8.	Income Taxes

Income Tax Expense (Benefit)

The following table presents Devon’s income tax components.

	Year Ended December 31,
	2017			2016			2015
Current income tax expense (benefit):
U.S. federal	$	10		$	5		$	(243	)
Various states		—			(11	)		(8	)
Canada and various provinces		102			106			14
Total current tax expense (benefit)		112			100			(237	)
Deferred income tax expense (benefit):
U.S. federal		(192	)		(3	)		(5,487	)
Various states		(5	)		—			(332	)
Canada and various provinces		(97	)		44			(157	)
Total deferred tax expense (benefit)		(294	)		41			(5,976	)
Total income tax expense (benefit)	$	(182	)	$	141		$	(6,213	)

Total income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as a result of the following:

	Year Ended December 31,
	2017			2016			2015
Total income tax expense (benefit)	$	(182	)	$	141		$	(6,213	)

U.S. statutory income tax rate		35	%		35	%		35	%
Non-deductible goodwill and intangible impairment		0	%		(23	%)		(3	%)
U.S. Tax Reform		8	%		0	%		0	%
Legal entity restructuring		(81	%)		6	%		0	%
Other		(13	%)		0	%		1	%
Deferred tax asset valuation allowance		31	%		(29	%)		(2	%)
Effective income tax rate		(20	%)		(11	%)		31	%

Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.

Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgements and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.

2017

On December 22, 2017, the Tax Reform Legislation was enacted into law and contains several key tax provisions that affect Devon, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. Devon is required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring U.S. deferred tax assets and liabilities and reassessing the net realizability of deferred tax assets and liabilities.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows Devon to record provisional amounts during a measurement period not to extend beyond one year after the enactment date. As the Tax Reform Legislation was passed late in the fourth quarter of 2017 and ongoing guidance and accounting interpretation are expected over the next 12 months, Devon considers the accounting of the transition tax, deferred tax remeasurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. Devon expects to complete its analysis within the measurement period in accordance with SAB 118. Provisional amounts recorded this quarter are as follows:

(a) Devon’s U.S. segment recognized $167 million of deferred tax expense for the one-time mandatory transition tax on accumulated foreign earnings.

(b) Devon’s U.S. segment recognized $108 million in deferred tax expense and EnLink recognized $211 million in deferred tax benefit related to the reduction of the U.S. corporate income tax rate to 21%.

In the fourth quarter of 2017, Devon’s Canadian segment generated nonrecurring capital losses from internal legal entity restructuring. A deferred tax asset of $727 million was recognized related to the capital losses, offset by a $641 million increase in the valuation allowance.

Throughout 2017, Devon continued to maintain a 100% valuation allowance against its U.S. deferred tax assets resulting from prior year cumulative financial losses largely due to asset impairments and significant net operating losses for U.S. federal and state income tax. Devon reduced its U.S. segment valuation allowance by $323 million in 2017 based primarily on the financial income recorded during the period. Furthermore, a partial allowance continues to be held against certain Canadian segment deferred tax assets. The valuation allowances impacted the effective tax rate and are discussed in the next section.

Also in the table above, the “other” effect is primarily composed of permanent differences for which dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, such items have an insignificant impact on our effective income tax rate. However, these items have a more noticeable impact to our rate in 2017 due to lower relative earnings during the period. During 2017, “other” is primarily related to the taxation of other financing items.

2016

During 2016, Devon’s U.S. segment recognized an additional $313 million valuation allowance against its deferred tax assets. The allowance results from continued financial losses in 2016. As of December 31, 2016, the allowance continued to represent a 100% valuation against the U.S. net deferred tax assets. Additionally, the Canadian segment recognized a $71 million partial valuation allowance resulting from continued financial losses.

In the first quarter of 2016, EnLink recognized a goodwill impairment of approximately $873 million. Additionally, during the third quarter of 2016, Devon derecognized $83 million of goodwill related to its U.S. operations in conjunction with the divestiture of certain non-core U.S. upstream oil and gas assets. These items are not deductible for purposes of calculating income tax and, therefore, impact the effective tax rate.

