Income Taxes
Income taxes charged to income were:
|
| | | | | | | | | |
| Millions of Dollars |
| 2013 |
| | 2012 |
| | 2011 |
|
Income Taxes | | | | | |
Federal | | | | | |
Current | $ | 1,054 |
| | 1,967 |
| | 713 |
|
Deferred | 526 |
| | 69 |
| | 745 |
|
Foreign | | | | | |
Current | 98 |
| | 160 |
| | 126 |
|
Deferred | (48 | ) | | 45 |
| | (9 | ) |
State and local | | | | | |
Current | 146 |
| | 253 |
| | 132 |
|
Deferred | 68 |
| | (21 | ) | | 115 |
|
| $ | 1,844 |
| | 2,473 |
| | 1,822 |
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:
|
| | | | | | |
| Millions of Dollars |
| 2013 |
| | 2012 |
|
Deferred Tax Liabilities | | | |
Properties, plants and equipment, and intangibles | $ | 3,747 |
| | 3,721 |
|
Investment in joint ventures | 2,696 |
| | 2,183 |
|
Investment in foreign subsidiaries | 401 |
| | 386 |
|
Other | — |
| | 24 |
|
Total deferred tax liabilities | 6,844 |
| | 6,314 |
|
Deferred Tax Assets | | | |
Benefit plan accruals | 499 |
| | 614 |
|
Inventory | 51 |
| | 92 |
|
Asset retirement obligations and accrued environmental costs | 223 |
| | 234 |
|
Other financial accruals and deferrals | 223 |
| | 166 |
|
Loss and credit carryforwards | 123 |
| | 313 |
|
Other | 18 |
| | 59 |
|
Total deferred tax assets | 1,137 |
| | 1,478 |
|
Less: valuation allowance | 127 |
| | 329 |
|
Net deferred tax assets | 1,010 |
| | 1,149 |
|
Net deferred tax liabilities | $ | 5,834 |
| | 5,165 |
|
Current assets, long-term assets, current liabilities and long-term liabilities included deferred taxes of $291 million, $0 million, $0 million and $6,125 million, respectively, at December 31, 2013, and $307 million, $1 million, $29 million and $5,444 million, respectively, at December 31, 2012.
With the exception of certain foreign tax credit and separate company loss carryforwards, tax attributes were not allocated to us from ConocoPhillips. The foreign tax credit carryforwards, which have a full valuation allowance against them, begin to expire in 2019. The loss carryforwards, all of which are related to foreign operations, have indefinite carryforward periods.
Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2013, valuation allowances decreased by a total of $202 million. This decrease is primarily related to the write off of deferred tax assets deemed unrecoverable as a result of the Separation and the utilization of certain foreign tax credits, partially offset by the recording of current year valuation allowances. Based on our historical taxable income, expectations for the future, and available tax-planning strategies, management expects remaining net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and the tax consequences of future taxable income.
As of December 31, 2013, we had undistributed earnings related to foreign subsidiaries and foreign corporate joint ventures of approximately $1.7 billion for which deferred income taxes have not been provided. We plan to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the number of unknown variables inherent in the calculation.
As a result of the Separation and pursuant to the Tax Sharing Agreement with ConocoPhillips, the unrecognized tax benefits related to our operations for which ConocoPhillips was the taxpayer remain the responsibility of ConocoPhillips, and we have indemnified ConocoPhillips for such amounts. Those unrecognized tax benefits are reflected in the following table which shows a reconciliation of the beginning and ending unrecognized tax benefits.
|
| | | | | | | | | |
| Millions of Dollars |
| 2013 |
| | 2012 |
| | 2011 |
|
| | | | | |
Balance at January 1 | $ | 158 |
| | 169 |
| | 166 |
|
Additions based on tax positions related to the current year | 30 |
| | 3 |
| | 11 |
|
Additions for tax positions of prior years | 25 |
| | 35 |
| | 27 |
|
Reductions for tax positions of prior years | (8 | ) | | (47 | ) | | (32 | ) |
Settlements | (3 | ) | | (2 | ) | | (2 | ) |
Lapse of statute | — |
| | — |
| | (1 | ) |
Balance at December 31 | $ | 202 |
| | 158 |
| | 169 |
|
Included in the balance of unrecognized tax benefits for 2013, 2012 and 2011 were $161 million, $125 million and $114 million, respectively, which, if recognized, would affect our effective tax rate. With respect to various unrecognized tax benefits and the related accrued liability, approximately $118 million may be recognized or paid within the next twelve months due to completion of audits.
