principles of taxation to be used and the manner in which any
Tax Item shall be reported, (2) whether any extensions may be requested, (3) the
elections that will be made on such Tax Return, (4) whether an amended Tax
Return shall be filed, (5) whether any claims for refund shall be made, (6)
whether any refunds shall be paid by way of refund or credited against any
liability for the related Tax and (7) whether to retain outside firms to prepare
or review such Tax Return.
(b) Election to File Consolidated or Combined Returns.
Holdings shall have the sole discretion of filing any Consolidated Return or
Combined Return, if the filing of such return is elective under the relevant Tax
Law.
(c) Returns Affecting Liability of Other Party. Insofar
as a Tax Return prepared by Holdings may affect Taxes for which TODCO is liable
pursuant to this Agreement, or vice versa:
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(i) Tax Accounting Practices. The Tax Return shall
be prepared consistently with past Tax accounting practices to the extent
permissible under applicable Tax Law.
(ii) Review Prior to Filing. The Company
responsible for preparing any Tax Return (whether Holdings on the one hand or
TODCO on the other hand) shall make the Tax Return or relevant portion thereof
available to the other Company no later than thirty days before the Tax Return
is due, taking into account any extensions that the responsible Company files,
and shall in good faith take into account any comments on such Tax Return by the
other Company.
(d) Standard of Performance. Holdings shall prepare the
Tax Returns for which it is responsible pursuant to this Section 3 and which
relate to the TODCO Tax Group with the same general degree of care as it uses in
preparing Tax Returns relating solely to the Transocean Tax Group. Holdings
shall not be liable for any additional Taxes that result from a redetermination
in a Tax Contest and for which TODCO is otherwise liable under Section 2, unless
such additional Taxes arise solely as a result of Holdings failure to exercise
such degree of care.
SECTION 4. TAX BENEFITS, REFUNDS, AND CARRYBACKS.
4.1 Compensation by Holdings for TODCO's Post-IPO Tax Assets.
--------------------------------------------------------
In the event that any member of the Transocean Tax Group realizes a Tax Benefit
during any Consolidated Year or Combined Year as a result of the use or
absorption by any Transocean Tax Group member of any Post-IPO Tax Asset of the
TODCO Tax Group, as determined under the principles of Section 4.2(b), then
Holdings (or other appropriate member of the Transocean Tax Group) shall pay to
TODCO, in accordance with Section 5, the value of such Tax Asset, as determined
under the principles of Section 4.2(c) without regard to the specific rules
following clause (iii) thereof.
4.2 Compensation by TODCO for Pre-IPO Tax Assets.
--------------------------------------------------
(a) Payment for Tax Assets. Except as otherwise
provided in Sections 4.2(f), (g) and (h), if on any Tax Return, any member of
the TODCO Tax Group uses or absorbs any Pre-IPO Tax Asset to reduce any Tax for
which TODCO is liable under Section 2, then TODCO shall, in accordance with
Section 5, pay to Holdings (or another member of the Transocean Tax Group
designated by Holdings pursuant to Section 5.5) an amount equal to the value of
such Tax Asset. For purposes of this Section 4.2(a), whether the use or
absorption of a Pre-IPO Tax Asset by any member of the TODCO Tax Group has the
effect of reducing any Tax for which TODCO is liable under Section 2 shall be
determined without regard to any unused Tax Asset that, but for such Pre-IPO Tax
Asset, could have otherwise been used or absorbed to reduce such Tax.
(b) Time at which Tax Asset is Created. For purposes of
Section 4.2(a):
(i) General Rule. A Tax Asset shall be considered
created in the Tax Year relating to the Tax Return (including an information
return of
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U.S. persons with respect to certain foreign corporations on Internal Revenue
Service Form 5471) on which the Tax Asset is first included. In the case of a
Straddle Period, the principles of Section 2.5(b) shall apply to determine
whether such Tax Asset is created on or before the IPO Closing Date.
(ii) Exception for Certain Excluded Tax Assets.
Any Tax Asset not included in a Tax Return by reason of Sections 163(j) or 267
of the Code, Treasury Regulations Section 1.1502-13 or any similar deferral
provision under federal, state or foreign Tax Law shall be considered included
in such Tax Return.
(iii) Exception for Tax Assets Arising out of the
Payment of Income Taxes. Any Tax Asset resulting from the payment of (x) a
Foreign Income Tax, other than a Foreign Income Tax described in Section 5.3(b),
(y) a State Income Tax or (z) an alternative minimum tax imposed by Section 55
of the Code shall be considered created in the year in which the income or other
Tax Item to which such Tax relates accrued, regardless of the year in which such
Tax is paid or accrued.
(iv) Exception for Displaced Post-IPO Tax Assets.
Any Tax Asset that (x) would otherwise be treated, pursuant to Sections
4.2(b)(i) through (iii), as created after the IPO Closing Date and (y) has the
effect of reducing, pursuant to Section 4.2(c), the value of any Pre-IPO Tax
Asset shall thereafter be treated as created on or before the IPO Closing Date.
(c) Value of Tax Assets. For purposes of Section 4.2(a),
the value of any Tax Asset shall be considered equal to:
(i) in the case of any deduction, loss previously
deferred under Section 267(f) of the Code, net operating loss or net capital
loss not otherwise described in clause (iii) below, the product of (1) the
amount of such deduction or loss used or absorbed on such Tax Return and (2) the
highest statutory tax rate applicable under Section 11 of the Code or relevant
state or foreign Tax Law,
(ii) in the case of any tax credit not otherwise
described in clause (iii) below, one hundred percent (100%) of such tax credit
used or absorbed on such Tax Return, and
(iii) in the case of any Tax Asset that is a
Pre-IPO Tax Asset by reason of Section 4.2(b)(iv), the amount by which such Tax
Asset previously reduced, pursuant to this Section 4.2(c), the value of another
Pre-IPO Tax Asset;
provided, however, that the value of any Pre-IPO Tax Asset shall be reduced (but
not below zero) by the value of any Post-IPO Tax Asset (other than a carryback
of (1) a net operating loss, (2) tax credit or (3) any other Post-IPO Tax Asset)
to the extent that such Post-IPO Tax Asset could have otherwise been used or
absorbed by the TODCO Tax Group, but for the existence of a Pre-IPO Tax Asset,
to similarly reduce the Tax for which TODCO is liable under Section 2. For
purposes of the immediately preceding sentence, a Post-IPO Tax Asset will also
be considered eligible to have otherwise been used or absorbed if such Tax Asset
was used or absorbed on the relevant Tax Return as a
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deduction and could have been used or absorbed as a tax credit, but for the
existence of a Pre-IPO Tax Asset. Any Post-IPO Tax Asset that TODCO (or
Holdings, by reason of Section 3.2(b)(ii)) may elect to treat either as a tax
credit or a deduction shall be valued in the following manner: (x) in the case
of a Tax Asset that is reported on the relevant Tax Return as a tax credit, the
Tax Asset shall have a value equal to 80 percent of its value determined under
Section 4.2(c)(ii), and (y) in the case of a Tax Asset that is reported on the
relevant Tax Return as a deduction, the Tax Asset shall have a value equal to 80
percent of the excess of its value as if determined under Section 4.2(c)(ii)
over its value determined under Section 4.2(c)(i).
