
14.	INCOME TAXES

Income Statement Components

Income from continuing operations before income tax expense was as follows (in millions):



	Year Ended December 31,
	2016		2015		2014
U.S. operations	$	1,733	$	5,327	$	4,677
International operations	1,449		644		875
Income from continuing operations before income tax expense	$	3,182	$	5,971	$	5,552

Statutory income tax rates applicable to the countries in which we operate were as follows:



	Year Ended December 31,
	2016		2015		2014
U.S.	35	%	35	%	35	%
Canada	15	%	15	%	15	%
U.K.	20	%	20	%	21	%
Ireland	13	%	13	%	13	%
Aruba^(a)	7	%	7	%	7	%

^{___________________________}


^(a)	Statutory income tax rate applicable through the date of the Aruba Disposition as described in Note 2.

The following is a reconciliation of income tax expense computed by applying statutory income tax rates as reflected in the table above to actual income tax expense related to continuing operations (in millions):



	Year Ended December 31, 2016
	U.S.			International			Total
Income tax expense at statutory rates	$	606		$	256		$	862
U.S. state and Canadian provincial tax expense, net of federal income tax effect	5			31			36
Permanent differences:
Manufacturing deduction	(22		)	—			(22		)
Other	(3		)	(10		)	(13		)
Change in tax law	—			(7		)	(7		)
Tax effects of income associated with noncontrolling interests	(44		)	—			(44		)
Other, net	(37		)	(10		)	(47		)
Income tax expense	$	505		$	260		$	765



	Year Ended December 31, 2015
	U.S.			International			Total
Income tax expense at statutory rates	$	1,864		$	92		$	1,956
U.S. state and Canadian provincial tax expense, net of federal income tax effect	45			73			118
Permanent differences:
Manufacturing deduction	(102		)	—			(102		)
Other	(18		)	(5		)	(23		)
Change in tax law	—			(17		)	(17		)
Tax effects of income associated with noncontrolling interests	(39		)	—			(39		)
Other, net	(25		)	2			(23		)
Income tax expense	$	1,725		$	145		$	1,870



	Year Ended December 31, 2014
	U.S.			International		Total
Income tax expense at statutory rates	$	1,637		$	145	$	1,782
U.S. state and Canadian provincial tax expense, net of federal income tax effect	62			71		133
Permanent differences:
Manufacturing deduction	(74		)	—		(74		)
Other	(16		)	1		(15		)
Tax effects of income associated with noncontrolling interests	(28		)	—		(28		)
Other, net	(22		)	1		(21		)
Income tax expense	$	1,559		$	218	$	1,777

There was no income tax expense or benefit related to discontinued operations for the year ended December 31, 2014.

Components of income tax expense related to continuing operations were as follows (in millions):



	Year Ended December 31, 2016
	U.S.			International			Total
Current:
Country	$	294		$	194		$	488
U.S. state / Canadian provincial	12			35			47
Total current	306			229			535
Deferred:
Country	203			35			238
U.S. state / Canadian provincial	(4		)	(4		)	(8		)
Total deferred	199			31			230
Income tax expense	$	505		$	260		$	765



	Year Ended December 31, 2015
	U.S.			International		Total
Current:
Country	$	1,513		$	64	$	1,577
U.S. state / Canadian provincial	85			43		128
Total current	1,598			107		1,705
Deferred:
Country	143			8		151
U.S. state / Canadian provincial	(16		)	30		14
Total deferred	127			38		165
Income tax expense	$	1,725		$	145	$	1,870



	Year Ended December 31, 2014
	U.S.		International		Total
Current:
Country	$	1,196	$	53	$	1,249
U.S. state / Canadian provincial	59		24		83
Total current	1,255		77		1,332
Deferred:
Country	268		94		362
U.S. state / Canadian provincial	36		47		83
Total deferred	304		141		445
Income tax expense	$	1,559	$	218	$	1,777

Income Taxes Paid

Income taxes paid to U.S. and international taxing authorities were as follows (in millions):



	Year Ended December 31,
	2016		2015		2014
Income taxes paid, net:
U.S.	$	241	$	2,092	$	1,455
International	203		1		169
Total	$	444	$	2,093	$	1,624

Deferred Income Tax Assets and Liabilities

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):



	December 31,
	2016			2015
Deferred income tax assets:
Tax credit carryforwards	$	65		$	33
Net operating losses (NOLs)	374			423
Inventories	93			72
Compensation and employee benefit liabilities	344			331
Environmental liabilities	69			80
Other	100			139
Total deferred income tax assets	1,045			1,078
Less: Valuation allowance	(374		)	(435		)
Net deferred income tax assets	671			643

Deferred income tax liabilities:
Property, plant, and equipment	6,900			6,725
Deferred turnaround costs	450			394
Inventories	356			287
Investments	253			226
Other	73			71
Total deferred income tax liabilities	8,032			7,703
Net deferred income tax liabilities	$	7,361		$	7,060

