
15.	INCOME TAXES

Tax Reform

On December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code) and was effective beginning on January 1, 2018. The most significant changes affecting us are as follows:


•	reduction in the statutory income tax rate from 35 percent to 21 percent;


•	repeal of the manufacturing deduction;


•	deduction for all of the costs to acquire or construct certain business assets in the year they are placed in service through 2022;


•	shift from a worldwide system of taxation to a territorial system of taxation, resulting in a minimum tax on the income of international subsidiaries (the GILTI tax) rather than a tax deferral on such earnings in certain circumstances; and


•	assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries.

The following narrative describes the activity that occurred with respect to Tax Reform for the years ended December 31, 2017 and 2018.

We reflected an overall income tax benefit of $1.9 billion for the year ended December 31, 2017 with respect to Tax Reform as a result of the following:


•	We remeasured our U.S. deferred tax assets and liabilities using the 21 percent rate, which resulted in a tax benefit and a reduction to our net deferred tax liabilities of $2.6 billion.

•

We recognized a one-time transition tax of $734 million on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries based on approximately $4.7 billion of the combined earnings and profits of our international subsidiaries that had not been distributed to us. This transition tax will be remitted to the Internal Revenue Service (IRS) over the eight-year period provided in the Code, with the first annual remittance being paid in 2018.


•	We accrued withholding tax of $47 million on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country.

Because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidance from the IRS to properly account for many of the provisions, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” that was codified through the issuance of ASU No. 2018-05 as described in Note 1. Specifically, ASU No. 2018-05 required that the effects of Tax Reform be recorded for items where the accounting was complete, as well as for items where a reasonable estimate could be made (referred to as provisional amounts). For items where reasonable estimates could not be made, provisional amounts were not recorded and those items continued to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate could be made. During the fourth quarter of 2018, we completed our accounting for the income tax effects of Tax Reform, and we reflected an overall income tax benefit of $12 million for the year ended December 31, 2018 with respect to Tax Reform.

The following table summarizes the components of our adjustment (in millions) to reflect the effects of Tax Reform for the years ended December 31, 2018 and 2017, including whether such amounts were complete, provisional, or incomplete. The amounts presented for 2018 were completed during the fourth quarter of 2018.



	Year Ended December 31,								Cumulative Tax Reform Adjustment
	2017				2018
	Accounting Status	Amount			Accounting Status	Amount
Income tax benefit from the remeasurement of U.S. deferred income tax assets and liabilities	Complete	$	(2,643	)	Complete	$	—		$	(2,643	)
Tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Provisional	734			Complete	6			740
Recognition of foreign withholding tax, net of U.S. federal tax benefit	Complete	47			Complete	—			47
Deductibility of certain executive compensation expense	Incomplete	—			Complete	5			5
Income tax expense associated with the statutory income tax rate differential on accrual to return adjustments that were identified upon completion of our U.S. federal income tax return in 2018	Incomplete	—			Complete	9			9
Foreign tax credit available to offset the tax on deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Incomplete	—			Complete	(32		)	(32		)
Tax Reform benefit		$	(1,862	)		$	(12	)	$	(1,874	)

Income Statement Components

Income before income tax expense (benefit) was as follows (in millions):



	Year Ended December 31,
	2018		2017		2016
U.S. operations	$	3,168	$	2,283	$	1,733
International operations	1,064		924		1,449
Income before income tax expense (benefit)	$	4,232	$	3,207	$	3,182

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



	Year Ended December 31,
	2018		2017		2016
U.S.	21	%	35	%	35	%
Canada	15	%	15	%	15	%
U.K.	19	%	19	%	20	%
Ireland	13	%	13	%	13	%
Peru	30	%	n/a		n/a
Mexico	30	%	n/a		n/a
Aruba	n/a		n/a		7	%

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



	Year Ended December 31, 2018
	U.S.					International				Total
	Amount			Percent		Amount		Percent		Amount			Percent
Income tax expense at statutory rates	$	665		21.0	%	$	163	15.3	%	$	828		19.6	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	44			1.4	%	80		7.5	%	124			2.9	%
Permanent differences	(9		)	(0.3	)%	—		—		(9		)	(0.2	)%
GILTI tax	67			2.1	%	—		—		67			1.6	%
Foreign tax credits	(50		)	(1.6	)%	—		—		(50		)	(1.2	)%
Effects of Tax Reform	(12		)	(0.4	)%	—		—		(12		)	(0.3	)%
Tax effects of income associated with noncontrolling interests	(49		)	(1.5	)%	—		—		(49		)	(1.2	)%
Other, net	(23		)	(0.7	)%	3		0.3	%	(20		)	(0.5	)%
Income tax expense	$	633		20.0	%	$	246	23.1	%	$	879		20.7	%



