Note I – Income Taxes

The components of income (loss) from continuing operations before income taxes for each of the three years ended December 31, 2015 and income tax expense (benefit) attributable thereto were as follows.



(Thousands of dollars)	2015		2014	2013
Income (loss) from continuing operations before income taxes
United States	$	(1,259,268)	179,484	(5,810)
Foreign		(2,022,994)	1,072,786	1,478,497
Total	$	(3,282,262)	1,252,270	1,472,687

Income tax expense (benefit)
Federal – Current	$	(9,435)	25,151	(56,790)
– Deferred		(241,127)	25,444	65,883
		(250,562)	50,595	9,093
State		(5,294)	8,840	7,141
Foreign – Current		(40,550)	359,502	477,715
– Deferred		(730,084)	(191,640)	90,601
		(770,634)	167,862	568,316
Total	$	(1,026,490)	227,297	584,550

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


(Thousands of dollars)	2015		2014	2013
Income tax expense (benefit) based on the U.S. statutory tax rate	$	(1,148,792)	438,295	515,440
Foreign income (loss) subject to foreign tax rates different than the U.S. statutory rate		49,739	20,562	31,752
State income taxes, net of federal benefit		(3,441)	5,746	4,642
U.S. tax benefit on certain foreign upstream investments		(16,939)	(95,838)	(133,526)
Current tax on distribution of foreign earnings		–	52,724	–
Deferred tax on distribution of foreign earnings		188,461	–	–
Tax effects on sale of Malaysian assets		(122,559)	(227,241)	–
Increase in deferred tax asset valuation allowance related to other foreign exploration expenditures		40,788	37,712	129,588
Impairment or abandonment of Azurite field with no tax benefit		–	–	35,475
Other, net		(13,747)	(4,663)	1,179
Total	$	(1,026,490)	227,297	584,550

In December 2015, one of the company’s foreign subsidiaries declared a $2,000,000,000 dividend payable to its parent. The dividend represented substantially all of the foreign subsidiary’s accumulated retained earnings under U.S. GAAP. The foreign subsidiary’s dividend was settled with an $800,000,000 cash payment plus issuance of a $1,200,000,000 note payable to its U.S. parent to be paid over 10 years. The dividend was completed without a U.S. current tax impact due to the utilization of the 2015 U.S. tax net operating loss combined with the shareholder’s ability to use allowed foreign tax credits that attached to the dividend. Based on the usage of the 2015 U.S. tax net operating loss, a non-cash tax expense of $188,461,000 was recorded in 2015, primarily associated with using a U.S. deferred tax asset that would otherwise have carried forward to future years without the dividend.

An analysis of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2015 and 2014 showing the tax effects of significant temporary differences follows.



(Thousands of dollars)	2015		2014
Deferred tax assets
Property and leasehold costs	$	587,517	379,577
Liabilities for dismantlements		114,565	85,544
Postretirement and other employee benefits		226,217	208,600
Alternative minimum tax		39,683	46,792
Foreign tax credit carryforwards		855	44,061
Other deferred tax assets		127,165	22,426
Total gross deferred tax assets		1,096,002	787,000
Less valuation allowance		(294,406)	(306,463)
Net deferred tax assets		801,596	480,537

Deferred tax liabilities
Property, plant and equipment		–	(479,677)
Accumulated depreciation, depletion and amortization		(793,972)	(1,123,864)
Other deferred tax liabilities		(21,095)	(15,753)
Total gross deferred tax liabilities		(815,067)	(1,619,294)
Net deferred tax liabilities	$	(13,471)	(1,138,757)

In management’s judgment, the net deferred tax assets in the preceding table are more likely than not to be realized based on the consideration of deferred tax liability reversals and future taxable income. 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 2016 through 2025. The valuation allowance decreased $12,057,000 in 2015. The deferred tax valuation allowance decreased by $43,206,000 in 2015 due to foreign tax credit carry forwards realization of U.S. tax benefits on cash repatriated to the U.S. in 2015, partially offset by increases related to other 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, and Malaysian operating subsidiaries because such earnings are considered indefinitely reinvested in foreign countries. As of December 31, 2015, undistributed earnings of the Company’s subsidiaries considered indefinitely reinvested were approximately $2,866,000,000. 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 $440,000,000. The Company does not consider undistributed earnings from certain other international operations to be indefinitely reinvested. 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.

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, 2015 is shown in the following table.



(Thousands of dollars)	2015		2014	2013
Balance at January 1	$	6,011	6,366	16,611
Additions for tax positions related to current year		821	988	2,486
Settlements due to lapse of time		–	(1,225)	(12,731)
Foreign currency translation effect		(201)	(118)	–
Balance at December 31	$	6,631	6,011	6,366

All additions or settlements 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, 2015 and 2014 for interest and penalties of $233,000 and $142,000, respectively, associated with uncertain tax positions. Income tax expense for the years ended December 31, 2015, 2014 and 2013 included net benefits for interest and penalties of $91,000, $4,000 and $829,000, 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 2016 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 Operations during 2016.

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, 2015, 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; Malaysia – 2008; and United Kingdom – 2014.