We had the following income tax credit and loss carryforwards as of December 31, 2016 (in millions):



	Amount		Expiration
U.S. state income tax credits	$	71	2017 through 2026
U.S. state income tax credits	2		Unlimited
U.S. state NOLs (gross amount)	9,018		2017 through 2036
U.S. alternative minimum tax credit	18		Unlimited

We have recorded a valuation allowance as of December 31, 2016 and 2015 due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of certain U.S. state income tax credits and NOLs, before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. During 2016, the valuation allowance decreased by $61 million, primarily due to the write off of NOLs in Aruba, offset by increases in State NOLs. The realization of net deferred income tax assets recorded as of December 31, 2016 is primarily dependent upon our ability to generate future taxable income in certain U.S. states.

Deferred income taxes have not been provided on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases of our international subsidiaries based on the determination that such differences are essentially permanent in duration in that the earnings of these subsidiaries are expected to be indefinitely reinvested in the international operations. As of December 31, 2016, the cumulative undistributed earnings of these subsidiaries were approximately $3.9 billion. If those earnings were not considered indefinitely reinvested, deferred income taxes would have been recorded after consideration of U.S. foreign tax credits. It is not practicable to estimate the amount of additional tax that might be payable on those earnings, if distributed. As of December 31, 2016, $2.2 billion of our cash and temporary cash investments was held by our international subsidiaries.

Unrecognized Tax Benefits

The following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties, interest (net of the U.S. federal and state income tax effects), and the U.S. federal income tax effect of state unrecognized tax benefits (in millions):



	Year Ended December 31,
	2016			2015			2014
Balance as of beginning of year	$	964		$	989		$	950
Additions based on tax positions related to the current year	36			36			35
Additions for tax positions related to prior years	11			83			118
Reductions for tax positions related to prior years	(46		)	(82		)	(67		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(3		)	(3		)	(1		)
Settlements	(237		)	(59		)	(46		)
Reclassification of uncertain tax receivable to long-term receivable from IRS	211			—			—
Balance as of end of year	$	936		$	964		$	989

As of December 31, 2016, the balance in unrecognized tax benefits included $433 million of tax refunds that we intend to claim by amending various of our income tax returns for 2008 through 2016. We intend to propose that incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products be excluded from taxable income during these periods. However, due to the complexity of this matter and uncertainties with respect to the interpretation of the Internal Revenue Code, we concluded that the refund claims included in the table below cannot be recognized in our financial statements. As a result, these amounts are not included in our uncertain tax position liabilities as of December 31, 2016, 2015, and 2014 even though they are reflected in the table above.

The following is a reconciliation of unrecognized tax benefits reflected in the table above to our uncertain tax position liabilities that are presented in our balance sheets (in million).



	December 31,
	2016			2015
Unrecognized tax benefits	$	936		$	964
Tax refund claim not presented in our balance sheets	(433		)	(570		)
Other	(5		)	25
Uncertain tax position liabilities presented in our balance sheets	$	498		$	419

Amounts recognized in our balance sheets for uncertain tax positions include (in millions):



	December 31,
	2016			2015
Deferred charges and other assets, net	$	—		$	195
Income taxes payable	(7		)	(438		)
Other long-term liabilities	(465		)	(148		)
Deferred tax liabilities	(26		)	(28		)
Uncertain tax position liabilities presented in our balance sheets	$	(498	)	$	(419	)

As of December 31, 2016 and 2015, there were $756 million and $757 million, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate.

Penalties and interest during the years ended December 31, 2016, 2015, and 2014 were immaterial. Accrued penalties and interest totaled $70 million and $117 million as of December 31, 2016 and 2015, respectively, excluding the U.S. federal and state income tax effects related to interest.

During the next 12 months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits, excluding interest, by approximately $4 million, either because the tax positions are sustained on audit or because we agree to their disallowance. We do not expect these reductions to have a significant impact on our financial statements because such reductions would not significantly affect our annual effective tax rate.

U.S. Tax Returns Under Audit

Federal

As of December 31, 2016, our tax years for 2010 through 2014 were under audit by the Internal Revenue Service (IRS). The IRS has proposed adjustments to our taxable income for certain open years. We are currently contesting the proposed adjustments with the Office of Appeals of the IRS for certain open years and do not expect that the ultimate disposition of these adjustments will result in a material change to our financial position, results of operations, or liquidity. We are continuing to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with recorded amounts of unrecognized tax benefits associated with these matters.

During the year ended December 31, 2016, we settled the audit with the IRS related to our 2008 and 2009 tax years.

State

As of December 31, 2016, our tax years for 2004 through 2007 and 2011 through 2013 were under audit by the state of California for certain tax issues. We do not expect the ultimate disposition of these issues will result in a material change to our financial position, results of operations, or liquidity. We believe these matters will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these matters.