16. Income Taxes
The provision (benefit) for income taxes from continuing operations consisted of:
| 2013 | 2012 | 2011 | ||||||||||
| (In millions) | ||||||||||||
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United States |
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Federal |
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Current |
$ | 8 | $ | 30 | $ | 202 | ||||||
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Deferred |
67 | (419 | ) | (653 | ) | |||||||
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State |
4 | 34 | 6 | |||||||||
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| 79 | (355 | ) | (445 | ) | ||||||||
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Foreign |
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Current |
941 | 2,019 | 1,185 | |||||||||
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Deferred |
187 | (220 | ) | (60 | ) | |||||||
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| 1,128 | 1,799 | 1,125 | ||||||||||
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Total |
1,207 | 1,444 | 680 | |||||||||
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Adjustment of deferred taxes for foreign income tax law changes* |
(682 | ) | 115 | 29 | ||||||||
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Total provision for income taxes |
$ | 525 | $ | 1,559 | $ | 709 | ||||||
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| * |
In 2013, amount reflects $674 million for the effect of the Denmark hydrocarbon income tax law change to the Chapter 3A regime from the Chapter 3 regime in December 2013 and $8 million for the effect of a change in Norway’s hydrocarbon and base corporate income tax rates in December 2013. In 2012, amount reflects the effect of the UK supplementary income tax rate change in July 2012. In 2011, amount reflects the July 2011 increase in the supplementary tax on petroleum operations in the UK. |
Income from continuing operations before income taxes consisted of the following:
| 2013 | 2012 | 2011 | ||||||||||
| (In millions) | ||||||||||||
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United States (a) |
$ | 473 | $ | (520 | ) | $ | 14 | |||||
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Foreign (b) |
4,020 | 3,946 | 2,226 | |||||||||
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Total income from continuing operations before income taxes |
$ | 4,493 | $ | 3,426 | $ | 2,240 | ||||||
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| (a) |
Includes substantially all of the Corporation’s interest expense and the results of hedging activities. |
| (b) |
Foreign income includes the Corporation’s Virgin Islands and other operations located outside of the U.S. |
The components of deferred tax liabilities and deferred tax assets at December 31 were as follows:
| 2013 | 2012 | |||||||
| (In millions) | ||||||||
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Deferred tax liabilities |
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Property, plant and equipment |
$ | (5,581 | ) | $ | (5,345 | ) | ||
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Other |
(155 | ) | (105 | ) | ||||
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Total deferred tax liabilities |
(5,736 | ) | (5,450 | ) | ||||
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Deferred tax assets |
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Net operating loss carryforwards |
2,726 | 1,985 | ||||||
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Tax credit carryforwards |
161 | 373 | ||||||
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Property, plant and equipment and investments |
2,643 | 2,796 | ||||||
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Accrued compensation, deferred credits and other liabilities |
982 | 976 | ||||||
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Asset retirement obligations |
1,516 | 1,340 | ||||||
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Other |
216 | 313 | ||||||
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Total deferred tax assets |
8,244 | 7,783 | ||||||
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Valuation allowances |
(1,519 | ) | (1,282 | ) | ||||
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Total deferred tax assets, net of valuation allowances |
6,725 | 6,501 | ||||||
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Net deferred tax assets |
$ | 989 | $ | 1,051 | ||||
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At December 31, 2013, the Corporation has recognized a gross deferred tax asset related to net operating loss carryforwards of $2,726 million before application of the valuation allowances. The deferred tax asset is comprised of $2,390 million attributable to foreign net operating losses which begin to expire in 2020, $71 million attributable to U.S. federal operating losses which begin to expire in 2020 and $265 million attributable to losses in various U.S. states which begin to expire in 2014. The deferred tax asset attributable to foreign net operating losses, net of valuation allowances, is $1,704 million, substantially all of which relates to loss carryforwards in Denmark, Norway and Malaysia. At December 31, 2013, the Corporation has federal, state and foreign alternative minimum tax credit carryforwards of $110 million which can be carried forward indefinitely, and approximately $1 million of other business credit carryforwards. Foreign tax credit carryforwards, which begin to expire in 2016, total $50 million.
