Income Taxes

We are exempt from Swiss cantonal and communal tax on income derived outside Switzerland, and we are also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying investments in subsidiaries. We expect that the participation relief will result in a full exemption of participation income from Swiss federal income tax.

We provide for income taxes based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries are considered resident for income tax purposes. The relationship between our pre-tax income or loss and our income tax provision or benefit varies from period to period as a result of various factors which include changes in total pre-tax income or loss, the jurisdictions in which our income is earned, the tax laws in those jurisdictions and in our operating structure.

Our income tax (provision) benefit from continuing operations consisted of the following:



	Year Ended December 31,
(Dollars in millions)	2014			2013			2012
Total current provision	$	(350	)	$	(177	)	$	(475	)
Total deferred benefit	66			33			13
Provision for Income Taxes	$	(284	)	$	(144	)	$	(462	)

The difference between the income tax provision at the Swiss federal income tax rate and the income tax provision attributable to “Loss Before Income Taxes” for each of the three years ended December 31, 2014, 2013 and 2012 is analyzed below:



	Year Ended December 31,
(Dollars in millions)	2014			2013			2012
Swiss federal income tax rate at 7.83%	$	20		$	13		$	23
Tax on operating earnings subject to rates different than the Swiss federal income tax rate	(70		)	89			(341		)
Tax on divestitures gains subject to different tax rate	(109		)	—			—
Change in valuation allowance	(222		)	(264		)	(108		)
Change in uncertain tax positions	97			18			(36		)
Provision for Income Taxes	$	(284	)	$	(144	)	$	(462	)

In 2014, we had a tax provision of $284 million on a loss before income taxes of $255 million. Our results for 2014 include a $161 million goodwill impairment charge, a $245 million loss due to the devaluation of Venezuela bolivar and $72 million of project losses related to our early production facility contracts in Iraq, all of which provided no tax benefit. In addition, we incurred a $495 million long-lived assets impairments charge, with limited tax benefit. During 2014, we also sold our land drilling and workover rig operations in Russia and Venezuela, pipeline and specialty services business, engineered chemistry, Integrity drilling fluids business and our equity investment in Proserv for a total gain of approximately $349 million.

In 2013, our income before tax included a $153 million charge for the settlement of the United Nations oil-for-food program governing sales of goods into Iraq and Foreign Corrupt Practices Act (“FCPA”) matters, a $299 million loss on certain legacy projects in Iraq, $98 million of bad debt expense, which included an increase to the allowance for doubtful accounts in Venezuela, and a $100 million loss due to the devaluation of the Venezuelan bolivar, all with no or little tax benefit. Our 2013 tax provision included certain discrete tax benefits primarily due to tax planning activities, decreases in reserves for uncertain tax positions due to statute of limitation expiration and audit closures and the enactment of the American Taxpayer Relief Act, which decreased our effective tax rate for the period.

In 2012, our results included a $589 million goodwill impairment charge, substantially all of which was non-deductible, a $204 million equity method impairment charge and a $100 million accrual for a loss contingency, both of which were fully non-deductible.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in which we have operations. Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability for financial reporting.

The components of the net deferred tax asset (liability) attributable to continuing operations were as follows:



	December 31,
(Dollars stated in millions)	2014			2013
Net operating losses carryforwards	$	600		$	614
Accrued liabilities and reserves	235			224
Tax credit carryforwards	103			115
Employee benefits	70			54
Inventory	70			51
Other differences between financial and tax basis	108			79
Valuation allowance	(732		)	(554		)
Total deferred tax assets	454			583
Deferred tax liabilities:
Property, plant and equipment	(324		)	(415		)
Intangible assets	(206		)	(221		)
Deferred Income	(22		)	(6		)
Other differences between financial and tax basis	(21		)	(22		)
Total deferred tax liabilities	(573		)	(664		)
Net deferred tax liability	$	(119	)	$	(81	)

The overall increase in the valuation allowance in both 2014 and 2013 is primarily attributable to the establishment of a valuation allowance against current year net operating losses ("NOLs") and tax credits in various jurisdictions. Our results in 2014 include significant tax losses in Mexico, Venezuela, and Iraq and in 2013 include significant tax losses in Iraq which we recorded a valuation allowance of $172 million and $134 million, respectively.

Deferred income taxes generally have not been recognized on the cumulative undistributed earnings of our non-Swiss subsidiaries because they are considered to be indefinitely reinvested or they can be distributed on a tax free basis. Distribution of these earnings in the form of dividends or otherwise may result in a combination of income and withholding taxes payable in various countries. As of December 31, 2014, the cumulative undistributed earnings of our non-Swiss subsidiaries that are considered indefinitely reinvested and may be subject to tax if distributed amount to approximately $3 billion. Due to complexities in the tax laws and the manner of repatriation, it is not practicable to estimate the unrecognized amount of deferred income taxes and the related dividend withholding taxes associated with these undistributed earnings.

At December 31, 2014, we had approximately $2.6 billion of NOLs in various jurisdictions, $239 million of which were generated by certain U.S. subsidiaries. Loss carryforwards, if not utilized, will mostly expire for U.S. subsidiaries in 2030 and 2033 and at various dates from 2015 through 2034 for non-U.S. subsidiaries. At December 31, 2014, we had $103 million of tax credit carryovers, of which $85 million is for U.S. subsidiaries. The U.S. credits primarily consists of $28 million of research and development tax credit carryforwards which expire from 2017 through 2034, and $57 million of foreign tax credit carryforwards which expire from 2015 through 2022.

A tabular reconciliation of the total amounts of uncertain tax positions at the beginning and end of the period is as follows:



	Year Ended December 31,
(Dollars stated in millions)	2014			2013			2012
Balance at beginning of year	$	289		$	296		$	292
Additions as a result of tax positions taken during a prior period	23			64			8
Reductions as a result of tax positions taken during a prior period	(35		)	(12		)	(1		)
Additions as a result of tax positions taken during the current period	2			31			29
Reductions relating to settlements with taxing authorities	(24		)	(60		)	(14		)
Reductions as a result of a lapse of the applicable statute of limitations	(9		)	(19		)	(19		)
Foreign exchange effects	(11		)	(11		)	1
Balance at end of year	$	235		$	289		$	296

Substantially all of the uncertain tax positions, if recognized in future periods, would impact our effective tax rate. To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense and other non-current liabilities in the Consolidated Financial Statements in accordance with our accounting policy. We recorded benefits of $53 million and $21 million and an expense of $21 million of interest and penalties for the years ended December 31, 2014, 2013 and 2012, respectively. The amounts in the table above exclude accrued interest and penalties of $58 million, $121 million and $142 million at December 31, 2014, 2013 and 2012, respectively, which are included in other liabilities.

We are subject to income tax in many of the over 100 countries where we operate. As of December 31, 2014, the following table summarizes the tax years that remain subject to examination for the major jurisdictions in which we operate:



Canada	2007 - 2014
Mexico	2007 - 2014
Russia	2012 - 2014
Switzerland	2009 - 2013
United States	2007 - 2014
Venezuela	2009 - 2014

We anticipate that it is reasonably possible that the amount of uncertain tax positions may decrease by up to $24 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.