	Year Ended December 31, 2017
	U.S.					International				Total
	Amount			Percent		Amount		Percent		Amount			Percent
Income tax expense at statutory rates	$	799		35.0	%	$	158	17.1	%	$	957		29.8	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	37			1.6	%	46		5.0	%	83			2.6	%
Permanent differences:
Manufacturing deduction	(42		)	(1.8	)%	—		—		(42		)	(1.3	)%
Other	(9		)	(0.4	)%	—		—		(9		)	(0.3	)%
Change in tax law	(1,862		)	(81.6	)%	—		—		(1,862		)	(58.1	)%
Tax effects of income associated with noncontrolling interests	(31		)	(1.4	)%	—		—		(31		)	(1.0	)%
Other, net	(52		)	(2.3	)%	7		0.8	%	(45		)	(1.4	)%
Income tax expense (benefit)	$	(1,160	)	(50.9	)%	$	211	22.9	%	$	(949	)	(29.7	)%



	Year Ended December 31, 2016
	U.S.					International					Total
	Amount			Percent		Amount			Percent		Amount			Percent
Income tax expense at statutory rates	$	606		35.0	%	$	256		17.7	%	$	862		27.1	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	5			0.3	%	31			2.1	%	36			1.1	%
Permanent differences:
Manufacturing deduction	(22		)	(1.3	)%	—			—		(22		)	(0.7	)%
Other	(3		)	(0.2	)%	(10		)	(0.7	)%	(13		)	(0.4	)%
Change in tax law	—			—		(7		)	(0.5	)%	(7		)	(0.2	)%
Tax effects of income associated with noncontrolling interests	(44		)	(2.5	)%	—			—		(44		)	(1.4	)%
Other, net	(37		)	(2.1	)%	(10		)	(0.7	)%	(47		)	(1.5	)%
Income tax expense	$	505		29.2	%	$	260		17.9	%	$	765		24.0	%

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



	Year Ended December 31, 2018
	U.S.			International		Total
Current:
Country	$	432		$	141	$	573
U.S. state / Canadian provincial	37			66		103
Total current	469		(a)	207		676
Deferred:
Country	145			25		170
U.S. state / Canadian provincial	19			14		33
Total deferred	164		(b)	39		203
Income tax expense	$	633		$	246	$	879



	Year Ended December 31, 2017
	U.S.				International			Total
Current:
Country	$	1,305			$	194		$	1,499
U.S. state / Canadian provincial	34				61			95
Total current	1,339			(a)	255			1,594
Deferred:
Country	(2,522		)		(29		)	(2,551		)
U.S. state / Canadian provincial	23				(15		)	8
Total deferred	(2,499		)	(b)	(44		)	(2,543		)
Income tax expense (benefit)	$	(1,160	)		$	211		$	(949	)

^{___________________________}


(a)	Current income tax expense includes a $21 million benefit and a $781 million expense related to our Tax Reform adjustment for the years ended December 31, 2018 and 2017, respectively, as described in “Tax Reform” above.


(b)	Deferred income tax expense (benefit) includes a $9 million expense and a $2.6 billion benefit related to our Tax Reform adjustment for the years ended December 31, 2018 and 2017, respectively, as described in “Tax Reform” above.



	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

Income Taxes Paid

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



	Year Ended December 31,
	2018		2017		2016
U.S.	$	1,016	$	239	$	241
International	345		171		203
Income taxes paid, net	$	1,361	$	410	$	444

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,
	2018			2017
Deferred income tax assets:
Tax credit carryforwards	$	644		$	69
Net operating losses (NOLs)	523			492
Inventories	101			135
Compensation and employee benefit liabilities	175			179
Environmental liabilities	71			47
Other	141			112
Total deferred income tax assets	1,655			1,034
Valuation allowance	(1,111		)	(498		)
Net deferred income tax assets	544			536

Deferred income tax liabilities:
Property, plant, and equipment	4,589			4,545
Deferred turnaround costs	316			272
Inventories	287			243
Investments	142			77
Other	172			107
Total deferred income tax liabilities	5,506			5,244
Net deferred income tax liabilities	$	4,962		$	4,708

We had the following income tax credit and loss carryforwards as of December 31, 2018 (in millions):



	Amount		Expiration
U.S. state income tax credits	$	80	2019 through 2031
U.S. state income tax credits	6		Unlimited
U.S. foreign tax credits	575		2027
U.S. state NOLs (gross amount)	10,039		2019 through 2038

