Note I – Income Taxes

The components of income (loss) from continuing operations before income taxes for each of the three years ended December 31, 2016 and income tax expense (benefit) attributable thereto were as follows.



(Thousands of dollars)	2016		2015	2014
Income (loss) from continuing operations before income taxes
United States	$	(595,196)	(1,259,268)	179,484
Foreign		102,081	(2,022,994)	1,072,786
Total	$	(493,115)	(3,282,262)	1,252,270
Income tax expense (benefit)
Federal – Current	$	-	(9,435)	25,151
– Deferred		(197,450)	(241,127)	25,444
		(197,450)	(250,562)	50,595
State		13,984	(5,294)	8,840
Foreign – Current		146,861	(40,550)	359,502
– Deferred		(182,567)	(730,084)	(191,640)
		(35,706)	(770,634)	167,862
Total	$	(219,172)	(1,026,490)	227,297

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


(Thousands of dollars)	2016		2015	2014
Income tax expense (benefit) based on the U.S. statutory tax rate	$	(172,590)	(1,148,792)	438,295
Foreign income (loss) subject to foreign tax rates different than the U.S. statutory rate		8,582	49,739	20,562
State income taxes, net of federal benefit		9,090	(3,441)	5,746
U.S. tax benefit on certain foreign upstream investments		(21,336)	(16,939)	(95,838)
Current tax on distribution of foreign earnings		–	–	52,724
Deferred tax on distribution of foreign earnings		–	188,461	–
Tax effects on sale of Canadian assets		(89,473)	–	–
Tax effects on sale of Malaysian assets		2,080	(122,559)	(227,241)
Increase in deferred tax asset valuation allowance related to other foreign exploration expenditures		25,734	40,788	37,712
Other, net		18,741	(13,747)	(4,663)
Total	$	(219,172)	(1,026,490)	227,297

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 that was settled in June 2016. 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 noncash 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, 2016 and 2015 showing the tax effects of significant temporary differences follows.



(Thousands of dollars)	2016		2015
Deferred tax assets
Property and leasehold costs	$	572,481	587,517
Liabilities for dismantlements		170,946	114,565
Postretirement and other employee benefits		214,288	226,217
Alternative minimum tax		29,710	39,683
Foreign tax credit carryforwards		33,295	855
U. S. net operating loss		454,231	–
Other deferred tax assets		16,541	127,165
Total gross deferred tax assets		1,491,492	1,096,002
Less valuation allowance		(305,389)	(294,406)
Net deferred tax assets		1,186,103	801,596
Deferred tax liabilities
Accumulated depreciation, depletion and amortization		(867,343)	(793,972)
Other deferred tax liabilities		(21,908)	(21,095)
Total gross deferred tax liabilities		(889,251)	(815,067)
Net deferred tax assets (liabilities)	$	296,852	(13,471)

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 2017 through 2026. The valuation allowance increased $10,983,000 in 2016 due to foreign tax carry forwards. 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 an estimated U.S. net operating loss of $1.29 billion at year-end 2016 with a corresponding deferred tax asset of $454,231,000. The Company believes the U.S. net operating loss being carried forward will be utilized before it expires in 2036.

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, 2016, undistributed earnings of the Company’s subsidiaries considered indefinitely reinvested were approximately $3.0 billion. The unrecognized deferred tax liability is dependent on many factors including withholding taxes under current tax treaties, any repatriation occurring while the United States is in a taxable income position, and associated foreign tax credits and the unrecognized deferred tax liability is estimated to be approximately $395,000,000. Under present law, if the Company repatriates earnings from Canada to the United States in a future year, it would incur a 5% withholding tax on the amounts repatriated.

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 Sheets. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the three years ended December 31, 2016 is shown in the following table.



(Thousands of dollars)	2016		2015	2014
Balance at January 1	$	6,631	6,011	6,366
Additions for tax positions related to current year		756	821	988
Settlements due to lapse of time		–	–	(1,225)
Foreign currency translation effect		30	(201)	(118)
Balance at December 31	$	7,417	6,631	6,011

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, 2016, 2015 and 2014 for interest and penalties of $343,000, $233,000 and $142,000, respectively, associated with uncertain tax positions. Income tax expense for the years ended December 31, 2016, 2015 and 2014 included net benefits for interest and penalties of $111,000, $91,000 and $4,000, 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 2017 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 2017.

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, 2016, 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 – 2009; and United Kingdom – 2014.