BPZ Resources, Inc. - Shareholder.com

The income tax expense (benefit) for the year ended December 31, 2009 and 2008 differs from the amount computed by
applying the U.S. statutory federal income tax rate for the applicable year to consolidated net loss before income taxes as follows (in
thousands):
2009 2008
Federal statutory income tax rate ................................................................. $ (14,408) $ (2,212)
Increases (decreases) resulting from: ....................................................... — —
Peruvian income tax - rate difference less than 34% statutory............. — —
Non-deductible stock compensation expense....................................... 2,908 6,551
Non-deductible intercompany expenses and other .............................. 4,180 —
Tax effect of Peru conversion to permanent establishment status........ — 7,642
Change in domestic valuation allowance ............................................. 745 (8,840)
$ (6,575) $ 3,141
A summary of the components of deferred tax assets, deferred tax liabilities and other taxes deferred at December 31, 2009
and 2008 are presented below (in thousands):
55
2009 2008
Deferred Tax:
Asset:
Net Operating Loss............................................................................ $ 16,546 $ 19,941
Deferred Compensation..................................................................... 2,514 1,889
Foreign Tax AMT ............................................................................. 1,647 —
Asset Basis Difference ...................................................................... — —
Exploration Expense ......................................................................... 7,256 2,080
Depreciation ...................................................................................... — 12
Depletion........................................................................................... 8,162 3,340
Asset Retirement Obligation ............................................................. 67 27
Overhead Allocaion to Foreign Locations ........................................ 2,298 —
Other.................................................................................................. 119 666
Liability: — —
Preoperation Expenses ...................................................................... (295) (295)
Depreciation ...................................................................................... (18) —
Asset Basis Difference ...................................................................... (1,819) (1,298)
Other.................................................................................................. (1) (300)
Net Deferred Tax Asset..................................................................... $ 36,476 $ 26,062
Less Domestic Valuation Allowance .................................................... (19,548) (21,191)
Deferred Tax Asset............................................................................ $ 16,928 $ 4,871
Net deferred tax assets in the foregoing table include the deferred consequences of the future reversal of Peruvian deferred
tax assets and liabilities on the impact of the Peruvian employee profit share plan tax of $3.3 million in 2009 and $1.1 million in 2008.
As of December 31, 2009 and 2008, we had a valuation allowance for the full amount of the domestic deferred tax asset resulting from
the income tax benefit generated from net losses, as we believe, based on the weight of available evidence, that it is more likely than
not that the deferred tax asset will not be realized prior to the expiration of net operating loss carryforwards in various amounts
through 2028. Furthermore, because we have no operations within the U.S. taxing jurisdiction, it is likely that a sufficient generation
of revenue to offset our deferred tax asset is remote. As a result, we have a full allowance on our deferred tax asset generated in the
U.S. However, we are subject to Peruvian income tax on our earnings at a statutory rate, as defined in the Block Z-1 License
Contract, of 22%. Because we were under a well testing program from which we will finalize a development plan for Block Z-1, we
had not moved into the commercial phase of production as defined by the license contract. As such, certain deductions were
disallowed by the Peruvian tax regime while we operated under the well testing program. In addition, the tax provision is based on
taxable Peruvian income that excludes certain U.S. expenses that are not deductible at the Peruvian level. As a result, we recognized a
total tax provision for the year ended December 31, 2009 of approximately $6.6 million.
We moved into commercial production in Block Z-1 under the license contract in 2010, at which time our full investment in
our producing properties were eligible to be amortized over five years. We assessed the realizability of the deferred tax asset generated
in Peru. We considered whether it is more likely than not that some portion or the entire deferred tax asset would not be realized. The
ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income in Peru during the periods in
which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future