(d) Determination of Tax Assets Used or Absorbed. The
determination of (x) whether any Pre-IPO Tax Asset (including any Tax Asset
treated as a Pre-IPO Tax Asset pursuant to Section 4.2(b)(iv)) has been used or
absorbed on any relevant Tax Return after the IPO Closing Date, (y) the value of
any such Tax Asset as determined pursuant to Section 4.2(c), and (z) whether any
other Tax Asset becomes described in Section 4.2(b)(iv) as a result of the use
or absorption of any Pre-IPO Tax Asset shall be made by TODCO and reported by a
nationally recognized accounting firm no later than twenty (20) days after the
date on which the relevant Tax Return is filed. Such accounting firm shall
report such determination by applying the same standards as it would in
preparing a tax return that it would sign as an "income tax return preparer" (as
defined in Section 7701(a)(36) of the Code) and such accounting firm shall sign
a letter certifying that such determination has been made in accordance with
such standards and on a fair and impartial basis. Holdings shall be given an
opportunity to review such determination and the supporting schedules and
calculations. Holdings shall be given the opportunity to ask questions of the
accounting firm, and if Holdings is not satisfied with the detail given in the
supporting schedules, the accounting firm shall provide Holdings with any
additional supporting detail as Holdings shall reasonably request. Holdings
shall have, in its sole discretion, the right to designate a nationally
recognized accounting firm and shall bear all costs associated with such firms
reporting under this Section 4.2(d).
(e) Forecast of Tax Assets Used or Absorbed. If during
any Tax Year ending after the IPO Closing Date any Pre-IPO Tax Asset continues
to be available for use by any member of the TODCO Tax Group, then TODCO shall
provide to Holdings, no later than March 15, June 15, September 15 and December
15 of such year, periodic forecasts of (1) the use of such Tax Asset during such
year, (2) the value of such Tax Asset, (3) whether any other Tax Asset will
become described in Section 4.2(b)(iv) and (4) any other items reasonably
requested by Holdings. TODCO shall also provide to Holdings, no later than
October 15 of such year, a forecast of (1) the use or absorption of any such Tax
Asset in the following year, (2) the value of such Tax Asset, (3) any other Tax
Asset that will become described in Section 4.2(b)(iv) and (4) any other items
reasonably requested by Holdings.
(f) Acceleration of Payments Upon Change of Control. If
on any day following the IPO Closing Date any person or entity other than a
member of the Transocean Tax Group owns stock (or would be treated as owning
stock if the attribution rules of Section 318(a) of the Code were to apply)
possessing greater than 50% of the
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voting power of all of the outstanding TODCO stock, all unused Pre-IPO Tax
Assets shall, for purposes of Section 4.2(a), be treated as having been used by
TODCO on a Tax Return filed immediately prior to such day. In such case, TODCO
shall, in accordance with Section 5, pay to Holdings (or another member of the
Transocean Tax Group designated by Holdings pursuant to Section 5.5) the amount
equal to the product of (x) the value of all unused Pre-IPO Tax Assets and (y)
the Applicable Discount Rate for the year in which the Tax Return including such
Pre-IPO Tax Assets is treated as being filed. The value of all such unused
Pre-IPO Tax Assets shall be determined pursuant to Sections 4.2(c)(i), (ii) and
(iii), without reduction by the value of any Post-IPO Tax Asset. However, if any
such unused Pre-IPO Tax Asset (other than a Tax Asset that is a Pre-IPO Tax
Asset by reason of Section 4.2(b)(iv)) is a foreign tax credit under Section 901
of the Code, then such unused Pre-IPO Tax Asset shall be valued under Section
4.2(c)(i) as if it were a deduction rather than under Section 4.2(c)(ii).
(g) Acceleration of Payments Upon Deconsolidation. If
on any day following the IPO Closing Date any member of the TODCO Tax Group
ceases to join in the filing of a Federal Income Tax Return which is filed on a
consolidated basis by TODCO, as the common parent, and its eligible Subsidiaries
(as determined under Section 1504(a) of the Code or any successor provision),
all Pre-IPO Tax Assets attributable to such member shall, for purposes of
Section 4.2(a), be treated as having been used on a Tax Return filed immediately
prior to such day. A Tax Asset shall be attributable to a member of the TODCO
Tax Group if such member would be entitled to deduct, credit or otherwise use,
under the relevant Tax Law, such Pre-IPO Tax Asset on a Tax Return filed with
respect to any Tax Year, or portion thereof, beginning after such day. If any
Pre-IPO Tax Asset is treated as being used pursuant to this Section 4.2(g),
TODCO shall, in accordance with Section 5, pay to Holdings (or another member of
the Transocean Tax Group designated by Holdings pursuant to Section 5.5) the
amount equal to the product of (x) the value of such Pre-IPO Tax Asset and (y)
the Applicable Discount Rate for the year in which the Tax Return including such
Pre-IPO Tax Asset is treated as being filed. The value of such Pre-IPO Tax
Asset shall be determined pursuant to Sections 4.2(c)(i), (ii) and (iii),
without reduction by the value of any Post-IPO Tax Asset. However, if such
Pre-IPO Tax Asset (other than a Tax Asset that is a Pre-IPO Tax Asset by reason
of Section 4.2(b)(iv)) is a foreign tax credit under Section 901 of the Code,
then such Pre-IPO Tax Asset shall be valued under Section 4.2(c)(i) as if it
were a deduction rather than under Section 4.2(c)(ii).
(h) Other Special Rules. The following rules shall
apply for purposes of applying this Section:
(i) Ordering Rules. If as a result of the
application of Section 4.2(a), Section 4.2(f) or Section 4.2(g) a Tax Asset is
treated as used or absorbed more than once, such Tax Asset shall be treated as
used, for purposes of this Section 4, only once and at the earliest possible
date.
(ii) Alternative Minimum Tax. This Section 4 shall
be applied without regard to the alternative minimum tax and the alternative
minimum tax credit provisions of Sections 53 and 55 through 59 of the Code;
provided, however, that
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this Section 4 shall apply to any credit under Section 53 of the Code arising
out of the payment of alternative minimum tax under Section 55 of the Code with
respect a Tax Year, or portion thereof, ending on or before the IPO Closing
Date. For purposes of Section 4.2(a), TODCO will be deemed to use or absorb any
credit under Section 53 of the Code that is a Pre-IPO Tax Asset only after it
has used or absorbed all other available credits under Section 53 of the Code.
(iii) Trinidad and Tobago Taxes and Tax Assets.
Section 4.2(a) shall not apply, and TODCO shall have no obligation to pay
Holdings, with respect to any Pre-IPO Tax Asset, to the extent that such Tax
Asset either (x) reduces a Foreign Income Tax imposed by the Republic of
Trinidad and Tobago and the creation of such Tax Asset was attributable to the
TODCO Business or (y) is generated as a result of the payment of a Foreign
Income Tax imposed by the Republic of Trinidad and Tobago and such Foreign
Income Tax was attributable to the TODCO Business.
