The income tax provision for VAALCO consists primarily of Gabonese and United States income taxes. The Company’s operations in other foreign jurisdictions have a 0% effective tax rate because the Company has incurred losses in those countries and has full valuation allowances against the corresponding net deferred tax assets. The Company files income tax returns in all jurisdictions where such requirements exist, with Gabon and the United States being its primary tax jurisdictions.

For interim reporting periods, the Company determines its tax expense by estimating an annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and applies this tax rate to the Company’s ordinary income or loss to calculate its estimated tax expense or benefit. The tax effect of discrete items is recognized in the period in which they occur at the applicable statutory tax rate.

Provision for income tax expense (benefit) related to income from continuing operations consists of the following:

The Company’s effective tax rate for the nine months ended September 30, 2021 and 2020, excluding the impact of discrete items, was 37.5% and (53%), respectively. For the nine months ended September 30, 2021, the Company’s overall effective tax rate was impacted by non-deductible items associated with operations, the impact of deducting foreign taxes rather than crediting them, and a change in valuation allowance. Prior to September 30, 2021, the valuation allowance was necessary due to the decline in crude oil prices caused by declining global economic activity and excess oil supply, which impacted the Company’s expected ability to utilize its deferred tax assets. However, the Company’s observation of the increasing crude oil prices over a sustained period of time, lack of disruption in operations due to the pandemic, steady increase in global economic activity and oil supply demand over multiple quarters has removed much of the uncertainty and instability in the industry. The Company’s forecasts show these factors as having a positive impact on future taxable income. On the basis of these factors, the Company determined it was more likely than not that it will realize a portion of our deferred tax assets. Accordingly, the Company reversed $22.3 million of the valuation allowance based on estimated future earnings, which was treated as a discrete item for the three and nine months ended September 30, 2021. Should these factors continue to strengthen, further recognition of additional deferred tax assets may be warranted. The total change in valuation allowances for the nine months ended September 30, 2021 was $(15.8) million. For the three months ended September 30, 2021, the current tax expense of $5.5 million includes a $0.2 million unfavorable oil price adjustment as a result of the change in value of the government’s allocation of Profit Oil between the time it was produced and the time it was taken in-kind. After excluding the impact, current income taxes were $5.3 million for the period. For the nine months ended September 30, 2021, the current tax expense of $15.1 million includes a $1.7 million unfavorable oil price adjustment as a result of the change in value of the government’s allocation of Profit Oil between the time it was produced and the time it was taken in-kind. After excluding the impact, current income taxes were $13.4 million for the period.

As of September 30, 2021, the Company had no material uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.