Note I – Income Taxes

The components of income from continuing operations before income taxes for each of the three years ended December 31, 2014 and income tax expense attributable thereto were as follows.



(Thousands of dollars)	2014		2013	2012
Income (loss) from continuing operations before income taxes
United States	$	179,484	(5,810)	54,275
Foreign		1,072,786	1,478,497	1,313,735
Total	$	1,252,270	1,472,687	1,368,010

Income tax expense (benefit)
Federal – Current	$	25,151	(56,790)	(256,931)
– Deferred		25,444	65,883	177,325
		50,595	9,093	(79,606)
State		8,840	7,141	8,104
Foreign – Current		359,502	477,715	472,701
– Deferred		(191,640)	90,601	160,317
		167,862	568,316	633,018
Total	$	227,297	584,550	561,516

The following table reconciles income taxes based on the U.S. statutory tax rate to the Company’s income tax expense.


(Thousands of dollars)	2014		2013	2012
Income tax expense based on the U.S. statutory tax rate	$	438,295	515,440	478,804
Foreign income subject to foreign tax rates different than the U.S. statutory rate		20,562	31,752	7,710
State income taxes, net of federal benefit		5,746	4,642	5,268
U.S. tax benefit on certain foreign upstream investments		(95,838)	(133,526)	(108,077)
Deferred tax benefit on sale of Malaysian assets		(176,661)	–	–
Increase in deferred tax asset valuation allowance related to other foreign exploration expenditures		37,712	129,588	87,558
Impairment or abandonment of Azurite field with no tax benefit		–	35,475	70,000
Other, net		(2,519)	1,179	20,253
Total	$	227,297	584,550	561,516

An analysis of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 showing the tax effects of significant temporary differences follows.



(Thousands of dollars)	2014		2013
Deferred tax assets
Property and leasehold costs	$	379,577	708,947
Liabilities for dismantlements		85,544	79,111
Postretirement and other employee benefits		208,600	175,446
Alternative minimum tax		46,792	49,536
Foreign tax credit carryforwards		44,061	19,896
Other deferred tax assets		22,426	23,352
Total gross deferred tax assets		787,000	1,056,288
Less valuation allowance		(306,463)	(633,735)
Net deferred tax assets		480,537	422,553

Deferred tax liabilities
Property, plant and equipment		(479,677)	(747,561)
Accumulated depreciation, depletion and amortization		(1,123,864)	(1,040,251)
Other deferred tax liabilities		(15,753)	(38,849)
Total gross deferred tax liabilities		(1,619,294)	(1,826,661)
Net deferred tax liabilities	$	(1,138,757)	(1,404,108)

In management’s judgment, the net deferred tax assets in the preceding table will more likely than not be realized as reductions of future taxable income or by utilizing available tax planning strategies. The valuation allowance for deferred tax assets relates primarily to tax assets arising in foreign tax jurisdictions and foreign tax credit carryforwards. In the judgment of management at the present time, these tax assets are not likely to be realized. The foreign tax credit carryforwards expire in 2015 through 2024. The valuation allowance decreased $327,272,000 in 2014. The deferred tax valuation allowance decreased by $65,384,000 in 2014 due to sanction of the Block H development plan, which allowed recognition of deferred tax benefits that were fully reserved in prior years. Additionally, the decrease included realization of U.S. tax benefits related to certain foreign upstream investments where the Company has exited. The remainder of the valuation allowance reduction offset changes in certain deferred tax assets. Subsequent reductions of the valuation allowance are expected to be reported as reductions of tax expense assuming no offsetting change in the deferred tax asset.

The Company has not recognized a deferred tax liability for undistributed earnings of its Canadian, Malaysian and certain other foreign subsidiaries because such earnings are considered indefinitely reinvested in foreign countries. As of December 31, 2014, undistributed earnings of the Company’s subsidiaries considered indefinitely reinvested were approximately $6,045,000,000. The unrecognized deferred tax liability is dependent on many factors including withholding taxes under current tax treaties and foreign tax credits and is estimated to be approximately $684,000,000. The Company does not consider undistributed earnings from certain other international operations to be indefinitely reinvested; however, any estimated tax liabilities upon repatriation of earnings from these international operations are expected to be offset with foreign tax credits. Although the Company does not foresee repatriating earnings considered indefinitely reinvested, under present law, it would incur a 5% withholding tax on any monies repatriated from Canada to the United States.

During 2014, the Company sold its U.K. retail marketing assets as well as 20% of its oil and gas assets in Malaysia. Following these sales, the Company repatriated cash from the U.K. and Malaysia of $250,000,000 and $1,700,000,000, respectively. Foreign tax credits were available to cover most of the U.S. income taxes associated with these repatriated funds. The Company continues to assert that the previously generated earnings in Malaysia are indefinitely reinvested as of December 31, 2014.

Uncertain Income Tax Positions

The FASB’s rules for accounting for income tax uncertainties clarify the criteria for recognizing uncertain income tax benefits and require additional disclosures about uncertain tax positions. Under current rules the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. Liabilities associated with uncertain income tax positions are included in Deferred Credits and Other Liabilities in the Consolidated Balance Sheet. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the three years ended December 31, 2014 is shown in the following table.



(Thousands of dollars)	2014		2013	2012
Balance at January 1	$	6,366	16,611	18,857
Additions for tax positions related to current year		988	2,486	1,258
Settlements due to lapse of time		(1,225)	(12,731)	(3,504)
Foreign currency translation effect		(118)	–	–
Balance at December 31	$	6,011	6,366	16,611

All additions or reductions to the above liability affect the Company’s effective income tax rate in the respective period of change. The Company accounts for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. The Company also had other recorded liabilities as of December 31, 2014 and 2013 for interest and penalties of $142,000 and $146,000, respectively, associated with uncertain tax positions. Income tax expense for the years ended December 31, 2014, 2013 and 2012 included net benefits for interest and penalties of $4,000, $829,000 and $1,000, respectively, associated with uncertain tax positions.

During the next twelve months, the Company currently expects to add between $1,000,000 and $2,000,000 to the liability for uncertain taxes for 2015 events. Although existing liabilities could be reduced by settlement with taxing authorities or lapse due to statute of limitations, the Company believes that the changes in its unrecognized tax benefits due to these events will not have a material impact on the Consolidated Statement of Income during 2015.

The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities. These audits often take years to complete and settle. Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future years from resolution of outstanding unsettled matters. As of December 31, 2014, the earliest years remaining open for audit and/or settlement in the Company’s major taxing jurisdictions are as follows: United States – 2011; Canada – 2008; United Kingdom – 2012; and Malaysia – 2007.