(iv) Examples. The operation of various provisions
of this Section 4 is illustrated by examples in Appendix A of this Agreement.
4.3 Claims for Refund from Carrybacks.
-------------------------------------
(a) Filing Claims and Making Payments for Carrybacks.
If the TODCO Tax Group generates a Carryback to a Consolidated Year or Combined
Year, then, upon request of TODCO, Holdings may, in its sole discretion, file a
claim for refund arising from such Carryback and pay such refund to TODCO in
accordance with Section 5.
(b) Adjustment of Tax Items. In the event that a
Carryback by the TODCO Tax Group to a Consolidated Year or Combined Year
increases the liability for Taxes of the Transocean Tax Group, the amount of the
refund to which the TODCO Tax Group shall be entitled to receive, in accordance
with Section 5, shall be net of such increased liability to the Transocean Tax
Group.
4.4 Tax Benefits Resulting from Exercise of Employee Stock
---------------------------------------------------------
Options. Except as otherwise provided in Section 5.8, if (x) pursuant to the
-------
exercise of an employee stock option the Transocean Tax Group delivers to an
employee of the TODCO Tax Group stock of Transocean at any time during a Tax
Year, or portion thereof, that begins after the IPO Closing Date and (y) the
delivery of such stock results in a present or potential future Tax Benefit to
the TODCO Tax Group, TODCO shall pay to Holdings the deemed value of such Tax
Benefit within thirty days after the delivery of such stock. For purposes of
this Section 4.4, the deemed value of such Tax Benefit shall be an amount equal
to the product of (x) the amount of the deduction allowed to the TODCO Tax Group
by the Code with respect to the delivery of the Transocean stock and (y) the
highest statutory rate applicable under Section 11 of the Code. However, if any
deduction otherwise described in this Section 4.4 exceeds U.S.$1.0 million,
determined on an employee-by-employee basis, the Tax Benefit relating to such
deduction shall not be treated as a Tax Benefit described in this Section 4.4,
but the underlying deduction
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shall be treated in the same manner as if it were a Tax Asset created on or
before the IPO Closing Date, as described in Section 4.2.
SECTION 5. TAX PAYMENTS AND INTERCOMPANY XXXXXXXX.
5.1 Consolidated and Combined Returns.
------------------------------------
(a) Computation and Payment of Tax Due. At least ten
business days prior to any Payment Date for a Consolidated or Combined Return,
Holdings shall compute the amount of Tax required to be paid to the relevant Tax
Authority with respect to such Tax Return on such Payment Date and shall notify
TODCO in writing of (x) the amount of Tax required to be paid on such Payment
Date, and (y) the amount, if any, of such Tax which is allocable to TODCO under
Sections 2.1(a), 2.2(a) and 2.3(a). Holdings will pay, or shall cause one or
more of its Subsidiaries (other than members of the TODCO Tax Group) to pay, the
amount described in clause (x) of the immediately preceding sentence to the
relevant Tax Authority on or before such Payment Date.
(b) Computation and Payment of TODCO Liability With
Respect to Tax Due. Within thirty days following any Payment Date, TODCO will
pay to Holdings (or another member of the Transocean Tax Group designated by
Holdings pursuant to Section 5.5) the amount, if any, of Tax paid on such
Payment Date for which TODCO is liable in accordance with Sections 2.1(a),
2.2(a) and 2.3(a), appropriately adjusted for prior payments made by TODCO with
respect to that Consolidated or Combined Year. If, at any time, the total
amount of payments made by TODCO to Transocean (or any of its Subsidiaries other
than members of the TODCO Tax Group) with respect to Taxes for a Consolidated or
Combined Year exceeds the amount for which TODCO is liable in accordance with
Sections 2.1(a), 2.2(a) and 2.3(a), Holdings will promptly remit the excess to
TODCO.
5.2 Payment of Refunds, Tax Benefits, and Tax Assets. Except
------------------------------------------------
as otherwise provided in Section 5.8 or any other part of this Agreement:
(a) Refund or Tax Benefit Received by Transocean Tax
Group. If a member of the Transocean Tax Group receives a Tax refund with
respect to Taxes for which a member of the TODCO Tax Group is liable hereunder
or receives a Tax Benefit for which TODCO is entitled to reimbursement
hereunder, Holdings, as appropriate, shall pay to TODCO, within thirty days
following the receipt of the Tax refund or Tax Benefit, an amount equal to such
Tax refund or Tax Benefit. Unless specified otherwise in this Agreement, a Tax
Benefit will be considered received at the time the Tax Return is filed with
respect to such Tax Benefit.
(b) Refund Received by TODCO Tax Group. If a member of
the TODCO Tax Group receives a Tax refund with respect to Taxes for which a
member of the Transocean Tax Group is liable hereunder, TODCO shall pay to
Holdings, within thirty days after the receipt of the Tax refund, an amount
equal to such Tax refund.
(c) Tax Asset Used by TODCO Tax Group.
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(i) Estimated Payments. TODCO shall, consistent
with the principles of Section 4.2, estimate the value of all Pre-IPO Tax Assets
utilized in determining each required installment of estimated taxes payable by
any member of the TODCO Tax Group either to Holdings under Section 5.1(b) or to
a Tax Authority under Code Section 6655 (without regard to Code Section
6655(d)(1)(B)(ii)) or other applicable Tax Law. Within thirty days following
the required payment date for such installment (and whether or not any payment
is actually made), TODCO shall pay to Holdings the estimated value of such
Pre-IPO Tax Assets, reduced by any payments previously made by TODCO to
Holdings, and increased by any payments previously made by Holdings to TODCO,
pursuant to this Section 5.2(c)(i) for the same Tax Year. If the adjustments
described in the immediately preceding sentence result in a deficit (i.e., a
reduction below zero), then Holdings will promptly remit to TODCO the amount of
such deficit.
(ii) Date Tax Return is Due. If any member of the
TODCO Tax Group receives an extension of the due date for filing a Tax Return,
as determined under Code Section 6072 or other applicable Tax Law, TODCO shall,
consistent with the principles of Section 4.2, estimate the value of all Pre-IPO
Tax Assets that will be used or absorbed on such Tax Return. Within thirty days
following such due date (determined without regard to extensions), TODCO shall
pay to Holdings the estimated value of such Pre-IPO Tax Assets, reduced by any
payments previously made by TODCO to Holdings, and increased by any payments
previously made by Holdings to TODCO, pursuant to Section 5.2(c)(i) for the same
Tax Year. If the adjustments described in the immediately preceding sentence
result in a deficit (i.e., a reduction below zero), then Holdings will promptly
remit to TODCO the amount of such deficit.
(iii) Date Tax Return is Filed. Within thirty days
after any member of the TODCO Tax Group files a Tax Return for a Tax Year under
Code Section 6012 or other applicable Tax Law, TODCO shall pay to Holdings the
value of all Pre-IPO Tax Assets used or absorbed on such Tax Return as
determined under Section 4.2, reduced by any payments previously made by TODCO
to Holdings, and increased by any payments previously made by Holdings to TODCO,
pursuant to Sections 5.2(c)(i) and (ii) for the same Tax Year. If the
adjustments described in the immediately preceding sentence result in a deficit
(i.e., a reduction below zero), then Holdings will promptly remit to TODCO the
amount of such deficit.
