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, 2016 and 2015, 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,
	2016			2015		2014
Current income tax expense:
State income tax	$	2		$	1	$	1
Canadian federal and provincial income tax	83			83		70
Total current income tax expense	$	85		$	84	$	71

Deferred income tax expense/(benefit):
Federal income tax	$	57		$	75	$	38
State income tax	(4		)	7		3
Canadian federal and provincial income tax	(60		)	16		100
Total deferred income tax expense/(benefit)	$	(7	)	$	98	$	141
Total income tax expense	$	78		$	182	$	212

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,
	2016			2015			2014
Income before tax	$	738		$	991		$	1,540
Net income attributable to noncontrolling interests	(566		)	(691		)	(1,258		)
Income taxes attributable to noncontrolling interests	(25		)	(100		)	(171		)
	$	147		$	200		$	111
Federal statutory income tax rate	35		%	35		%	35		%
Income tax at statutory rate	$	51		$	70		$	39

Deferred tax rate adjustment	(1		)	8			—
State income tax, net of federal benefit	3			4			2
Income taxes attributable to noncontrolling interests:
Canadian federal and provincial income tax	$	10		$	85		$	154
Canadian withholding tax	13			14			16
State income tax	2			1			1
Total income tax expense	$	78		$	182		$	212

Deferred tax assets and liabilities are aggregated by the applicable tax paying entity and jurisdiction and result from the following (in millions):



	December 31,
	2016			2015
Deferred tax assets:
Investment in partnerships	$	1,685		$	1,730
Net operating losses	191			105
Derivative instruments	49			—
Book accruals in excess of current tax deductions	24			20
Total deferred tax assets	1,949			1,855
Deferred tax liabilities:
Derivative instruments	—			(30		)
Property and equipment in excess of tax values	(394		)	(312		)
Other	(41		)	(41		)
Total deferred tax liabilities	(435		)	(383		)
Net deferred tax assets	$	1,514		$	1,472

Balance sheet classification of deferred tax assets/(liabilities):
Deferred tax asset	$	1,876		$	1,835
Other long-term liabilities and deferred credits	(362		)	(363		)
	$	1,514		$	1,472

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 common units by PAA in the period 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 partner’s capital. See Note 11 for additional information regarding the issuance of common units by PAA.

We elected to amend PAGP's 2014 tax return to deduct foreign taxes as opposed to carrying the foreign tax credit forward, which increased PAGP's federal and state net operating loss carryforwards. As of December 31, 2016, we had net operating loss carryforwards for (i) U.S. federal income tax purposes of $512 million, which will expire from 2033 to 2036, (ii) state income tax purposes of $201 million, which will expire from 2018 to 2036, and (iii) foreign income tax purposes of $15 million, which will expire from 2034 to 2036.

Generally, tax returns for our Canadian entities are open to audit from 2008 through 2016. Our U.S. and state tax years are generally open to examination from 2013 to 2016.