2015

In the third and fourth quarters of 2015, EnLink recognized goodwill and intangibles impairments of approximately $1.6 billion, which impacted the effective tax rate.

During 2015, Devon recognized approximately $16 billion of oil and gas impairments related to its U.S. operations. These impairments resulted in deferred tax assets against which Devon recognized a $403 million valuation allowance.

Deferred Tax Assets and Liabilities

The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.

	December 31,
	2017			2016
Deferred tax assets:
Asset retirement obligations	$	313		$	488
Accrued liabilities		62			130
Net operating loss carryforwards		865			777
Pension benefit obligations		54			98
Canadian capital loss carryforwards		760			17
Other		135			186
Total deferred tax assets before valuation allowance		2,189			1,696
Less: valuation allowance		(968	)		(645	)
Net deferred tax assets		1,221			1,051
Deferred tax liabilities:
Property and equipment		(1,703	)		(1,635	)
Long-term debt		(92	)		(53	)
Other		(261	)		(426	)
Total deferred tax liabilities		(2,056	)		(2,114	)
Net deferred tax liability	$	(835	)	$	(1,063	)

At December 31, 2017, Devon has recognized $865 million of deferred tax assets related to various net operating loss carryforwards available to offset future income taxes. The Canadian segment has $710 million of noncapital loss carryforwards expiring between 2029 and 2037. Devon’s U.S. segment has $2.4 billion of U.S. federal carryforwards expiring between 2036 and 2037 and $1.7 billion of U.S. state carryforwards expiring between 2018 and 2037. EnLink has $259 million of U.S. federal carryforwards expiring between 2034 and 2037 and $263 million of state carryforwards expiring between 2028 and 2037. In the current environment, Devon expects tax benefits from the Canadian carryforwards to be utilized in 2018 and beyond and EnLink carryforwards to be utilized in 2020 and beyond. Devon currently does not anticipate utilizing the U.S. federal or state net operating loss carryforwards, as indicated by the full valuation allowance position in the U.S. segment.

As a result of the reduction in U.S. statutory income tax rate and favorable temporary differences, Devon reduced its valuation allowance by $337 million against the U.S. deferred tax assets in 2017 and remains in a full valuation allowance position. Also during 2017, Devon’s Canadian segment recognized a $660 million partial valuation allowance against the deferred tax asset related to the Canadian capital loss carryforward due to projected lack of future capital gain income. In the event Devon were to determine that it would be able to realize the deferred income tax assets in the future, Devon would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.

As of December 31, 2017, Devon’s unremitted foreign earnings from its international operations totaled approximately $908 million. All of this amount was deemed to be indefinitely reinvested into the development and growth of Devon’s Canadian business. Therefore, Devon has not recognized a deferred tax liability for U.S. income taxes associated with such earnings. If such earnings were to be repatriated to the U.S., Devon may be subject to U.S. income taxes and foreign withholding taxes. However, it is not practical to estimate the amount of such additional taxes that may be payable due to the inter-relationship of the various factors involved in making such an estimate.

Unrecognized Tax Benefits

The following table presents changes in Devon’s unrecognized tax benefits.

	December 31,
	2017			2016
Balance at beginning of year	$	202		$	131
Tax positions taken in prior periods		(7	)		36
Tax positions taken in current year		(3	)		—
Accrual of interest related to tax positions taken		16			39
Settlements		(101	)		—
Lapse of statute of limitations		—			(5	)
Foreign currency translation		8			1
Balance at end of year	$	115		$	202

Devon’s unrecognized tax benefit balance at December 31, 2017 and 2016 included $28 million and $68 million, respectively, of interest and penalties. If recognized, $115 million of Devon’s unrecognized tax benefits as of December 31, 2017 would affect Devon’s effective income tax rate. During 2017, Devon removed $101 million of unrecognized tax benefits, including $50 million of interest, as a result of the settlement of certain tax examinations. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

Jurisdiction		Tax Years Open
U.S. Federal		2012-2017
Various U.S. states		2012-2017
Canada Federal		2004-2017
Various Canadian provinces		2004-2017

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.