5.3 Initial Determinations and Subsequent Adjustments.
-----------------------------------------------------
(a) General Rules. The initial determination of the
amount of a payment, if any, which one Company is required to make to another
under this Agreement shall be made on the basis of the Tax Return as filed, or,
if the Tax to which the payment relates is not reported in a Tax Return, on the
basis of the amount of Tax initially paid to the Tax Authority. Except as
otherwise provided in Section 8.3, payments will be made, as appropriate, if as
a result of an audit by a Tax Authority or for any other reason (x) additional
Taxes to which such determination relates are subsequently paid, (y) a refund of
such Taxes or a Tax Benefit relating to such Taxes is received, or (z) the
amount or character of any Tax Item is adjusted or redetermined. Except as
otherwise provided in Section 5.8, each payment required by the immediately
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preceding sentence (x) as a result of a payment of additional Taxes will be due
thirty days after the date on which the additional Taxes were paid or, if later,
thirty days after the date of a request from the other Company for the payment,
(y) as a result of the receipt of a refund or Tax Benefit will be due thirty
days after the refund or Tax Benefit was received, or (z) as a result of an
adjustment or redetermination of the amount or character of a Tax Item will be
due thirty days after the date on which the final action resulting in such
adjustment or redetermination is taken by a Tax Authority or either Company. If
a payment is made as a result of an audit by a Tax Authority which does not
conclude the matter, further adjusting payments will be made, as appropriate, to
reflect the outcome of subsequent administrative or judicial proceedings.
(b) Taxes that Generate TODCO Tax Benefits. Except as
otherwise provided in Section 5.8, if (x) pursuant to Section 5.3(a), Holdings
indemnifies TODCO and its Subsidiaries against any additional State Income Tax,
Foreign Income Tax, or Other Tax that is attributable to any Tax Year or portion
thereof beginning before the IPO Closing Date and (y) the payment of such Tax
generates a present or potential future Tax Benefit to the TODCO Tax Group, then
TODCO shall be liable for and pay to Holdings within thirty days after the
payment of such Tax by Holdings the deemed value of such Tax Benefit. For
purposes of this Section 5.3(b), the deemed value of such Tax Benefit shall be
an amount equal to the product of (x) the amount of the Tax giving rise to such
Tax Benefit and (y) the highest statutory rate applicable under Section 11 of
the Code. However, if any Tax otherwise described in this Section 5.3(b)
exceeds U.S.$1.0 million, determined separately for each Tax Contest, the Tax
Benefit relating to such Tax shall not be treated as a Tax Benefit described in
this Section 5.3(b), but the underlying deduction allowed by the Code arising
from the payment of such Tax shall be treated in the same manner as if it were a
Pre-IPO Tax Asset described in Section 4.2.
5.4 Indemnification Payments. Except as otherwise provided
-------------------------
in Section 2.5(d), if any member of one Group is required to make a payment to a
Tax Authority for Taxes for which a Company belonging to the other Group is
liable under this Agreement, the Company which is liable for such Taxes under
this Agreement will remit the amount for which it is liable to the appropriate
other Company within thirty days after receiving notification requesting such
amount.
5.5 Payments by or to Other Members of the Groups. When
--------------------------------------------------
appropriate under the circumstances to reflect the underlying liability for a
Tax or entitlement to a Tax refund or Tax Benefit, a payment which is required
to be made by or to a Company may be made by or to another member of the Group
to which that Company belongs, but nothing in this Section 5.5 shall relieve any
Company of its obligations under this Agreement.
5.6 Interest. Payments pursuant to this Agreement that are
--------
not made within the period prescribed in this Agreement or, if no period is
prescribed, within fifteen (15) business days after demand for payment is made
(the "Payment Period") shall bear interest for the period from and including the
date immediately following the last date of the Payment Period through and
including the date of payment at a per annum rate equal to the rate specified in
Section 6.5 of the Master Separation Agreement. Such
-22-
interest will be payable at the same time as the payment to which it relates and
shall be calculated on the basis of a year of 365 days and the actual number of
days for which due.
5.7 Tax Consequences of Payments. For all Tax purposes and
------------------------------
to the extent permitted by applicable law, the parties hereto shall treat any
payment made pursuant to this Agreement as a capital contribution or a dividend
distribution, as the case may be, immediately prior to the Effective Date and,
accordingly, as not includible in the taxable income of the recipient.
5.8 Subordination Agreement. If without regard to this
------------------------
Section 5.8, (x) TODCO would be required pursuant to this Agreement to make a
payment to Holdings within the period prescribed in Section 4.4 or elsewhere in
this Section 5, and (y) such payment by TODCO at such time would not be
permitted under the terms of the Subordination Agreement, dated as of December
30, 2003, by Transocean, TODCO, and certain of their Subsidiaries, then such
payment obligation shall be deferred until permitted by the Subordination
Agreement; provided, however, that for purposes of Section 5.6 (relating to
interest) such payment shall be considered due at the time prescribed in Section
4.4 or elsewhere in this Section 5 without regard to this Section 5.8.
SECTION 6. ASSISTANCE AND COOPERATION. The parties will
cooperate (and cause their respective affiliates to cooperate) with each other
and with each other's agents, including accounting firms and legal counsel, in
connection with Tax matters, including provision of relevant documents and
information in their possession and making available to each other, as
reasonably requested and available, personnel (including officers, directors,
employees and agents of the Companies or their affiliates) responsible for
preparing, maintaining, and interpreting information and documents relevant to
Taxes, and personnel reasonably required as witnesses or for purposes of
providing information or documents in connection with any administrative or
judicial proceedings relating to Taxes. Any information or documents provided
under this Section 6 shall be kept confidential by the Company receiving the
information or documents, except as may otherwise be necessary in connection
with the filing of Tax Returns or in connection with any administrative or
judicial proceedings relating to Taxes.
SECTION 7. TAX RECORDS.
7.1 Retention of Tax Records. Each Company shall preserve,
--------------------------
and shall cause its affiliates to preserve, all Tax Records which are in its
possession, and which could affect the liability of any member of the other
Group for Taxes, for so long as the contents thereof may become material in the
administration of any matter under applicable Tax Law, but in any event until
the later of (x) the expiration of any applicable statutes of limitation, as
extended, and (y) seven years after the IPO Closing Date.
7.2 Access to Tax Records. The Companies and their
------------------------
respective affiliates shall make available to members of the other Group for
inspection and copying during normal business hours upon reasonable notice all
Tax Records in their possession to the extent reasonably requested by any such
member of the other Group in connection
-23-
with the preparation of Tax Returns, audits, litigation, or the resolution of
items under this Agreement.
SECTION 8. TAX CONTESTS.
