Income Taxes
Income (loss) before tax expense for continuing operations was:
|
| | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | | 2017 | | 2016 | | 2015 |
United States | | $ | (783 | ) | | $ | (1,449 | ) | | $ | (2,384 | ) |
Foreign | | 329 |
| | 285 |
| | (55 | ) |
Total | | $ | (454 | ) | | $ | (1,164 | ) | | $ | (2,439 | ) |
Income tax provisions (benefits) for continuing operations were: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
(In millions) | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total |
Federal | $ | (32 | ) | | $ | 41 |
| | $ | 9 |
| | $ | 2 |
| | $ | 836 |
| | $ | 838 |
| | $ | (41 | ) | | $ | (684 | ) | | $ | (725 | ) |
State and local | (14 | ) | | 2 |
| | (12 | ) | | 2 |
| | 8 |
| | 10 |
| | (8 | ) | | (18 | ) | | (26 | ) |
Foreign | 483 |
| | (104 | ) | | 379 |
| | 91 |
| | (16 | ) | | 75 |
| | 115 |
| | (102 | ) | | 13 |
|
Total | $ | 437 |
| | $ | (61 | ) | | $ | 376 |
| | $ | 95 |
| | $ | 828 |
| | $ | 923 |
| | $ | 66 |
| | $ | (804 | ) | | $ | (738 | ) |
A reconciliation of the federal statutory income tax rate applied to income (loss) from continuing operations before income taxes to the provision (benefit) for income taxes follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In millions) | | 2017 | | 2016 | | 2015 |
Total pre-tax income (loss) from continuing operations | | $ | (454 | ) | | $ | (1,164 | ) | | $ | (2,439 | ) |
Total income tax expense (benefit) | | $ | 376 |
| | $ | 923 |
| | $ | (738 | ) |
Effective income tax expense (benefit) rate on continuing operations | | 83 | % | | 79 | % | | (30 | )% |
| | | | | | |
Income taxes at the statutory tax rate of 35% (a) | | $ | (159 | ) | | $ | (407 | ) | | $ | (854 | ) |
Effects of foreign operations | | 140 |
| | 47 |
| | (55 | ) |
Adjustments to valuation allowances | | 446 |
| | 1,270 |
| | 95 |
|
State income taxes | | (19 | ) | | 9 |
| | (15 | ) |
Tax law change | | (35 | ) | | 6 |
| | (3 | ) |
Goodwill impairment | | — |
| | — |
| | 94 |
|
Other federal tax effects | | 3 |
| | (2 | ) | | — |
|
Income tax expense (benefit) on continuing operations | | $ | 376 |
| | $ | 923 |
| | $ | (738 | ) |
(a) Includes income tax benefits primarily related to our U.S. federal income taxes where we have maintained a full valuation allowance since December 2016.
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision and the sum of the amounts allocated to segments appears in the "Not Allocated to Segments" column of the tables in Note 6.
Effects of foreign operations – The effects of foreign operations increased our tax expense in 2017, 2016, and 2015 due to the mix of pretax income between high and low tax jurisdictions. This increase primarily relates to increased sales volumes in Libya during 2017 where the tax rate is 93.5%. Excluding Libya, the effective tax rates on continuing operations would be an expense of 5% in 2017, an expense of 79% in 2016, and a benefit of 29% in 2015.
Adjustments to valuation allowances - Since December 31, 2016, we have maintained a full valuation allowance on our net federal deferred tax assets. In 2017, we recorded a $446 million valuation allowance primarily related to current year activity in the U.S. Included within the $446 million is a $41 million out-of-period adjustment as a result of identifying certain deferred tax assets for which the impact should have been recorded to other comprehensive income, but had been recorded to income from continuing operations in 2016.
Change in tax law – On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Reform Legislation”). Tax Reform Legislation, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018, and repeal of the corporate alternative minimum tax (“AMT”), and a one-time deemed repatriation of accumulated foreign earnings. In the fourth quarter of 2017, we remeasured our deferred taxes at 21%, in accordance with U.S. GAAP standards. The impact of the remeasurement on our federal deferred tax assets and liabilities was equally offset by an adjustment to our valuation allowance with no material impact to current year earnings. We recorded a net benefit of $35 million, classified as a receivable within other noncurrent assets on the consolidated balance sheet, during the fourth quarter of 2017 related to the repeal of the corporate AMT. Although the $35 million net benefit represents what we believe is a reasonable estimate of the impact of the income tax effects of the Act on our consolidated financial statements as of December 31, 2017, it should be considered provisional. We do not expect to pay U.S. federal cash taxes on the deemed repatriation due to an accumulated deficit in foreign earnings for tax purposes.
Once we finalize certain tax positions when we file our 2017 federal tax return, we will be able to conclude whether any further adjustments are required to our net tax position as of December 31, 2017. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.
