Note H – Income Taxes

The components of income from continuing operations before income taxes for each of the three years ended December 31, 2012 and income tax expense attributable thereto were as follows.


(Thousands of dollars)	2012			2011		2010
Income from continuing operations before income taxes
United States	$	229,981			440,753		188,588
Foreign		1,393,001			1,051,891		1,137,064

	$	1,622,982			1,492,644		1,325,652

Income tax expense
Federal – Current	$	(181,003	)		99,451		110,142
Deferred		156,856			43,602		(40,981	)

		(24,147	)		143,053		69,161

State		24,754			30,372		15,486

Foreign – Current		503,674			465,150		303,808
Deferred		154,655			124,598		188,117

		658,329			589,748		491,925

Total	$	658,936			763,173		576,572

Income tax benefits attributable to employee stock option transactions of $5,920,000 in 2012, $8,775,000 in 2011 and $15,896,000 in 2010 were included in Capital in Excess of Par Value within Stockholders’ Equity 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)	2012			2011			2010
Income tax expense based on the U.S. statutory tax rate	$	568,044			522,425			463,978
Foreign income subject to foreign taxes at a rate different than the U.S. statutory rate		5,542			(1,945	)		45,859
State income taxes, net of federal benefit		16,090			19,742			10,066
U.S. tax benefit on certain foreign exploration activities		(108,077	)		0			0
Increase in deferred tax asset valuation allowance related to other foreign exploration expenditures		87,558			102,714			47,128
Impairment of Azurite field with no tax benefit		70,000			129,010			0
Malaysian tax benefits on prior year costs in Block P		0			(25,573	)		0
Other, net		19,779			16,800			9,541

Total	$	658,936			763,173			576,572

An analysis of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 showing the tax effects of significant temporary differences follows.


(Thousands of dollars)	2012			2011
Deferred tax assets
Property and leasehold costs	$	658,588			627,093
Liabilities for dismantlements		78,100			114,175
Postretirement and other employee benefits		197,912			164,044
Alternative minimum tax		37,253			0
Foreign tax credit carryforwards		18,594			21,368
Other deferred tax assets		32,500			38,341

Total gross deferred tax assets		1,022,947			965,021
Less valuation allowance		(523,966	)		(445,842	)

Net deferred tax assets		498,981			519,179

Deferred tax liabilities
Property, plant and equipment		(808,311	)		(851,330	)
Accumulated depreciation, depletion and amortization		(1,077,867	)		(754,295	)
Other deferred tax liabilities		(70,710	)		(78,751	)

Total gross deferred tax liabilities		(1,956,888	)		(1,684,376	)

Net deferred tax liabilities	$	(1,457,907	)		(1,165,197	)

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 2022. The valuation allowance increased $78,124,000 in 2012, 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, 2012, undistributed earnings of the Company’s subsidiaries considered indefinitely invested were approximately $6,022,000,000. 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 $709,000,000. 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 three years ended December 31, 2012 is shown in the following table.


(Thousands of dollars)	2012			2011			2010
Balance at January 1	$	18,857			23,196			25,978
Additions for tax positions related to current year		1,258			1,294			1,225
Settlements due to lapse of time		(3,504	)		(5,633	)		(4,007	)

Balance at December 31	$	16,611			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, 2012 and 2011 for interest and penalties of $975,000 and $976,000, respectively, associated with uncertain tax positions. Income tax expense for the years ended December 31, 2012, 2011 and 2010 included (charges)/benefits for interest and penalties of $1,000, $34,000 and $(43,000), 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 2013 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 2013.

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, 2012, the earliest years remaining open for audit and/or settlement in the Company’s major taxing jurisdictions are as follows: United States – 2009; Canada – 2007; United Kingdom – 2011; and Malaysia – 2006.