8.1 Notices. Each of the parties shall provide prompt notice
-------
to the other party of any pending or threatened Tax audit, assessment or
proceeding or other Tax Contest of which it becomes aware relating to Taxes for
which it is or may be indemnified by the other party hereunder. Such notice
shall contain factual information (to the extent known) describing any asserted
Tax liability in reasonable detail and shall be accompanied by copies of any
notice and other documents received from any Tax Authority in respect of any
such matters. If an indemnified party has knowledge of an asserted Tax liability
with respect to a matter for which it is to be indemnified hereunder and such
party fails to give the indemnifying party prompt notice of such asserted Tax
liability, then (x) if the indemnifying party is precluded from contesting the
asserted Tax liability in any forum as a result of the failure to give prompt
notice, the indemnifying party shall have no obligation to indemnify the
indemnified party for any Taxes arising out of such asserted Tax liability, and
(y) if the indemnifying party is not precluded from contesting the asserted Tax
liability in any forum, but such failure to give prompt notice results in a
monetary detriment to the indemnifying party, then any amount which the
indemnifying party is otherwise required to pay the indemnified party pursuant
to this Agreement shall be reduced by the amount of such detriment.
8.2 Control of Tax Contests. Each Company shall have full
--------------------------
responsibility and discretion in handling, settling or contesting any Tax
Contest involving a Tax for which it is liable pursuant to Section 2 of this
Agreement, except that (x) Holdings shall have full responsibility and
discretion in handling, settling or contesting any Tax Contest with respect to a
Consolidated Return or Combined Return and (y) TODCO shall not, without written
consent from Holdings, exercise its discretion in handling, settling or
contesting or paying Taxes subject to any Tax Contest in a manner that TODCO
knows, or reasonably should know, would adversely affect any member of the
Transocean Tax Group.
8.3 Cooperation. The indemnified Company shall provide the
-----------
Company controlling any Tax Contest pursuant to Section 8.2 with all information
relating to the indemnified Company and its Subsidiaries which the Company
controlling the Tax Contest needs to handle, settle or contest the Tax Contest.
At the request of the Company controlling the Tax Contest, the indemnified
Company shall take any action (e.g., executing a power of attorney) that is
reasonably necessary in order for the Company controlling the Tax Contest to
handle, settle or contest the Tax Contest. TODCO shall assist Holdings, and
Holdings shall assist TODCO, in taking any remedial actions which are necessary
or desirable to minimize the effects of any adjustment made by a Tax Authority,
including without limitation those described in Internal Revenue Service Revenue
Procedure 99-32. The Company controlling the Tax Contest shall have no
obligation to indemnify the indemnified Company for any additional Taxes
resulting from the Tax Contest, if the indemnified Company fails to cooperate
fully or provide complete assistance to the Company controlling the Tax Contest.
-24-
SECTION 9. RESTRICTION ON CERTAIN POST-IPO ACTIONS OF TODCO.
TODCO agrees that it will not take or fail to take, or permit any Subsidiary of
TODCO to take or fail to take, any action where such action or failure to act
would be inconsistent with or prohibit a distribution by Transocean of its stock
in TODCO from qualifying as a tax-free distribution under Section 355 of the
Code. TODCO also agrees that (i) TODCO has no intentions of causing its wholly
owned subsidiary, THE Offshore Drilling Company, to dispose of the assets it
acquired from R&B Falcon Holdings Inc. in a February 2003 merger of those two
companies, (ii) TODCO will cause THE Offshore Drilling Company to continue
without interruption the business it conducted prior to the February 2003
merger, and (iii) TODCO has no intention of disposing of the stock of THE
Offshore Drilling Company that it received in the February 2003 merger.
SECTION 10. GENERAL PROVISIONS.
10.1 Survival of Obligations. The representations,
-------------------------
warranties, covenants and agreements set forth in this Agreement shall be
unconditional and absolute and shall remain in effect without limitation as to
time.
10.2 Expenses. Each Company and its affiliates shall bear
--------
their own expenses incurred in connection with preparation of Tax Returns, Tax
Contests, and other matters related to Taxes under the provisions of this
Agreement.
10.3 Breach of Agreement. A breach of this Agreement shall
---------------------
be treated as a breach of an Ancillary Agreement within the meaning of Sections
3.3(c) or 3.4(c), as appropriate, of the Master Separation Agreement.
10.4 Disputes. The procedures for discussion, negotiation
--------
and arbitration set forth in Article VI of the Master Separation Agreement shall
apply to all disputes, controversies or claims (whether sounding in contract,
tort or otherwise) that may rise out of or relate to, or arise under or in
connection with this Agreement.
10.5 Notices. All notices and other communications
-------
hereunder shall be in writing and shall be delivered in person, by telecopy, by
express or overnight mail delivered by a nationally recognized air courier
(delivery charges prepaid), or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties as follows:
(a) If to Holdings to:
Xxxxxx X. Xxxx
Vice President, Tax
Transocean Offshore Deepwater Drilling, Inc.
0 Xxxxxxxx Xxxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
(b) If to TODCO to:
T. Xxxxx X'Xxxxx
-25-
Senior Vice President and Chief Financial Officer
TODCO
0000 X. Xxx Xxxxxxx Xxxxxxx Xxxxx, Xxxxx 000
Xxxxxxx, Xxxxx 00000
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery or when delivery is refused. Any notice or communication sent by
telecopy or by air courier shall be deemed effective on the first business day
at the place at which such notice or communication is received following the day
on which such notice or communication was sent.
10.6 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same agreement. The Agreement may be
delivered by facsimile transmission of a signed copy thereof.
10.7 Binding Effect; Assignment. This Agreement and all of
----------------------------
the provisions hereof shall be binding upon the parties hereto and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Except with respect to a merger of a party, neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
party hereto without the prior written consent of the other parties, which
consent shall not be unreasonably withheld or delayed; provided, however, that
Holdings and TODCO may assign their respective rights, interests, duties,
liabilities and obligations under this Agreement to any other member of their
Group, but such assignment shall not relieve Holdings or TODCO, as the assignor,
of its obligations hereunder.
10.8 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.9 Amendment. This Agreement may not be amended or
---------
modified in any respect except by a written agreement signed by all of the
parties hereto.
10.10 Effective Time. This Agreement shall become effective
---------------
on the Effective Date.
10.11 Change in Law. Any reference to a provision of the
---------------
Code or any other Tax Law shall include a reference to any applicable successor
provision or law.
10.12 Authorization, Etc. Each of the parties hereto hereby
------------------
represents and warrants that it has the power and authority to execute, deliver
and perform this
-26-
Agreement, that this Agreement has been duly authorized by all necessary
corporate action on the part of such party, that this Agreement constitutes a
legal, valid and binding obligation of each such party and that the execution,
deliver and performance of this Agreement by such party does not contravene or
conflict with any provision of law or of its charter or bylaws or any agreement,
instrument or order binding such party.
10.13 No Third Party Beneficiaries. Except as provided in
------------------------------
Sections 3.3 and 3.4 of the Master Separation Agreement, this Agreement is
solely for the benefit of Transocean, Holdings, TODCO and their Subsidiaries and
is not intended to confer upon any other person any rights or remedies
hereunder.
-27-
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers as of the date set forth above.
TRANSOCEAN HOLDINGS INC.
