Income Taxes

Income tax provisions (benefits) for continuing operations were:



	Year Ended December 31,
	2015									2014								2013
(In millions)	Current			Deferred			Total			Current		Deferred			Total			Current		Deferred			Total
Federal	$	(43	)	$	(687	)	$	(730	)	$	15	$	62		$	77		$	83	$	(47	)	$	36
State and local	(8		)	(18		)	(26		)	8		(58		)	(50		)	39		(6		)	33
Foreign	103			(101		)	2			281		84			365			1,374		19			1,393
Total	$	52		$	(806	)	$	(754	)	$	304	$	88		$	392		$	1,496	$	(34	)	$	1,462

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,
	2015		2014		2013
Statutory rate applied to income (loss) from continuing operations before income taxes	(35	)%	35	%	35	%
Effects of foreign operations, including foreign tax credits	(2	)	(6	)	26
Change in permanent reinvestment assertion	—		(19	)	—
Adjustments to valuation allowances	3		21		(1	)
Change in tax law	5		—		—
Goodwill impairment	4		—		—
Other	—		(2	)	1
Effective income tax expense (benefit) rate on continuing operations	(25	)%	29	%	61	%

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 7.

Effects of foreign operations – The effects of foreign operations on our effective tax rate decreased in 2015 and 2014 as compared to 2013, due to a shift in pretax income mix between high and low tax jurisdictions. This is primarily related to decreased sales in Libya in 2015 and 2014 where the tax rate is in excess of 90%. Excluding Libya, the effective tax rates on continuing operations would be a benefit of 25% in 2015 and expense of 27% and 38% in 2014 and 2013.

Change in permanent reinvestment assertion – In the second quarter of 2015, we reviewed our operations and concluded that we do not have the same level of capital needs outside the U.S. as previously expected. Therefore, we no longer intend for previously unremitted foreign earnings of approximately $1 billion associated with our Canadian operations to be permanently reinvested outside the U.S. We anticipate foreign tax credits associated with these Canadian earnings would be sufficient to offset any incremental U.S. tax liabilities, and therefore, no additional net deferred taxes were recorded in the second quarter of 2015. As such, none of Marathon Oil’s foreign earnings remain permanently reinvested abroad.

In the second quarter of 2014, we reviewed our foreign operations, including the disposition of our Norway business, and concluded that our foreign operations did not have the same level of immediate capital needs as previously expected. Therefore, we removed our assertion for previously unremitted foreign earnings associated with our U.K. operations to be permanently reinvested outside the U.S. The U.K. statutory tax rate was in excess of the U.S. statutory tax rate and therefore foreign tax credits associated with these earnings exceeded any incremental U.S. tax liabilities.

Adjustments to valuation allowances – In 2015, we increased the valuation allowance against foreign tax credits because it is more likely than not that we will be unable to realize all U.S. benefits on foreign taxes accrued in 2015. Additionally, we increased the valuation allowance on deferred tax assets associated with our foreign operations as a result of pretax losses in certain jurisdictions. In 2014, we increased the valuation allowance against foreign tax credits as a result of removing the permanent reinvestment assertion on our U.K. operations since the U.K. statutory tax rate is in excess of the U.S. statutory tax rate per discussion above.

Change in tax law – On June 29, 2015, the Alberta government enacted legislation to increase the provincial corporate tax rate from 10% to 12%. As a result of this legislation, we recorded additional non-cash deferred tax expense of $135 million in the second quarter of 2015.

Deferred tax assets and liabilities resulted from the following:



	Year Ended December 31,
(In millions)	2015			2014
Deferred tax assets:
Employee benefits	$	260		$	364
Operating loss carryforwards	563			245
Capital loss carryforwards	17			89
Foreign tax credits	4,335			4,062
Other credit carryforwards	35			—
Investments in subsidiaries and affiliates	17			—
Other	73			116
Valuation allowances:
Federal	(2,820		)	(2,775		)
State, net of federal benefit	(56		)	(58		)
Foreign	(162		)	(108		)
Total deferred tax assets	2,262			1,935
Deferred tax liabilities:
Property, plant and equipment	3,376			3,737
Investments in subsidiaries and affiliates	—			66
Other	105			67
Total deferred tax liabilities	3,481			3,870
Net deferred tax liabilities	$	1,219		$	1,935

