Income Taxes

12 Months Ended

Dec. 31, 2018

The components of the benefit (provision) for income taxes on continuing operations were:



	Year Ended December 31
Millions of dollars	2018			2017			2016
Current income taxes:
Federal	$	19		$	40		$	737
Foreign	(428		)	(423		)	(415		)
State	(15		)	(14		)	35
Total current	(424		)	(397		)	357
Deferred income taxes:
Federal	286			(678		)	1,343
Foreign	9			(31		)	77
State	(28		)	(25		)	81
Total deferred	267			(734		)	1,501
Income tax benefit (provision)	$	(157	)	$	(1,131	)	$	1,858

The United States and foreign components of income (loss) from continuing operations before income taxes were as follows:



	Year Ended December 31
Millions of dollars	2018		2017			2016
United States	$	1,097	$	694		$	(6,636	)
Foreign	717		(12		)	(989		)
Total	$	1,814	$	682		$	(7,625	)

Reconciliations between the actual provision for income taxes on continuing operations and that computed by applying the United States statutory rate to income (loss) from continuing operations before income taxes were as follows:



	Year Ended December 31
	2018		2017		2016
United States statutory rate	21.0	%	35.0	%	35.0	%
Valuation allowance against tax assets	(16.2	)	(6.2	)	(2.1	)
Venezuela adjustment	5.7		36.6		—
Impact of foreign income taxed at different rates	(3.0	)	(18.3	)	(3.2	)
Impact of U.S. tax reform	(2.6	)	113.0		—
Adjustments of prior year taxes	2.0		(2.3	)	0.2
State income taxes	1.9		1.7		1.0
Undistributed foreign earnings	—		3.8		(5.1	)
Domestic manufacturing deduction	—		—		(1.3	)
Non-deductible acquisition costs	—		—		0.6
Other items, net	(0.1	)	2.5		(0.7	)
Total effective tax rate on continuing operations	8.7	%	165.8	%	24.4	%

Our effective tax rate on continuing operations was 8.7% for 2018, 165.8% for 2017 and 24.4% for 2016. For the year ended December 31, 2018, we had the following significant items impacting our effective tax rate:


–	during the fourth quarter of 2018, we recognized the impact of a strategic change in the Company’s corporate structure, which resulted in a net tax benefit of $306 million;


–	we wrote down all of our remaining investment in Venezuela during the first quarter of 2018. As a result, we recognized a pre-tax charge of $265 million, which was not tax-deductible, coupled with $47 million of additional accrued local Venezuela taxes in our tax provision. See Note 4 to the consolidated financial statements for further information;


–	we completed our analysis in the fourth quarter of 2018 on the impact of the United States tax reform enacted in 2017 and made an adjustment to the provisional estimate we previously recorded. As a result, we recognized $47 million of additional tax benefits, primarily related to the remeasurement of deferred taxes and an adjustment to mandatory deemed repatriation; and


–	we recognized income in our foreign operations in which the corresponding tax expenses are applied at lower statutory rates in certain jurisdictions.

The primary components of our deferred tax assets and liabilities were as follows:



	December 31
Millions of dollars	2018		2017
Gross deferred tax assets:
Net operating loss carryforwards	$	1,466	$	1,370
Foreign tax credit carryforwards	728		828
Employee compensation and benefits	242		263
Accrued liabilities	101		97
Other	404		416
Total gross deferred tax assets	2,941		2,974
Gross deferred tax liabilities:
Depreciation and amortization	635		315
Undistributed foreign earnings	2		242
Other	64		56
Total gross deferred tax liabilities	701		613
Valuation allowances	913		1,173
Net deferred income tax asset	$	1,327	$	1,188

At December 31, 2018, we had $1.5 billion of domestic and foreign tax-effected net operating loss carryforwards. The ultimate realization of these deferred tax assets depends on the ability to generate sufficient taxable income in the appropriate taxing jurisdiction. $168 million of the net operating loss carryforwards will expire after taxable years ended from 2019 through 2023, $180 million will expire after taxable years ended from 2024 through 2028, and $786 million will expire after taxable years ended from 2029 through 2039. The remaining balance will not expire. Additionally, we had $805 million of foreign tax credit carryforwards that will expire from 2024 through 2028, which are offset by foreign branch deferred activity reflected in the above table, along with $138 million of research and development tax credit carryforwards that will expire from 2029 through 2039.

In accordance with the Tax Cuts and Jobs Act of 2017, a company’s foreign earnings accumulated under the legacy tax laws are deemed to be repatriated into the United States. We have provided federal and state income tax related to this deemed repatriation. We have not provided incremental United States income taxes and foreign withholding taxes on undistributed earnings of foreign subsidiaries as of December 31, 2018. The Company generally does not provide for taxes related to its undistributed earnings because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested.

The following table presents a rollforward of our unrecognized tax benefits and associated interest and penalties.



Millions of dollars	Unrecognized Tax Benefits				Interest and Penalties
Balance at January 1, 2016	$	322			$	47
Change in prior year tax positions	44				20
Change in current year tax positions	129				3
Cash settlements with taxing authorities	(62		)		(8		)
Lapse of statute of limitations	(6		)		(1		)
Balance at December 31, 2016	$	427			$	61
Change in prior year tax positions	(108		)		—
Change in current year tax positions	24				2
Cash settlements with taxing authorities	(6		)		—
Lapse of statute of limitations	(4		)		(3		)
Balance at December 31, 2017	$	333		(a)	$	60
Change in prior year tax positions	32				11
Change in current year tax positions	63				—
Cash settlements with taxing authorities	(7		)		(2		)
Lapse of statute of limitations	(4		)		(2		)
Balance at December 31, 2018	$	417		(a)(b)	$	67

(a)

Includes $18 million as of December 31, 2018 and $9 million as of December 31, 2017 in foreign unrecognized tax benefits that would give rise to a United States tax credit. As of December 31, 2018 and December 31, 2017, approximately $399 million and $319 million, respectively, of unrecognized tax benefits would positively impact the effective tax rate and be recognized as additional tax benefits in our statement of operations if resolved in our favor.


(b)	Includes $21 million that could be resolved within the next 12 months.

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. In most cases, we are no longer subject to state, local, or non-United States income tax examination by tax authorities for years before 2009. Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. Currently, our United States federal tax filings for the tax years 2014 through 2015 are under review by the Internal Revenue Service, and the appeal process is closed and final resolution has been achieved for the tax years 2010 through 2013.