By: /s/ Xxxxxx X. Xxxx
------------------------------
Name: Xxxxxx X. Xxxx
Title: Vice President, Tax
TODCO
By: /s/ T. Xxxxx X'Xxxxx
------------------------------
Name: T. Xxxxx X'Xxxxx
Title: Senior Vice President and
Chief Financial Officer
-28-
SCHEDULE 1.1
APPLICABLE DISCOUNT RATES
2004 . . . . . . . . . . . . . 0.80
2005 . . . . . . . . . . . . . 0.70
2006 . . . . . . . . . . . . . 0.70
2007 . . . . . . . . . . . . . 0.80
2008 . . . . . . . . . . . . . 0.80
2009 . . . . . . . . . . . . . 0.85
2010 . . . . . . . . . . . . . 0.90
2011 . . . . . . . . . . . . . 0.95
2012 . . . . . . . . . . . . . 0.95
2013 and later years . . . . . 1.00
-29-
SCHEDULE 1.2
TODCO TAX GROUP
Cliffs Drilling (Barbados) Holdings SRL
Cliffs Drilling (Barbados) SRL
Cliffs Drilling Company
Cliffs Drilling de Venezuela, S.A.
Cliffs Drilling Trinidad L.L.C.
Cliffs Drilling Trinidad Offshore Limited
Perforaciones Falrig de Venezuela C.A.
Servicos Integrados Petroleros C.C.I., S.A.
Servicios TODCO, de RL de C.V.
THE Offshore Drilling Company
TODCO
TODCO Management Services, Inc. LLC
TODCO Mexico, Inc.
TODCO Trinidad Ltd.
-30-
SCHEDULE 1.3
TRANSOCEAN TAX GROUP
Arcade Drilling as
Asie Sonat Offshore Sdn Bhd
Cariba Ships Corporation N.V.
Caspian Sea Ventures International, Ltd.
Cliffs Drilling do Brasil Servicos de Petroleo S/C Ltda.
DeepVision LLC
Deepwater Drilling II L.L.C.
Deepwater Drilling L.L.C.
Falcon Atlantic Ltd.
Hellerup Finance International
International Chandlers Inc.
NRB Drilling Services Limited
Overseas Drilling Limited
P.T. Hitek Nusantara Offshore Drilling
Partrederiet Polar Frontier Drilling
Polar AS
Polar Frontier Drilling AS
PT RBF Offshore Drilling
R&B Falcon (A) Pty Ltd.
R&B Falcon (Caledonia) Limited
R&B Falcon (Ireland) Limited
R&B Falcon (M) Sdn. Berhad
R&B Falcon (U.K.) Limited
R&B Falcon B.V.
R&B Falcon Canada Co.
R&B Falcon Deepwater (UK) Limited
R&B Falcon Drilling (International & Deepwater) Inc. LLC
R&B Falcon Drilling Co. LLC
R&B Falcon Drilling do Brasil Ltda.
R&B Falcon Drilling Limited, LLC
R&B Falcon Exploration Co. LLC
R&B Falcon International Energy Services B.V.
R&B Falcon Offshore Limited, LLC
R&B Falcon, Inc. LLC
XX Xxxxx Ltd.
RB Astrid Ltd.
RB Mediterranean Ltd.
RBF (Nigeria) Limited
RBF Drilling Co. LLC
RBF Drilling Services, Inc. LLC
RBF Exploration LLC
RBF Finance Co.
RBF Rig Corporation LLC
-31-
RBF Servicos Angola, Limitada
Reading & Xxxxx - Demaga Perfuracoes Ltda.
Reading & Xxxxx Coal Co. LLC
SDS Offshore Ltd.
Sea Wolf Drilling Ltd.
Sea Wolf Drillstar Ltd.
Sea Wolf Sedex Ltd.
Sedco Forex (Malaysia) Sendirian Berhad
Sedco Forex Canada Ltd.
Sedco Forex Corporation
Sedco Forex Holdings Limited
Sedco Forex International Drilling, Inc.
Sedco Forex International Resources, Ltd.
Sedco Forex International Services, S.A.
Sedco Forex International, Inc.
Sedco Forex of Nigeria Limited
Sedco Forex Offshore International N.V.
Sedco Forex Shorebase Support Ltd.
Sedco Forex Technical Services, Inc.
Sedco Forex Technology, Inc.
Sedneth Panama, S.A.
Sefora Maritime Limited
Services Petroliers Sedco Forex
Shore Services, LLC
Sonat Brasocean Servicos De Perfuracoes Ltda.
Sonat Offshore do Brasil Perfuracoes Maritimas Ltda.
Sonat Offshore SA
Transhav AS
Transocean Alaskan Ventures Inc.
Transocean AS
Transocean Brasil Ltda.
Transocean Deepwater Frontier Limited
Transocean Deepwater Pathfinder Limited
Transocean Drilling (Nigeria) Ltd.
Transocean Drilling (U.S.A.) Inc.
Transocean Drilling Company, Inc.
Transocean Drilling Ltd.
Transocean Drilling Services Inc.
Transocean Enterprise Inc.
Transocean Holdings Inc.
Transocean I AS
Transocean Inc.
Transocean International Drilling Inc.
Transocean International Drilling Limited
Transocean Investmentivos Ltda.
Transocean Management Inc.
-00-
Xxxxxxxxxx Xxxxxxxxxxxxx LLC
Transocean Offshore (Cayman) Inc.
Transocean Offshore (North Sea) Ltd.
Transocean Offshore (U.K.) Inc.
Transocean Offshore Caribbean Sea, L.L.C.
Transocean Offshore D.V. Inc.
Transocean Offshore Deepwater Drilling Inc.
Transocean Offshore Drilling Services LLC
Transocean Offshore Europe Limited
Transocean Offshore Holdings ApS
Transocean Offshore International Ltd.
Transocean Offshore International Ventures Limited
Transocean Offshore Limited
Transocean Offshore Nigeria Ltd.
Transocean Offshore Norway Inc.
Transocean Offshore Services Ltd.
Transocean Offshore Ventures Inc.
Transocean Sedco Forex Brasil Ltda.
Transocean Sedco Forex Ventures Limited
Transocean Services AS
Transocean Sino Ltd.
Transocean Support Services Limited
Transocean UK Ltd.
Transocean-Xxxxxx Drilling Technology, L.L.C.
Triton Drilling Ltd.
Triton Holdings Limited
Triton Industries, Inc.
Wilrig Drilling (Canada) Inc.
Wilrig Offshore (UK) Ltd.
-33-
APPENDIX A
The following examples illustrate the operation of various provisions of
Section 4 of this Agreement. Each of the examples assumes (i) an income tax
rate of 35%, (ii) that the Closing Date occurred in 2003, and (iii) that TODCO
files a Separate Return with respect to all Taxes in 2004 and later years.