Tax carryforwards – At December 31, 2015 our operating loss carryforwards includes $365 million from the U.S. that expire in 2035. Foreign operating loss carryforwards include $863 million from Canada that expire in 2029 through 2035, $208 million from the Kurdistan Region of Iraq that expire in 2016 through 2020, $84 million from Libya that expires in 2025 and $81 million from E.G. that expire in 2017 through 2020. State operating loss carryforwards of $1,415 million expire in 2016 through 2035. Foreign tax credit carryforwards of $3,798 million expire in 2022 through 2025.

Valuation allowances – We consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. In the event it is more likely than not that some portion or all of our deferred taxes will not be realized, such assets are reduced by a valuation allowance. The estimated realizability of the benefit of our deferred tax asset is based on certain estimates concerning future operating conditions (particularly as related to prevailing commodity prices), future financial conditions, income generated from foreign sources and our tax profile in the years that such operating loss carryforwards and tax credits may be claimed. Future increases to our valuation allowance are possible if our estimates and assumptions (particularly as they relate to downward revisions of our long-term commodity price forecasts) are revised such that they reduce estimates of future taxable income during the carryforward period.

Federal valuation allowances increased $45 million in 2015 related to U.S. benefits on foreign taxes accrued in 2015. Federal valuation allowances decreased $222 million in 2014 primarily due to the sale of our Norway and Angola businesses. Federal valuation allowances increased $930 million in 2013 related to U.S. benefits on foreign taxes accrued in that year.

Foreign valuation allowances increased $54 million in 2015 primarily due to deferred tax assets generated in the Kurdistan Region of Iraq, E.G. and Gabon. Foreign valuation allowances decreased $41 million in 2014 primarily due the disposal of our Angolan assets. Foreign valuation allowances decreased $61 million in 2013 primarily due to the disposal of our Indonesian assets.

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
(In millions)	2015		2014
Assets:
Other current assets	$	—	$	29
Other noncurrent assets	1,222		525
Liabilities:
Other current liabilities	—		3
Noncurrent deferred tax liabilities	2,441		2,486
Net deferred tax liabilities	$	1,219	$	1,935

We elected to prospectively adopt Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, as of December 31, 2015, as disclosed in Note 2. Under this new guidance, we classify all deferred tax assets and liabilities and related valuation allowances as noncurrent. In accordance with a prospective adoption, we did not restate the balance sheet classification of deferred taxes for prior periods.

We are continuously undergoing examination of our U.S. federal income tax returns by the IRS. Such audits have been completed through the 2009 tax year. In November 2015, we received Notices of Proposed Adjustment related to our 2010-2011 tax years. We anticipate receiving the final agent's report in 2016. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. 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, 2015 our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:



United States^(a)	2004-2014
Canada	2010-2014
Equatorial Guinea	2007-2014
Libya	2012-2014
United Kingdom	2008-2014


^(a)	Includes federal and state jurisdictions.

The following table summarizes the activity in unrecognized tax benefits:



(In millions)	2015			2014			2013
Beginning balance	$	80		$	146		$	98
Additions for tax positions related to the current year	—			—			14
Additions for tax positions of prior years	1			11			66
Reductions for tax positions of prior years	—			(68		)	(25		)
Settlements	(7		)	(9		)	(5		)
Statute of limitations	(9		)	—			(2		)
Ending balance	$	65		$	80		$	146

If the unrecognized tax benefits as of December 31, 2015 were recognized, $25 million would affect our effective income tax rate. As of December 31, 2015, there are no material uncertain tax positions for which it is reasonably possible that the amount would significantly increase or decrease during the next twelve months.

Interest and penalties are recorded as part of the tax provision and were $1 million, $6 million and $13 million related to unrecognized tax benefits in 2015, 2014 and 2013. As of December 31, 2015 and 2014, $14 million and $16 million of interest and penalties were accrued related to income taxes.

Pretax income (loss) from continuing operations included amounts attributable to foreign sources of $(654) million, $1,180 million and $2,336 million in 2015, 2014 and 2013.