| Note 18—Income Taxes | |||||||
| Income tax benefits included in net loss were: | |||||||
| Millions of Dollars | |||||||
| 2017 | 2016 | 2015 | |||||
| Income Taxes | |||||||
| Federal | |||||||
| Current | $ | 79 | (9) | (718) | |||
| Deferred | (3,046) | (1,634) | (1,443) | ||||
| Foreign | |||||||
| Current | 1,729 | 393 | 745 | ||||
| Deferred | (510) | (519) | (1,315) | ||||
| State and local | |||||||
| Current | 51 | (135) | 8 | ||||
| Deferred | (125) | (67) | (145) | ||||
| $ | (1,822) | (1,971) | (2,868) | ||||
| 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 | ||||
| 2017 | 2016 | |||
| Deferred Tax Liabilities | ||||
| PP&E and intangibles | $ | 9,692 | 15,099 | |
| Investments in joint ventures | - | 933 | ||
| Inventory | 61 | 36 | ||
| Deferred state income tax | 178 | 203 | ||
| Other | 464 | 486 | ||
| Total deferred tax liabilities | 10,395 | 16,757 | ||
| Deferred Tax Assets | ||||
| Benefit plan accruals | 786 | 1,280 | ||
| Asset retirement obligations and accrued environmental costs | 3,060 | 3,514 | ||
| Investments in joint ventures | 57 | - | ||
| Other financial accruals and deferrals | 166 | 317 | ||
| Loss and credit carryforwards | 2,310 | 3,522 | ||
| Other | 152 | 250 | ||
| Total deferred tax assets | 6,531 | 8,883 | ||
| Less: valuation allowance | (1,254) | (675) | ||
| Net deferred tax assets | 5,277 | 8,208 | ||
| Net deferred tax liabilities | $ | 5,118 | 8,549 | |
At December 31, 2017, noncurrent assets and liabilities included deferred taxes of $164 million and $5,282 million, respectively. At December 31, 2016, noncurrent assets and liabilities included deferred taxes of $400 million and $8,949 million, respectively.
| At December 31, 2017, the components of our loss and credit carryforwards before and after consideration of | |||||||
| the applicable valuation allowances are: | |||||||
| Millions of Dollars | |||||||
| Net Deferred | Expiration of | ||||||
| Gross Deferred | Tax Asset After | Net Deferred | |||||
| Tax Asset | Valuation Allowance | Tax Asset | |||||
| U.S. foreign tax credits | $ | 856 | 567 | 2025-2027 | |||
| U.S. general business credits | 227 | 227 | 2036-2037 | ||||
| State net operating losses and tax credits | 420 | - | |||||
| Foreign net operating losses and tax credits | 807 | 786 | Post 2025 | ||||
| $ | 2,310 | 1,580 | |||||
Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2017, valuation allowances increased a total of $579 million. This increase primarily relates to the expected realization of certain deferred tax assets, including foreign tax credits; U.S. tax basis associated with foreign assets; and state net operating losses and tax credits not expected to be realized. Based on our historical taxable income, expectations for the future, and available tax-planning strategies, management expects deferred tax assets, net of valuation allowance, will primarily be realized as offsets to reversing deferred tax liabilities.
At December 31, 2017, unremitted income considered to be permanently reinvested in certain foreign subsidiaries and foreign corporate joint ventures totaled approximately $2,600 million. Deferred income taxes have not been provided on this amount, as we do not plan to initiate any action that would require the payment of income taxes. The estimated amount of additional tax that would be payable on this income if distributed is approximately $130 million.
| The following table shows a reconciliation of the beginning and ending unrecognized tax benefits for 2017, | ||||||
| 2016 and 2015: | ||||||
| Millions of Dollars | ||||||
| 2017 | 2016 | 2015 | ||||
| Balance at January 1 | $ | 381 | 459 | 442 | ||
| Additions based on tax positions related to the current year | 612 | 32 | 54 | |||
| Additions for tax positions of prior years | 109 | 19 | 4 | |||
| Reductions for tax positions of prior years | (129) | (118) | (37) | |||
| Settlements | (5) | (9) | (4) | |||
| Lapse of statute | (86) | (2) | - | |||
| Balance at December 31 | $ | 882 | 381 | 459 | ||
Included in the balance of unrecognized tax benefits for 2017, 2016 and 2015 were $882 million, $359 million and $354 million, respectively, which, if recognized, would impact our effective tax rate. The balance of unrecognized tax benefits increased in 2017 mainly due to the recognition of a U.S. worthless securities deduction that we do not believe will generate a cash tax benefit.
At December 31, 2017, 2016 and 2015, accrued liabilities for interest and penalties totaled $54 million, $54 million and $79 million, respectively, net of accrued income taxes. Interest and penalties resulted in no impact to earnings in 2017, a benefit to earnings of $18 million in 2016, and a reduction to earnings of $11 million in 2015.