At December 31, 2013, 2012 and 2011, accrued liabilities for interest and penalties totaled $18 million, $15 million and $9 million, respectively, net of accrued income taxes. Interest and penalties decreased earnings by $3 million and $6 million in 2013 and 2012, respectively, and benefited earnings by $7 million in 2011.
We file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Audits in significant jurisdictions are generally complete as follows: United Kingdom (2010), Germany (2007) and United States (2008). Certain issues remain in dispute for audited years, and unrecognized tax benefits for years still subject to or currently undergoing an audit are subject to change. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. Although it is reasonably possible such changes could be significant when compared with our total unrecognized tax benefits, the amount of change is not estimable.
The amounts of U.S. and foreign income (loss) before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were:
|
| | | | | | | | | | | | | | | | | | |
| Millions of Dollars | | Percent of Pre-tax Income |
| 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Income from continuing operations before income taxes | | | | | | | | | | | |
United States | $ | 5,158 |
| | 6,192 |
| | 6,107 |
| | 93.3 | % | | 94.4 |
| | 93.1 |
|
Foreign | 368 |
| | 364 |
| | 452 |
| | 6.7 |
| | 5.6 |
| | 6.9 |
|
| $ | 5,526 |
| | 6,556 |
| | 6,559 |
| | 100.0 | % | | 100.0 |
| | 100.0 |
|
| | | | | | | | | | | |
Federal statutory income tax | $ | 1,934 |
| | 2,295 |
| | 2,295 |
| | 35.0 | % | | 35.0 |
| | 35.0 |
|
Goodwill allocated to assets sold | — |
| | 9 |
| | 96 |
| | — |
| | 0.1 |
| | 1.4 |
|
Capital loss utilization | — |
| | — |
| | (619 | ) | | — |
| | — |
| | (9.4 | ) |
Tax on foreign operations | (198 | ) | | 141 |
| | (61 | ) | | (3.6 | ) | | 2.2 |
| | (0.9 | ) |
Federal manufacturing deduction | (68 | ) | | (124 | ) | | (52 | ) | | (1.2 | ) | | (1.9 | ) | | (0.8 | ) |
State income tax, net of federal benefit | 139 |
| | 151 |
| | 161 |
| | 2.5 |
| | 2.3 |
| | 2.5 |
|
Other | 37 |
| | 1 |
| | 2 |
| | 0.7 |
| | — |
| | — |
|
| $ | 1,844 |
| | 2,473 |
| | 1,822 |
| | 33.4 | % | | 37.7 |
| | 27.8 |
|
During 2011, we realized a significant tax capital loss, which had not previously been recognized, that was related to the disposition of the legal entity which ultimately held the Wilhelmshaven Refinery assets. The tax benefit of this loss was realized as a reduction of capital gains generated in 2011. During 2012, we impaired a foreign investment for which no tax benefit was recognized. No tax benefit was recognized due to our ownership structure and assertion that the earnings of the foreign subsidiary that holds the investment will be reinvested for the foreseeable future. This item is reflected in “Tax on foreign operations” in the table above.
Prior to the Separation, and except for certain state and dedicated foreign entity income tax returns, we were included in the ConocoPhillips income tax returns for all applicable years. In accordance with the Tax Sharing Agreement, a cash settlement was received from ConocoPhillips in 2013 upon the filing of the income tax return for the calendar year ended December 31, 2011. We received a further cash settlement in January 2014 for the January 1, 2012, through April 30, 2012 period. In 2013, we filed our initial U.S. consolidated income tax returns for the period May 1, 2012, through December 31, 2012.
