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)	2016			2015			2014
Total Current Provision	$	(115	)	$	(303	)	$	(350	)
Total Deferred (Provision) Benefit	(381		)	448			66
(Provision) Benefit for Income Taxes	$	(496	)	$	145		$	(284	)

Weatherford records deferred tax assets for net operating losses and temporary differences between the book and tax basis of assets and liabilities that are expected to produce tax deductions in future periods. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) when determining whether a valuation allowance is required. The Company evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies in making this assessment. The realizability of the deferred tax assets is dependent upon judgments and assumptions inherent in the determination of future taxable income, including factors such as future operation conditions (particularly as related to prevailing oil prices and market demand for our products and services).

Operations in the United States and other jurisdictions continue to experience losses due to the prolonged downturn in the demand for oil field services. Our expectations regarding the recovery were and are more measured due to the difficulties in obtaining pricing increases from our customers and a slower recovery in the U.S. land market. Also, the Company recorded significant long-lived asset impairments and established allowances for inventory and other assets in the third quarter of 2016. As a result of the historical and projected future losses, and limited objective positive evidence to overcome negative evidence, the Company concluded that it needed to record a valuation allowance of $526 million in the third quarter of 2016 against certain previously benefited deferred tax assets since it cannot support that it is more likely than not that the deferred tax assets will be realized. The valuation allowance primarily relates to operations in the United States.

The Company will continue to evaluate whether valuation allowances are needed in future reporting periods. Valuation allowances will remain until the Company can determine that net deferred tax assets are more likely than not to be realized. In the event that the Company were to determine that it would be able to realize the deferred income tax assets in the future as a result of significant improvement in earnings as a result of market conditions, the Company would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.

The difference between the income tax (provision) benefit at the Swiss federal income tax rate and the income tax (provision) benefit attributable to “Loss Before Income Taxes” for each of the three years ended December 31, 2016, 2015 and 2014 is analyzed below:



	Year Ended December 31,
(Dollars in millions)	2016			2015			2014
Swiss federal income tax rate at 7.83%	$	225		$	164		$	20
Tax on operating earnings subject to rates different than the Swiss federal income tax rate	319			411			(70		)
Tax on divestitures gains subject to different tax rate	—			—			(109		)
Non-cash tax expense on distribution of subsidiary earnings	(137		)	(265		)	—
Change in valuation allowance	(872		)	(159		)	(222		)
Change in uncertain tax positions	(31		)	(6		)	97
(Provision) Benefit for Income Taxes	$	(496	)	$	145		$	(284	)

Our income tax provision in 2016 was $496 million on a loss before income taxes of $2.9 billion. The primary component of the tax expense relates to the Company’s conclusion that certain deferred tax assets that had previously been benefited are not more likely than not to be realized. Our results for 2016 also include charges with no significant tax benefit principally related to $436 million of long-lived asset impairments, $219 million of excess and obsolete inventory charges, $140 million of settlement agreement charges, $41 million of currency devaluation related to the Angolan kwanza, $78 million of bond tender premium, and $76 million of PDVSA note receivable net adjustment, $62 million in accounts receivable reserves and write-offs, and $114 million in pressure pumping related charges. In addition, we recorded $137 million for a non-cash tax expense related to an internal restructuring of subsidiaries.

In 2015, we had a tax benefit of $145 million on a loss before income taxes of $2.1 billion. The tax benefit was favorably impacted by a U.S. loss, which included restructuring, impairment charges and a worthless stock deduction. Our results for 2015 include $255 million of Land Drilling Rig impairment charges, $232 million of restructuring charges, $116 million of litigation settlements, $153 million of legacy project losses, $85 million of currency devaluation and related losses and $25 million of equity investment impairment, all with no significant tax benefit. In addition, we recorded a tax charge of $265 million for a non-cash tax expense on distribution of subsidiary earnings.

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.

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. For 2015, 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. For 2016, we adopted ASU 2015-17 and classify net deferred tax assets and liabilities as non-current.