We and our subsidiaries file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Audits in major jurisdictions are generally complete as follows: United Kingdom (2014), Canada (2009), United States (2010) and Norway (2016). Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of completion in the many jurisdictions in which we operate around the world. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible such changes could be significant when compared with our total unrecognized tax benefits, but 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 (Loss) | |||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||
| Loss before income taxes | ||||||||||||||
| United States | $ | (5,250) | (4,410) | (4,150) | 200.8 | % | 79.7 | 57.3 | ||||||
| Foreign | 2,635 | (1,120) | (3,089) | (100.8) | 20.3 | 42.7 | ||||||||
| $ | (2,615) | (5,530) | (7,239) | 100.0 | % | 100.0 | 100.0 | |||||||
| Federal statutory income tax | $ | (915) | (1,936) | (2,534) | 35.0 | % | 35.0 | 35.0 | ||||||
| Non-U.S. effective tax rates | 625 | 361 | 301 | (23.9) | (6.5) | (4.2) | ||||||||
| Impact of U.S. tax legislation | (852) | - | - | 32.6 | - | - | ||||||||
| Canada disposition | (1,277) | - | - | 48.8 | - | - | ||||||||
| Recovery of outside basis | (962) | (60) | (491) | 36.8 | 1.1 | 6.8 | ||||||||
| Adjustment to tax reserves | 881 | 55 | 42 | (33.7) | (1.0) | (0.6) | ||||||||
| APLNG impairment | 834 | - | 525 | (31.9) | - | (7.3) | ||||||||
| State income tax | (84) | (122) | (85) | 3.2 | 2.2 | 1.2 | ||||||||
| Enhanced oil recovery credit | (68) | (62) | - | 2.6 | 1.1 | - | ||||||||
| U.K. rate change | - | (161) | (555) | - | 2.9 | 7.7 | ||||||||
| Canada rate change | - | - | 129 | - | - | (1.8) | ||||||||
| U.S. fair value election | - | - | (185) | - | - | 2.6 | ||||||||
| Other | (4) | (46) | (15) | 0.2 | 0.8 | 0.2 | ||||||||
| $ | (1,822) | (1,971) | (2,868) | 69.7 | % | 35.6 | 39.6 | |||||||
The increase in the effective tax rate for 2017 was primarily due to the impact of the Tax Cuts and Jobs Act (Tax Legislation) and the impact of the Canada disposition, partially offset by the impact of the APLNG impairment and our mix of income among taxing jurisdictions.
The Tax Legislation, enacted on December 22, 2017, reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Legislation; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax and recorded a provisional tax benefit of $852 million.
Provisional Amount—Deferred tax assets and liabilities
In the fourth quarter of 2017, we remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. However, we are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our U.S. deferred tax balance was a tax benefit of $908 million.
Provisional Amount—Foreign tax effects
The one-time transition tax is based on our total post-1986 earnings and profits which we have previously deferred from U.S. income taxes. We reasonably estimate that we will not incur a one-time transition tax. This assumption may change when we finalize the calculation of post-1986 foreign earnings and profits, previously deferred from U.S. federal taxation, and finalize the amounts held in cash or other specified assets. As a result of the Tax Legislation, we have removed the indefinite reinvestment assertion on one of our foreign subsidiaries and recorded a tax expense of $56 million in the fourth quarter of 2017.
Our effective tax rate in 2017 was favorably impacted by a tax benefit of $1,277 million related to the Canada disposition. This tax benefit was primarily associated with a deferred tax recovery related to the Canadian capital gains exclusion component of the 2017 Canada disposition and the recognition of previously unrealizable Canadian capital asset tax basis. The Canada disposition, along with the associated restructuring of our Canadian operations, may generate an additional tax benefit of $822 million. However, since we believe it is not likely we will receive a corresponding cash tax savings, this $822 million benefit has been offset by a full tax reserve. See Note 4—Assets Held for Sale, Sold or Acquired for additional information on our Canada disposition.
The impairment of our APLNG investment in the second quarter of 2017 did not generate a tax benefit. See the “APLNG” section of Note 5—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment.
The decrease in the effective tax rate for 2016 was primarily due to our mix of income among taxing jurisdictions, reduced net tax benefit from the tax law changes discussed below, and the absence of a tax benefit associated with electing the fair market value method of apportioning interest expense for prior years.
In the United Kingdom, legislation was enacted on September 15, 2016, to decrease the overall U.K. upstream corporation tax rate from 50 percent to 40 percent effective January 1, 2016. As a result, we recorded a $161 million net tax benefit related to the remeasurement of our U.K. deferred tax balance in 2016.
In the United Kingdom, legislation was enacted on March 26, 2015, to decrease the overall U.K. upstream corporation tax rate from 62 percent to 50 percent effective January 1, 2015. As a result, we recorded a $555 million net tax benefit related to the remeasurement of our U.K. deferred tax balance in 2015.
In Canada, legislation was enacted on June 29, 2015, to increase the overall Canadian corporation tax rate from 25 percent to 27 percent effective July 1, 2015. As a result, we recorded a $129 million net tax expense related to the remeasurement of our Canadian deferred tax balance in 2015.
In December 2015, we filed refund claims for prior years electing the fair market value method of apportioning interest in the United States. As a result, we recorded a $185 million tax benefit associated with these refund claims in 2015.
Certain operating losses in jurisdictions outside of the U.S. only yield a tax benefit in the U.S. as a worthless security deduction. For 2017, 2016 and 2015 the amount of the tax benefit was $962 million, $60 million and $491 million, respectively.