Deferred tax assets and liabilities resulted from the following: |
| | | | | | | |
| Year Ended December 31, |
(In millions) | 2017 | | 2016 |
Deferred tax assets: | | | |
Employee benefits | $ | 111 |
| | $ | 228 |
|
Operating loss carryforwards | 1,030 |
| | 1,065 |
|
Capital loss carryforwards | 3 |
| | 4 |
|
Foreign tax credits | 611 |
| | 4,430 |
|
Other credit carryforwards | — |
| | 35 |
|
Investments in subsidiaries and affiliates | 174 |
| | 91 |
|
Other | 69 |
| | 86 |
|
Subtotal | 1,998 |
| | 5,939 |
|
Valuation Allowance | (926 | ) | | (4,301 | ) |
Total deferred tax assets | 1,072 |
| | 1,638 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | 1,332 |
| | 3,672 |
|
Accrued revenue | 81 |
| | 75 |
|
Other | 3 |
| | (7 | ) |
Total deferred tax liabilities | 1,416 |
| | 3,740 |
|
Net deferred tax liabilities | $ | 344 |
| | $ | 2,102 |
|
Foreign Tax Credits - As a result of U.S. tax reform, we have reduced our foreign tax credits at December 31, 2017, which are offset by a corresponding reduction in valuation allowance, by $3,819 million due to the remote likelihood these credits will be utilized before expiration. We have not elected any of our foreign earnings to be permanently reinvested abroad. Additionally due to U.S. tax reform, we do not expect future foreign earnings from operations to be subject to tax in the U.S. The remaining foreign tax credits, which are offset by a valuation allowance, expire in 2022 through 2027.
Operating loss carryforwards - At December 31, 2017, our operating loss carryforwards before valuation allowance includes $898 million from the U.S. that expire in 2035-2037. Foreign operating loss carryforwards include $13 million that begin to expire in 2018. State operating loss carryforwards of $119 million expire in 2018 through 2037.
Valuation allowances – At December 31, 2017, we reflect a valuation allowance in our consolidated balance sheet of $926 million against our net deferred tax assets in various jurisdictions in which we operate. The reduction primarily related to the reduction of foreign tax credits in the U.S. In 2016 and 2015, we increased our valuation allowance by $1,268 million and $99 million respectively.
Net deferred tax liabilities were classified in the consolidated balance sheets as follows: |
| | | | | | | |
| December 31, |
(In millions) | 2017 | | 2016 |
Assets: |
| |
|
Other noncurrent assets | $ | 489 |
| | $ | 336 |
|
Liabilities: |
| |
|
Noncurrent deferred tax liabilities | 833 |
| | 769 |
|
Noncurrent liabilities held for sale | — |
| | 1,669 |
|
Net deferred tax liabilities | $ | 344 |
| | $ | 2,102 |
|
We are continuously undergoing examination of our U.S. federal income tax returns by the IRS. Such audits have been completed through the 2014 tax year, with the exception of 2010-11. During the third quarter of 2017, we received a partnership adjustment notification related to the 2010 and 2011 tax years, for which we have filed a Tax Court Petition in the fourth quarter of 2017. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. See Note 24 for further detail. Further, we are routinely involved in U.S. state income tax audits and foreign jurisdiction tax audits. We believe all other audits will be resolved within the amounts paid and/or provided for these liabilities.
As of December 31, 2017, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated: |
| |
United States(a) | 2008-2016 |
Equatorial Guinea | 2007-2016 |
Libya | 2012-2016 |
United Kingdom | 2008-2016 |
| |
(a) | Includes federal and state jurisdictions. |
The following table summarizes the activity in unrecognized tax benefits:
|
| | | | | | | | | | | |
(In millions) | 2017 | | 2016 | | 2015 |
Beginning balance | $ | 66 |
| | $ | 65 |
| | $ | 80 |
|
Additions for tax positions of prior years | 83 |
| | 6 |
| | 1 |
|
Reductions for tax positions of prior years | (3 | ) | | (5 | ) | | — |
|
Settlements | (20 | ) | | — |
| | (7 | ) |
Statute of limitations | — |
| | — |
| | (9 | ) |
Ending balance | $ | 126 |
| | $ | 66 |
| | $ | 65 |
|
If the unrecognized tax benefits as of December 31, 2017 were recognized, $10 million would affect our effective income tax rate. As of December 31, 2017, there are $83 million uncertain tax positions for which it is reasonably possible that the amount could significantly change during the next twelve months. If this were to significantly change, we estimate that any revisions to current and deferred tax liabilities would have no cumulative adverse earnings impact on our consolidated results of operations.
The U.K. tax authorities have challenged the timing of deductibility for certain Brae area decommissioning costs. In the fourth quarter of 2017, we received an adverse ruling from the U.K. first-tier tax tribunal. As a result of the adverse ruling, in the fourth quarter of 2017 we established an uncertain tax position. We have appealed the ruling, but were required to pay the disputed tax amount and associated interest in order to pursue the appeal. The payment of the disputed tax and interest, approximately $108 million, is not considered a settlement of the tax dispute with the U.K. tax authorities. If we prevail in appeals, we will be refunded the tax and interest paid, however, if we do not prevail no further material cash payments are expected due to the initial payment required to appeal the adverse ruling. See Note 24 for further detail.
Interest and penalties are recorded as part of the tax provision and were $2 million, $1 million and $1 million related to unrecognized tax benefits in 2017, 2016 and 2015. As of December 31, 2017 and 2016, $25 million and $15 million of interest and penalties were accrued related to income taxes.