Example 1. In 2004, TODCO has $100x of gross income, all of which is from
sources outside the United States, and pays $35x of Foreign Income Taxes. TODCO
has no other expenses or deductions in 2004, but has available a $100x net
operating loss ("NOL") carryforward from 2002. TODCO elects (or Holdings causes
TODCO to elect) to credit, rather than deduct, Foreign Income Taxes paid in
2004. TODCO's foreign tax credits are, however, subject to full limitation, but
solely because of the existence of the 2002 NOL. The following reflects TODCO's
2004 liability for Taxes with and without regard to the 2002 NOL:
Actual Return Hypothetical Return
with 2002 NOL without 2002 NOL
Gross Income 100x 100x
Deductions -0- -0-
2002 NOL 100x -0-
------ ------
Pre-Credit Tax Liability -0- 35x
Credits -0- 35x
------ ------
Income Tax Liability -0- -0-
Pursuant to Section 4.2(b)(i), the 2002 NOL is treated as a Pre-IPO Tax
Asset. Because the 2002 NOL has the effect of reducing Taxes for which TODCO is
liable pursuant to Section 2 (without regard to the 2004 foreign tax credits
that could have otherwise been used), TODCO must pay Holdings pursuant to
Section 4.2(a) an amount equal to the value of the 2002 NOL. Pursuant to
4.2(c), the value of the 2002 NOL is $35x (viz., 35% x $100x), reduced by the
value of the foreign tax credits that could have been used to similarly reduce
TODCO's Taxes, but for the existence of the 2002 NOL. Pursuant to clause (x) of
the last sentence of Section 4.2(c), the value of the foreign tax credits is
$28x (viz., 80% x $35x). Accordingly, the value of the 2002 NOL, $35x, is
reduced by the value of the foreign tax credits, $28x, resulting in a $7 payment
obligation by TODCO to Holdings.
Pursuant to Section 4.2(b)(iv), the 2004 foreign tax credits will
thereafter be treated as a Pre-IPO Tax Asset. Accordingly, if TODCO subsequently
uses those credits on a Tax Return to reduce its Taxes, it must pay Holdings
under Section 4.2(a) an amount equal to the value of those credits. The value of
those credits will be $28x, pursuant to Section 4.2(c)(iii), but subject to
reduction by any Post-IPO Tax that could have otherwise been used to similarly
reduce such Taxes. Similarly, if TODCO uses only half of those credits (i.e.,
$17.5x), TODCO must only pay Holdings an amount equal to the
-34-
value of half of the credits (i.e., $14x, subject to reduction by any Post-IPO
Tax that could have otherwise been used to similarly reduce such Taxes).
Example 2. The facts are the same as in Example 1, except that TODCO elects
(or Holdings causes TODCO to elect) to deduct rather than credit Foreign Income
Taxes paid in 2004. The following reflects TODCO's 2004 liability for Taxes with
and without regard to the 2002 NOL:
Actual Return Hypothetical Return
with 2002 NOL without 2002 NOL
Gross Income 100x 100x
Deductions 35x 35x
2002 NOL 65x -0-
------ ------
Pre-Credit Tax Liability -0- 22.75x
Credits -0- -0-
------ ------
Income Tax Liability -0- 22.75x
Pursuant to Section 4.2(b)(i), the 2002 NOL is treated as a Pre-IPO Tax
Asset. Because $65x of the 2002 NOL has the effect of reducing Taxes for which
TODCO is liable pursuant to Section 2, TODCO must pay Holdings pursuant to
Section 4.2(a) an amount equal to the value of that portion of the 2002 NOL.
Pursuant to 4.2(c), the value of that portion of the 2002 NOL is $22.75x (viz.,
35% x $65x), reduced by the value of any Post-IPO Tax Asset that could have
otherwise been used to reduce TODCO's Taxes. Pursuant to the second sentence of
Section 4.2(c), the deduction for Foreign Income Taxes paid in 2004 will be
considered a Tax Asset that could have otherwise been so used, because TODCO
could have credited, rather than deducted, such Foreign Income Taxes but for the
existence of the 2002 NOL. Pursuant to clause (y) of the last sentence of
Section 4.2(c), the value of the such deduction shall equal $18.20x (viz., 80% x
($35x - 35% x $35x)). Accordingly, the value of $65x of the 2002 NOL, $22.75x,
is reduced by the value of the deduction for Foreign Income Taxes paid in 2004,
$18.20x, resulting in a $4.55 payment obligation by TODCO to Holdings.
Example 3. The facts are the same as in Example 1, except that in 2008
TODCO files (or Holdings causes TODCO to file) an amended Tax Return for 2004 in
which TODCO elects to deduct, rather than credit, Foreign Income Taxes paid in
2004 (i.e., the results in Example 2). Accordingly, TODCO's obligations under
Section 4.2(a) will be recomputed taking into account the amended Tax Return,
and TODCO and Holdings will make payments between each other pursuant to Section
5.3 to reflect the adjusted obligation. On these facts, Holdings would pay TODCO
$2.45 (viz. $7 - $4.55).
The change in the 2004 election, however, also reduces the amount of the
2002 NOL carryforward that is used in 2004. Accordingly, a payment obligation
may arise with respect to the $35x of 2002 NOL carryforward that is carried to
2005 or a later year.
-35-
Example 4. In 2004, TODCO has $100x of gross income and pays no Foreign
Income Taxes. TODCO has no expenses or deductions in 2004, but has available a
$100x NOL carryforward from 2002. The following reflects TODCO's 2004 liability
for Taxes with and without regard to the 2002 NOL:
Actual Return Hypothetical Return
with 2002 NOL without 2002 NOL
Gross Income 100x 100x
Deductions -0- -0-
2002 NOL 100x -0-
------ ------
Pre-Credit Tax Liability -0- -0-
Credits -0- -0-
------ ------
Income Tax Liability -0- 35x
Pursuant to Section 4.2(b)(i), the 2002 NOL is treated as a Pre-IPO Tax
Asset. Because the 2002 NOL has the effect of reducing Taxes for which TODCO is
liable pursuant to Section 2, TODCO must pay Holdings pursuant to Section 4.2(a)
an amount equal to the value of the 2002 NOL. Pursuant to 4.2(c)(i), the value
of the 2002 NOL is $35x (viz., 35% x $100x). Accordingly, TODCO must pay
Holdings $35x.
In 2005, TODCO generates a $100x NOL. Pursuant to the "provided, however,"
clause of Section 4.2(c), TODCO may not carry back the 2005 NOL to the
hypothetical 2004 Tax Return in order to reduce the value of the 2002 NOL that
was used in 2004.
Example 5. In 2004, TODCO generates a $100x NOL. In 2005, TODCO has $100x
of gross income and pays no Foreign Income Taxes. TODCO has no expenses or
deductions in 2005, but has available a $100x NOL carryforward from 2002 and a
$100x NOL carryforward from 2004 . The following reflects TODCO's 2005
liability for Taxes with and without regard to the 2002 NOL:
Actual Return Hypothetical Return
with 2002 NOL without 2002 NOL
Gross Income 100x 100x
Deductions -0- -0-
2002 NOL -0- 100x
2004 NOL 100x -0-
------ ------
Pre-Credit Tax Liability -0- -0-
Credits -0- -0-
------ ------
Income Tax Liability -0- -0-
Pursuant to Section 4.2(b)(i), the 2002 NOL is treated as a Pre-IPO Tax
Asset. Because the 2002 NOL has the effect of reducing Taxes for which TODCO is
Liable
-36-
pursuant to Section 2 (without regard to the 2004 NOL that could have otherwise
been used), TODCO must pay Holdings pursuant to Section 4.2(a) an amount equal
to the value of the 2002 NOL. Pursuant to 4.2(c), the value of the 2002 NOL is
$35x (viz., 35% x $100x), reduced by the value of the 2004 NOL that could have
been used to similarly reduce TODCO's Taxes, but for the existence of the 2002
NOL. Pursuant to the general rule of Section 4.2(c)(i), the value of the 2004
NOL is $35x (viz., 35% x $100x). Accordingly, the value of the 2002 NOL, $35x,
is reduced by the value of the 2004 NOL, also $35x, resulting in no payment
obligation by TODCO to Holdings.