We have recorded a valuation allowance as of December 31, 2018 and 2017 due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of U.S. foreign tax credits and 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. As a part of the completion of the accounting for the income tax effects of Tax Reform as described in “Tax Reform” above, we assessed the ability of our available foreign tax credits to offset the tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries. The completion of such accounting resulted in U.S. general limitation foreign tax credit carryforwards and a correlating valuation allowance provided on the balance of the deferred income tax asset related to those carryforwards as it is not more likely than not that the deferred income tax asset will be realized. The valuation allowance increased by $613 million, primarily due to approximately $575 million of excess U.S. foreign tax credits. Foreign tax credits as of December 31, 2017 were used to offset the one-time transition tax, and excess tax credits were generated on the transition tax inclusion. Tax Reform imposes certain limits on a company’s use of foreign tax credits in the future, including any excess credits generated from the mandatory income inclusion of previously deferred foreign earnings. The realization of net deferred income tax assets related to state income tax credits and NOLs recorded as of December 31, 2018 is primarily dependent upon our ability to generate future taxable income in certain U.S. states.

As described in “Tax Reform” above, one of the most significant changes in Tax Reform was the shift from a worldwide system of taxation to a territorial system. The shift to a territorial system allows us to distribute cash via a dividend from our international subsidiaries with a full dividend received deduction. As a result, we will not recognize U.S. federal deferred taxes for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and the respective tax bases for our international subsidiaries. As of December 31, 2017, we recognized a one-time transition tax of $734 million on approximately $4.7 billion of combined earnings and profits of our international subsidiaries. In the fourth quarter of 2018, the one-time transition tax was increased by $6 million. Also, in the fourth quarter, we recorded a foreign tax credit of $32 million related to the one-time transition tax. Because of the deemed repatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the $2.4 billion of cash and cash equivalents held by our international subsidiaries as of December 31, 2018. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cash distributed outside of those countries. As of December 31, 2018, the cumulative undistributed earnings of these subsidiaries were approximately $5.3 billion. We have accrued for withholding taxes on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country. The remaining cash held by that subsidiary as well as our other international subsidiaries will be permanently reinvested in our operations in those countries. It is not practicable to estimate the amount of additional tax that would be payable on those earnings, if distributed.

Unrecognized Tax Benefits

The following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties and interest, (in millions):



	Year Ended December 31,
	2018			2017			2016
Balance as of beginning of year	$	941		$	936		$	964
Additions based on tax positions related to the current year	23			33			36
Additions for tax positions related to prior years	28			15			11
Reductions for tax positions related to prior years	(19		)	(42		)	(46		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(1		)	(1		)	(3		)
Settlements	(2		)	—			(237		)
Reclassification of uncertain tax receivable to long-term receivable from IRS	—			—			211
Balance as of end of year	$	970		$	941		$	936

As of December 31, 2018, the balance in unrecognized tax benefits included $277 million of tax refunds that we intend to claim by amending various of our income tax returns for 2010 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 Code, we concluded that the refund claims included in the following table 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, 2018, 2017, and 2016 even though they are reflected in the preceding table.

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



	December 31,
	2018			2017
Unrecognized tax benefits	$	970		$	941
Tax refund claim not presented in our balance sheets	(277		)	(274		)
Other	88			77
Uncertain tax position liabilities presented in our balance sheets	$	781		$	744

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



	December 31,
	2018		2017
Income taxes payable	$	42	$	—
Other long-term liabilities	721		723
Deferred tax liabilities	18		21
Uncertain tax position liabilities presented in our balance sheets	$	781	$	744

As of December 31, 2018 and 2017, there were $807 million and $793 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, 2018, 2017, and 2016 were immaterial. Accrued penalties and interest totaled $88 million and $77 million as of December 31, 2018 and 2017, 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, 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.

Tax Returns Under Audit

U.S. Federal

As of December 31, 2018, our U.S. federal tax returns for 2010 through 2015 were under audit by the 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.

We have amended our U.S federal income tax returns for 2005 through 2009 to exclude from taxable income incentive payments received from the U.S. federal government for blending alcohol fuel mixtures. These amended return claims have been disallowed by the IRS and we are currently protesting the disallowance of these adjustments. An ultimate disallowance of the exclusion from income would not result in a material change to our financial position, results of operations, or liquidity.

U.S. State

As of December 31, 2018, our California tax returns for 2004 through 2008 and 2011 through 2014 were under audit by the state of California. We do not expect the ultimate disposition of these audits will result in a material change to our financial position, results of operations, or liquidity. We believe these audits will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these audits.

International

As of December 31, 2018, our Canadian subsidiary’s federal tax returns for 2013 and 2014 were under audit by Canada Revenue Agency (CRA) and our Quebec provincial tax returns for 2013 through 2016 were under audit by Revenue Quebec. We are protesting the proposed adjustments by CRA for 2013 and we do not expect the ultimate disposition of these adjustments will result in a material change to our financial position, results of operations, or liquidity.