Income Taxes
Income tax expense is estimated using the tax rate in effect or to be in effect during the relevant periods in the jurisdictions in which we operate. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. We review contingent tax liabilities for estimated exposures on a more likely than not standard related to our current tax positions.
Pursuant to FASB guidance related to accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position and also the past administrative practices and precedents of the taxing authority. As of December 31, 2017 and 2016, we had not recognized any material amounts in connection with uncertainty in income taxes.
U.S. Federal and State Taxes
Although we are organized as a limited partnership, we have elected to be treated as a corporation for U.S. federal income tax purposes and are therefore subject to both U. S. federal and state income taxes.
Canadian Federal and Provincial Taxes
All of our Canadian operations are conducted by entities that are treated as corporations for Canadian tax purposes (flow through for U.S. income tax purposes) and that are subject to Canadian federal and provincial taxes. Additionally, payments of interest and dividends from our Canadian entities to other Plains entities are subject to Canadian withholding tax that is treated as income tax expense.
Tax Components
Components of income tax expense are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income tax expense: | | | | | |
State income tax | $ | 1 |
| | $ | 2 |
| | $ | 1 |
|
Canadian federal and provincial income tax | 27 |
| | 83 |
| | 83 |
|
Total current income tax expense | $ | 28 |
| | $ | 85 |
| | $ | 84 |
|
| | | | | |
Deferred income tax expense/(benefit): | | | | | |
Federal income tax | $ | 872 |
| | $ | 57 |
| | $ | 75 |
|
State income tax | 21 |
| | (4 | ) | | 7 |
|
Canadian federal and provincial income tax | 16 |
| | (60 | ) | | 16 |
|
Total deferred income tax expense/(benefit) | $ | 909 |
| | $ | (7 | ) | | $ | 98 |
|
Total income tax expense | $ | 937 |
| | $ | 78 |
| | $ | 182 |
|
The difference between income tax expense based on the statutory federal income tax rate and our effective income tax expense is summarized as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before tax | $ | 896 |
| | $ | 738 |
| | $ | 991 |
|
Net income attributable to noncontrolling interests | (690 | ) | | (566 | ) | | (691 | ) |
Income taxes attributable to noncontrolling interests | (44 | ) | | (25 | ) | | (100 | ) |
| $ | 162 |
| | $ | 147 |
| | $ | 200 |
|
Federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Income tax at statutory rate | $ | 57 |
| | $ | 51 |
| | $ | 70 |
|
| | | | | |
Deferred tax impact of federal 2017 Tax Act | 823 |
| | — |
| | — |
|
Deferred tax rate adjustment | 10 |
| | (1 | ) | | 8 |
|
State income tax, net of federal benefit | 3 |
| | 3 |
| | 4 |
|
Income taxes attributable to noncontrolling interests: | | | | | |
Canadian federal and provincial income tax | 41 |
| | 10 |
| | 85 |
|
Canadian withholding tax | 2 |
| | 13 |
| | 14 |
|
State income tax | 1 |
| | 2 |
| | 1 |
|
Total income tax expense | $ | 937 |
| | $ | 78 |
| | $ | 182 |
|
Deferred tax assets and liabilities are aggregated by the applicable tax paying entity and jurisdiction and result from the following (in millions):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Investment in partnerships | $ | 1,154 |
| | $ | 1,685 |
|
Net operating losses | 232 |
| | 191 |
|
Derivative instruments | 74 |
| | 49 |
|
Book accruals in excess of current tax deductions | 22 |
| | 24 |
|
Total deferred tax assets | 1,482 |
| | 1,949 |
|
Deferred tax liabilities: | | | |
Property and equipment in excess of tax values | (455 | ) | | (394 | ) |
Other | (50 | ) | | (41 | ) |
Total deferred tax liabilities | (505 | ) | | (435 | ) |
Net deferred tax assets | $ | 977 |
| | $ | 1,514 |
|
| | | |
Balance sheet classification of deferred tax assets/(liabilities): | | | |
Deferred tax asset | $ | 1,386 |
| | $ | 1,876 |
|
Other long-term liabilities and deferred credits | (409 | ) | | (362 | ) |
| $ | 977 |
| | $ | 1,514 |
|
As a result of the exchange of the ownership interest in AAP in connection with our IPO and all subsequent exchanges, a deferred tax asset was created.These transfers of ownership were accounted for at the historical carrying basis for GAAP accounting purposes, but were recorded at the fair market value of the Class A shares at the time of exchange for U.S. federal income tax purposes. The resulting basis difference resulted in a deferred tax asset that was recorded as a component of partners’ capital as it results from transactions among shareholders. The deferred tax asset is amortized to deferred income tax expense as the associated basis step-up is realized on our tax returns. In connection with the issuance of AAP units and PAA common units in the periods following the Simplification Transactions and the associated adjustments to partners' capital attributable to PAGP, a corresponding change to the deferred tax balance was recorded to partners’ capital. See Note 11 for additional information regarding the issuance of units by AAP and PAA.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. The 2017 Tax Act changed existing U.S. tax law and included numerous provisions that will affect businesses, including a decrease in the corporate federal income tax rate. Prior to the 2017 Tax Act, the value of our deferred tax asset was calculated based on the effective corporate income tax rate of 35%. As a result of the 2017 Tax Act, the value of our deferred tax asset was re-measured as of December 31, 2017 based on the new 21% corporate federal income tax rate, and the reduction in value was recognized as deferred income tax expense for the year ended December 31, 2017.
As of December 31, 2017, we had net operating loss carryforwards for (i) U.S. federal income tax purposes of $998 million, which will expire from 2033 to 2037, (ii) state income tax purposes of $353 million, which will expire from 2018 to 2037, and (iii) foreign income tax purposes of $9 million, which will expire from 2034 to 2036. Under the 2017 Tax Act, U.S. federal NOLs generated after 2017 will have an indefinite carryforward period but may only reduce up to 80% of taxable income in any given year. Our U.S. federal NOLs generated prior to 2018 will not be subject to the taxable income limitation and will remain subject to a 20 year carryforward period.
Generally, tax returns for our Canadian entities are open to audit from 2008 through 2017. Our U.S. and state tax years are generally open to examination from 2014 to 2017.