Income Taxes

Components of income (loss) from continuing operations before income taxes are as follows:



	Year Ended December 31,
	2012		2011			2010
(millions)
Domestic	$	92	$	(537	)	$	234
Foreign	1,264		1,039			614
Total	$	1,356	$	502		$	848

The income tax provision (benefit) from continuing operations consists of the following:



	Year Ended December 31,
	2012			2011			2010
(millions)
Current Taxes
Federal	$	14		$	11		$	25
State	1			2			2
Foreign	143			155			97
Total Current	158			168			124
Deferred Taxes
Federal	60			(130		)	86
State	1			(3		)	1
Foreign	172			55			6
Total Deferred	233			(78		)	93
Total Income Tax Provision	$	391		$	90		$	217
Effective Tax Rate	28.8		%	17.9		%	25.6		%

A reconciliation of the federal statutory tax rate to the effective tax rate is as follows:



	Year Ended December 31,
	2012		2011		2010
(percentages)
Federal Statutory Rate	35.0		35.0		35.0
Effect of
Earnings of Equity Method Investees	(4.9	)	(13.3	)	(4.8	)
State Taxes, Net of Federal Benefit	0.2		(0.1	)	0.4
Difference Between US and Foreign Rates	(4.9	)	(7.0	)	(1.2	)
Foreign Exploration Loss	(3.8	)	(4.2	)	—
Change in Valuation Allowance	4.3		6.6		(2.7	)
Oil Profits Tax - Israel	0.9		2.6		(1.9	)
Tax Contingency	1.8		—		—
Other, Net	0.2		(1.7	)	0.8
Effective Rate	28.8		17.9		25.6

Deferred tax assets and liabilities resulted from the following:



	December 31,
	2012			2011
(millions)
Deferred Tax Assets
Loss Carryforwards	$	235		$	200
Employee Compensation & Benefits	134			164
Foreign Tax Credits	38			57
Other	81			86
Total Deferred Tax Assets	488			507
Valuation Allowance - Foreign Loss Carryforwards	(81		)	(65		)
Valuation Allowance - Foreign Tax Credits	(38		)	(57		)
Net Deferred Tax Assets	369			385
Deferred Tax Liabilities
Property, Plant and Equipment, Principally Due to Differences in Depreciation, Amortization, Lease Impairment and Abandonments	(2,481		)	(2,409		)
Total Deferred Tax Liability	(2,481		)	(2,409		)
Net Deferred Tax Liability	$	(2,112	)	$	(2,024	)

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
	2012			2011
(millions)
Deferred Income Tax Asset - Current	$	106		$	41
Deferred Income Tax Liability - Current	—			(6		)
Deferred Income Tax Liability - Noncurrent	(2,218		)	(2,059		)
Net Deferred Tax Liability	$	(2,112	)	$	(2,024	)

Deferred Tax Assets In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the appropriate tax jurisdictions during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2012. The amount of the deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.

The valuation allowance on the deferred tax assets associated with foreign loss carryforwards totaled $81 million in 2012, $65 million in 2011, and $70 million in 2010. The changes to the valuation allowance for the loss carryforwards between periods was attributable to changes in losses on projects in new venture activities which are not yet commercial.

During 2012, as a result of execution of tax planning strategies, we reversed a $57 million deferred tax asset for future foreign tax credits from our foreign branch operations along with the corresponding valuation allowance. Additionally, we recorded a $38 million valuation allowance on excess foreign tax credits and released $12 million of deferred tax liability for a net increase in deferred income tax expense.

During 2011, we recorded a $57 million increase in the valuation allowance against our deferred tax asset for foreign tax credits. This deferred tax asset was fully offset by a valuation allowance because, based on our forecast of foreign tax credits, we did not believe it was more likely than not that the asset would be realized.

During 2010, we reversed a $28 million valuation allowance that had been established against a deferred tax asset of the same amount for the future foreign tax credits associated with deferred tax liabilities recorded by foreign branch operations and recorded a corresponding reduction in income tax expense.

Effective Tax Rate Our effective tax rate increased in 2012 as compared with 2011, primarily due to reduced impact of equity method earnings, which had the effect of decreasing the 2011 rate. The rate also increased due to additional valuation allowances and nondeductible allocation of goodwill to assets sold in 2012.

Our effective tax rate decreased in 2011 as compared with 2010. This decrease was due to the impact of higher equity method earnings in 2011 which had the effect of decreasing the 2011 rate. The decrease was partially offset by the change in the Israeli tax law discussed below. Additionally, in 2010, we reversed a $28 million valuation allowance, as discussed above, which reduced income tax expense. Finally, the rate for 2010 was increased by a nondeductible allocation of goodwill to assets sold.

Changes in Israeli Tax Law In March 2011, the Israeli government enacted the Petroleum Profits Taxation Law, 2011, which imposes additional income tax on oil and gas production. The Israeli government also repealed the percentage depletion deduction and made certain changes to the rules for deducting tangible and intangible development costs. These changes increased our 2011 consolidated effective income tax rate by approximately 4%. There was no remeasurement of our deferred tax assets or liabilities as of December 31, 2010.

Accumulated Undistributed Earnings of Foreign Subsidiaries As of December 31, 2012, the accumulated undistributed earnings of the foreign subsidiaries that have been permanently reinvested were approximately $2.6 billion. No US taxes have been recorded on these earnings. Upon distribution of additional earnings in the form of dividends or otherwise, we would likely be subject to US income taxes and foreign withholding taxes. It is not practicable, however, to determine precisely the amount of taxes that may be payable on the eventual remittance of these earnings because of the possible application of US foreign tax credits. Although we are currently claiming foreign tax credits, we may not be in a credit position when any future remittance of foreign earnings takes place, or the limitations imposed by the Internal Revenue Code and IRS Regulations may not allow the credits to be utilized during the applicable carryback and carryforward periods. However, if full use of tax credits is assumed, we estimate that the future US taxes on eventual remittance would be approximately $685 million.

Unrecognized Tax Benefits We file a consolidated income tax return in the US federal jurisdiction, and we file income tax returns in various states and foreign jurisdictions. Our income tax returns are routinely audited by the applicable revenue authorities, and provisions are routinely made in the financial statements for differences between positions taken in tax returns and amounts recognized in the financial statements in anticipation of the results of these audits.

In our major tax jurisdictions, the earliest years remaining open to examination are: U.S. - 2009, Equatorial Guinea - 2007, Israel - 2008, and China - 2006.

Our policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense. However, we did not accrue penalties at December 31, 2012 or 2011, because we believe that we are below the minimum statutory threshold for imposition of penalties.

A reconciliation of our beginning and ending amounts of unrecognized tax benefits follows:



	Year Ended December 31, 2012
(millions)
Unrecognized Tax Benefits, Beginning Balance	$	—
Additions for tax positions related to current year	(1		)
Additions for tax positions of prior years	24
Reductions for tax positions of prior years	—
Settlements	—
Unrecognized Tax Benefits, Ending Balance	$	23

As of December 31, 2012, approximately $23 million of unrecognized tax benefits would impact our effective tax rate if recognized. The changes to our unrecognized tax benefits during the twelve months ended December 31, 2012 primarily resulted from changes in various foreign tax return filings and positions. The adjustments to our reserves for uncertain tax positions had a de minimis impact on our net income.

During the year ended December 31, 2012, we recognized and accrued a de minimis amount of interest and none in penalties.

We expect that our unrecognized tax benefits could continue to change due to the settlement of audits and the expiration of statutes of limitation in the next twelve months; however, we do not anticipate any such change to have a significant impact on our results of operations, financial position or cash flows in the next twelve months.