Note I – Income Taxes

The components of income from continuing operations before income taxes for each of the three years ended December 31, 2011 and income tax expense attributable thereto were as follows.


(Thousands of dollars)	2011		2010			2009
Income from continuing operations before income taxes
United States	$	440,753		188,588			261,005
Foreign		1,110,230		1,200,122			974,408

	$	1,550,983		1,388,710			1,235,413

Income tax expense
Federal – Current	$	99,451		110,142			100,276
Deferred		43,602		(40,981	)		2,078

		143,053		69,161			102,354

State		30,372		15,486			7,087

Foreign – Current		497,446		347,746			318,619
Deferred		139,180		176,758			93,499

		636,626		524,504			412,118

Total	$	810,051		609,151			521,559

Income tax benefits attributable to employee stock option transactions of $8,775,000 in 2011, $15,896,000 in 2010 and $6,035,000 in 2009 were included in Capital in Excess of Par Value in the Consolidated Balance Sheets.

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


(Thousands of dollars)	2011			2010		2009
Income tax expense based on the U.S. statutory tax rate	$	542,844			486,049		432,395
Foreign income subject to foreign taxes at a rate different than the U.S. statutory rate		10,053			56,367		33,395
State income taxes, net of federal benefit		19,742			10,066		4,607
Increase in deferred tax asset valuation allowance related to foreign exploration expenditures		102,714			47,128		34,431
Impairment of Azurite field with no tax benefit		129,010			0		0
Malaysian tax benefits on prior year costs in Block P		(25,573	)		0		0
Increase in United Kingdom oil and gas tax rate		14,461			0		0
Other, net		16,800			9,541		16,731

Total	$	810,051			609,151		521,559

An analysis of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 showing the tax effects of significant temporary differences follows.


(Thousands of dollars)	2011			2010
Deferred tax assets
Property and leasehold costs	$	627,093			391,168
Liabilities for dismantlements		114,175			97,149
Postretirement and other employee benefits		164,044			137,709
Foreign tax credit carryforwards		21,368			47,725
Other deferred tax assets		38,341			47,511

Total gross deferred tax assets		965,021			721,262
Less valuation allowance		(445,842	)		(305,349	)

Net deferred tax assets		519,179			415,913

Deferred tax liabilities
Property, plant and equipment		(851,330	)		(729,699	)
Accumulated depreciation, depletion and amortization		(754,295	)		(702,512	)
Deferred major repair costs		(11,257	)		(35,848	)
Other deferred tax liabilities		(67,494	)		(96,838	)

Total gross deferred tax liabilities		(1,684,376	)		(1,564,897	)

Net deferred tax liabilities	$	(1,165,197	)		(1,148,984	)

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 2014 through 2020. The valuation allowance increased $140,493,000 in 2011, with these changes primarily offsetting the change in certain deferred tax assets. Any subsequent reductions of the valuation allowance will 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 certain other foreign subsidiaries because such earnings are considered indefinitely invested in foreign countries. As of December 31, 2011, undistributed earnings of the Company’s subsidiaries considered indefinitely invested were approximately $4,895,000,000. 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 $492,469,000. The Company does not consider undistributed earnings from certain other international operations to be indefinitely invested; 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 invested, 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 years ended December 31, 2011 and 2010 follows.


(Thousands of dollars)	2011			2010
Balance at January 1	$	23,196			25,978
Additions for tax positions related to current year		1,294			1,225
Settlements due to lapse of time		(5,633	)		(4,007	)

Balance at December 31	$	18,857			23,196

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, 2011 and 2010 for interest and penalties of $976,000 and $1,010,000, respectively, associated with uncertain tax positions. Income tax expense for the years ended December 31, 2011, 2010 and 2009 included (charges)/benefits for interest and penalties of $34,000, $(43,000) and $1,763,000, 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 2012 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 2012.

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, 2011, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2008; Canada – 2007; United Kingdom – 2010; and Malaysia – 2006.