In the Consolidated Balance Sheet, deferred tax assets and liabilities are netted by taxing jurisdiction and are recorded at December 31 as follows:
| 2013 | 2012 | |||||||
| (In millions) | ||||||||
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Other current assets |
$ | 963 | $ | 596 | ||||
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Deferred income taxes (long-term asset) |
2,319 | 3,126 | ||||||
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Accrued liabilities |
(1 | ) | (9 | ) | ||||
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Deferred income taxes (long-term liability) |
(2,292 | ) | (2,662 | ) | ||||
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Net deferred tax assets |
$ | 989 | $ | 1,051 | ||||
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A net deferred tax liability of $157 million, primarily relating to fixed asset basis differences and net operating losses of the Corporation’s subsidiaries in Thailand and Indonesia, is included in current liabilities associated with assets held for sale in the Consolidated Balance Sheet at December 31, 2013.
The difference between the Corporation’s effective income tax rate from continuing operations and the U.S. statutory rate is reconciled below:
| 2013 | 2012 | 2011 | ||||||||||
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U.S. statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Effect of foreign operations* |
7.2 | 12.5 | (4.1 | ) | ||||||||
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State income taxes, net of Federal income tax |
0.1 | 0.6 | 0.1 | |||||||||
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Change in enacted tax laws |
(15.2 | ) | 3.3 | 1.3 | ||||||||
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Gains on asset sales, net |
(16.0 | ) | (5.3 | ) | (5.5 | ) | ||||||
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Effect of equity loss and operations related to HOVENSA L.L.C. |
— | — | 3.1 | |||||||||
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Other |
0.6 | (0.6 | ) | 1.8 | ||||||||
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Total |
11.7 | % | 45.5 | % | 31.7 | % | ||||||
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| * |
The variance in effective income tax rates attributable to the effect of foreign operations primarily resulted from the suspension of operations in Libya for most of 2011 and part of 2013. |
Below is a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
| 2013 | 2012 | |||||||
| (In millions) | ||||||||
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Balance at January 1 |
$ | 523 | $ | 415 | ||||
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Additions based on tax positions taken in the current year |
161 | 132 | ||||||
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Additions based on tax positions of prior years |
2 | 45 | ||||||
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Reductions based on tax positions of prior years |
(96 | ) | (33 | ) | ||||
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Reductions due to settlements with taxing authorities |
(19 | ) | (30 | ) | ||||
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Reductions due to lapses in statutes of limitation |
(1 | ) | (6 | ) | ||||
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Balance at December 31 |
$ | 570 | $ | 523 | ||||
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The December 31, 2013 balance of unrecognized tax benefits includes $503 million that, if recognized, would impact the Corporation’s effective income tax rate. Over the next 12 months, it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $15 million to $25 million due to settlements with taxing authorities or other resolutions, as well as lapses in statutes of limitation. The Corporation had accrued interest and penalties related to unrecognized tax benefits of $52 million and $60 million as of December 31, 2013 and 2012, respectively.
The Corporation has not recognized deferred income taxes on the portion of undistributed earnings of foreign subsidiaries expected to be indefinitely reinvested in foreign operations. The Corporation had undistributed earnings from foreign subsidiaries that it expects to be indefinitely reinvested in foreign operations of approximately $7.5 billion as of December 31, 2013. If these earnings were not indefinitely reinvested, a deferred tax liability of approximately $2.6 billion would be recognized, not accounting for the utilization of foreign tax credits in the U.S.
The Corporation and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Corporation is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2005.
Income taxes paid (net of refunds) in 2013, 2012 and 2011 amounted to $1,353 million, $1,822 million and $1,384 million, respectively.