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



	December 31,
(Dollars in millions)	2016			2015
Net operating losses carryforwards	$	1,258		$	972
Accrued liabilities and reserves	200			190
Tax credit carryforwards	102			102
Employee benefits	34			52
Inventory	75			64
Other differences between financial and tax basis	252			267
Valuation allowance	(1,738		)	(868		)
Total deferred tax assets	183			779
Deferred tax liabilities:
Property, plant and equipment	(13		)	(53		)
Intangible assets	(212		)	(209		)
Deferred Income	(9		)	(21		)
Undistributed Subsidiary Earnings	—			(179		)
Other differences between financial and tax basis	(25		)	(12		)
Total deferred tax liabilities	(259		)	(474		)
Net deferred tax asset (liability)	$	(76	)	$	305

The overall increase in the valuation allowance in 2016 is primarily attributable to the establishment of a valuation allowance against current year net operating losses (“NOLs”) and beginning-of-year deferred tax assets in the United States, Brazil, and Colombia. The valuation allowance increase for 2015 is primarily attributable to the establishment of a valuation allowance against current year NOLs and tax credits in Mexico, Venezuela, and Iraq.

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. In 2015 the company reversed its indefinitely reinvested assertion on a portion of those earnings and recorded a non-cash tax charge of $265 million. In addition, during the third quarter of 2016 we recorded a tax charge of $137 million for a non-cash tax expense related to an internal restructuring of subsidiaries. These charges covered the tax expense on distributions of earnings made during the fourth quarter of 2016 from subsidiaries to the U.S. As of December 31, 2016, the pool of positive undistributed earnings of our non-Swiss subsidiaries that are considered indefinitely reinvested and may be subject to tax if distributed amounts to approximately $3.6 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, 2016, we had approximately $4.5 billion of NOLs in various jurisdictions, $1.7 billion of which were generated by certain U.S. subsidiaries. Loss carryforwards, if not utilized, will mostly expire for U.S. subsidiaries from 2033 through 2036 and at various dates from 2017 through 2036 for non-U.S. subsidiaries. At December 31, 2016, we had $102 million of tax credit carryovers, of which $82 million is for U.S. subsidiaries. The U.S. credits primarily consists of $30 million of research and development tax credit carryforwards which expire from 2018 through 2036, and $52 million of foreign tax credit carryforwards which expire from 2017 through 2023.

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 in millions)	2016			2015			2014
Balance at beginning of year	$	195		$	235		$	289
Additions as a result of tax positions taken during a prior period	30			28			23
Reductions as a result of tax positions taken during a prior period	(1		)	(9		)	(35		)
Additions as a result of tax positions taken during the current period	20			5			2
Reductions relating to settlements with taxing authorities	(19		)	(46		)	(24		)
Reductions as a result of a lapse of the applicable statute of limitations	(12		)	(7		)	(9		)
Foreign exchange effects	(5		)	(11		)	(11		)
Balance at end of year	$	208		$	195		$	235

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 an expense of $2 million, and a benefit of $4 million and $53 million of interest and penalty for the years ended December 31, 2016, 2015 and 2014, respectively. The amounts in the table above exclude cumulative accrued interest and penalties of $51 million, $50 million, and $58 million at December 31, 2016, 2015 and 2014, respectively, which are included in other liabilities.

We are subject to income tax in many of the approximately 90 countries where we operate. As of December 31, 2016, the following table summarizes the tax years that remain subject to examination for the major jurisdictions in which we operate:



Canada	2008 - 2016
Mexico	2007 - 2016
Russia	2013 - 2016
Switzerland	2010 - 2016
United States	2010 - 2016
Venezuela	2010 - 2016

We are continuously under tax examination in various jurisdictions. We cannot predict the timing or outcome regarding resolution of these tax examinations or if they will have a material impact on our financial statements. We anticipate that it is reasonably possible that the amount of uncertain tax positions may decrease by up to $40 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.