Pursuant to Section 4.2(b)(iv), the 2004 NOL will thereafter be treated in
the same manner as if such NOL had been created on or before the Closing Date.
Accordingly, if TODCO subsequently uses the 2004 NOL on a Tax Return to reduce
its Taxes, it must pay Holdings under Section 4.2(a) an amount equal to the
value of such NOL.
Example 6. In 2004, TODCO has $100x of gross income from sources outside
the United States, and pays $35x of Foreign Income Taxes. TODCO also has $100 of
gross income from sources within the United States and a $100 deduction from
sources outside the United States. TODCO has no other expenses or deductions in
2004, but has available a $100x NOL carryforward from 2002. TODCO elects (or
Holdings causes TODCO to elect) to credit, rather than deduct, Foreign Income
Taxes paid in 2004. TODCO's foreign tax credits are, however, subject to full
limitation, NOT solely because of the existence of the 2002 NOL, but also
because of the $100 deduction from sources outside the United States. The
following reflects TODCO's 2004 liability for Taxes with and without regard to
the 2002 NOL:
Actual Return Hypothetical Return
with 2002 NOL without 2002 NOL
Gross Income (US Source) 100x 100x
Gross Income (Foreign Source) 100x 100x
Deductions (US Source) -0- -0-
Deductions (Foreign Source) 100x 100x
2002 NOL 100x -0-
------ ------
Pre-Credit Tax Liability -0- 35x
Credits -0- -0-
------ ------
Income Tax Liability -0- 35x
Pursuant to Section 4.2(b)(i), the 2002 NOL is treated as a Pre-IPO Tax
Asset. Because the 2002 NOL has the effect of reducing Taxes for which TODCO is
liable pursuant to Section 2 (without regard to the 2004 foreign tax credits),
TODCO must pay Holdings pursuant to Section 4.2(a) an amount equal to the value
of the 2002 NOL. Pursuant to 4.2(c), the value of the 2002 NOL is $35x (viz.,
35% x $100x), reduced by the value of the foreign tax credits that could have
been used to similarly reduce TODCO's Taxes, but for the existence of the 2002
NOL. Because the foreign tax credits
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could not have been used even without the existence of the 2002 NOL, there is no
reduction in the value of the 2002 NOL. Accordingly, there is a $35 payment
obligation by TODCO to Holdings. The foreign tax credits continue to be a
Post-IPO Tax Asset.
Example 7. As of January 30, 2006, TODCO and its Subsidiaries,
collectively, have the following Tax Assets:
- a $1,000x NOL carryforward from 2002,
- a $100x foreign tax credit carryforward from 2002, and
- a $100x foreign tax credit carryforward from 2004 that is treated as a
Pre-IPO Tax Asset by reason of Section 4.2(b)(iv) with a value of $80x
pursuant to Section 4.2(c)(iii).
On January 31, 2006, TODCO disposes of 30% of the stock of one its
Subsidiaries ("Subsidiary A"). As a result of such disposition, Subsidiary A
immediately thereafter ceases to join in the filing of a Federal Income Tax
Return that is filed on a consolidated basis by TODCO and its eligible
Subsidiaries (the "Deconsolidation"). Under the relevant Tax Law, Subsidiary A
will be allowed to carry forward and deduct or credit, as applicable, on a Tax
Return filed with respect to a Tax Year, or portion thereof, beginning after the
day of Deconsolidation the following Tax Assets: (1) $200x of the 2002 NOL
carryforward, (2) $20x of the 2002 foreign tax credit carryforward, and (3) $20x
of the 2004 foreign tax credit carryforward. On May 31, 2006, 51% of the TODCO
stock is acquired by a corporation unrelated to Holdings.
As a result of the Deconsolidation, the TODCO Tax Group will, pursuant to
Section 4.2(g), be deemed to have used those Tax Assets attributable to
Subsidiary A: (1) $200x of the 2002 NOL carryforward, (2) $20x of the 2002
foreign tax credit carryforward, and (3) $20x of the 2004 foreign tax credit
carryforward. The value of these deemed used Tax Assets is determined as
follows:
- The value of $200x of the 2002 NOL carryforward will equal $70x (viz.,
35% x $200), pursuant to Section 4.2(c)(i) and the penultimate
sentence of Section 4.2(g).
- The value of $20x of the 2002 foreign tax credit carryforward will
equal $7x (viz., 35% x $20), pursuant to Section 4.2(c)(i) and the
last sentence of Section 4.2(g).
- The value of $20x of the 2004 foreign tax credit carryforward will
equal $16x (viz., 20/100 x $80x), pursuant to Section 4.2(c)(iii) and
the penultimate sentence of Section 4.2(g).
Accordingly, TODCO will be obligated to pay Holdings $93x (viz., $70x + $7x
+ $16x), pursuant to Sections 4.2(a) and (g). Such payment will be due 30 days
after January 30, 2006, pursuant to Section 5.2(b). This payment is due without
regard to whether any member of the TODCO Tax Group actually uses such Tax
Assets.
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As a result of the acquisition of 51% of the stock of TODCO by a
corporation unrelated to Holdings, the remaining members of the TODCO Tax Group
will, pursuant to Section 4.2(f), be deemed to have used: (1) the remaining
$800x of the 2002 NOL carryforward, (2) the remaining $80x of the 2002 foreign
tax credit carryforward, and (3) the remaining $80x of the 2004 foreign tax
credit carryforward. Pursuant to Section 4.2(h)(i), TODCO will not be deemed to
have again used the Pre-IPO Tax Assets deemed used on January 30, 2006 pursuant
to Section 4.2(g). The value of these deemed used Tax Assets is determined as
follows:
- The value of the remaining $800x of the 2002 NOL carryforward will
equal $280x (viz., 35% x $800), pursuant to Section 4.2(c)(i) and the
penultimate sentence of Section 4.2(f).
- The value of the remaining $80x of the 2002 foreign tax credit
carryforward will equal $28x (viz., 35% x $80), pursuant to Section
4.2(c)(i) and the last sentence of Section 4.2(f).
- The value of the remaining $80x of the 2004 foreign tax credit
carryforward will equal $64x (viz., 80/100 x $80x), pursuant to
Section 4.2(c)(iii) and the penultimate sentence of Section 4.2(g).
Accordingly, TODCO will be obligated to pay Holdings $372x (viz., $280x +
$28x + $64x), pursuant to Sections 4.2(a) and (f). Such payment will be due 30
days after May 30, 2006, pursuant to Section 5.2(b). This payment is due
without regard to whether any member of the TODCO Tax Group actually uses such
Tax Assets.
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