Note 11. Income Taxes

Recent Changes in US Tax Law On December 22, 2017, the US Congress enacted the Tax Reform Legislation, which made significant changes to US federal income tax law, including a reduction in the federal corporate tax rate to 21% effective January 1, 2018. Under US GAAP, we are required to recognize the effect of a rate change on deferred tax assets and liabilities in the period in which the tax rate change is enacted. Therefore, the rate change enacted by the Tax Reform Legislation resulted in the recognition of a deferred tax benefit of $500 million at December 31, 2017.

Further, the Tax Reform Legislation provides for a transition tax (toll tax) on a one-time “deemed repatriation” of accumulated foreign earnings for the year ended December 31, 2017. Based on current interpretations of the law, we have recognized additional taxable income of $767 million associated with the transition tax, which is fully offset by current year net operating losses and have recorded corresponding deemed foreign tax credits of $164 million, against which we have recorded a full valuation allowance.

The Tax Reform Legislation also repealed corporate alternative minimum tax (AMT) for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. We have approximately $3 million of AMT credit carryovers that are expected to be fully refunded by 2022.

In addition, the Tax Reform Legislation preserves deductibility of intangible drilling costs and provides for 100% bonus depreciation on tangible personal property expenditures through 2022. The bonus depreciation percentage is phased down from 100% beginning in 2023 to 0% for years after 2026.

The Tax Reform Legislation is a comprehensive bill containing other provisions, such as limitations on the deductibility of interest expense and certain executive compensation, that are not expected to materially affect us. The ultimate impact of the Tax Reform Legislation may differ from our estimates due to changes in interpretations and assumptions made by us, as well as additional regulatory guidance that may be issued. In particular, our estimate of the impact of the toll tax is a provisional amount, based on current legal interpretations. This amount may be adjusted in future periods, as an adjustment to income tax expense or benefit, in the period in which the final amounts are determined.

Income Tax Disclosures

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



	Year Ended December 31,
(millions)	2017			2016			2015
Domestic	$	(2,831	)	$	(1,859	)	$	(2,338	)
Foreign	640			87			119
Total	$	(2,191	)	$	(1,772	)	$	(2,219	)

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



	Year Ended December 31,
(millions)	2017			2016			2015
Current Taxes
Federal	$	(11	)	$	(4	)	$	(1	)
State	1			5			—
Foreign	96			196			107
Total Current	$	86		$	197		$	106
Deferred Taxes
Federal	$	(1,258	)	$	(784	)	$	216
State	(8		)	(24		)	(5		)
Foreign	39			(176		)	(95		)
Total Deferred	$	(1,227	)	$	(984	)	$	116
Total Income Tax (Benefit) Provision Attributable to Noble Energy	$	(1,141	)	$	(787	)	$	222
Effective Tax Rate	52.1		%	44.4		%	(10.0		)%

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



	Year Ended December 31,
(percentages)	2017		2016		2015
Federal Statutory Rate ⁽¹⁾	35.0	%	35.0	%	35.0	%
Effect of
Earnings of Equity Method Investees	1.9		1.0		0.6
Noncontrolling Interests	1.1		0.4		—
US and Foreign Statutory Rate Change ⁽¹⁾	23.5		1.6		—
Transition Tax ⁽¹⁾	(4.8	)	—		—
State Taxes, Net of Federal Benefit	0.3		1.3		0.3
Difference Between US and Foreign Rates	1.8		(0.1	)	2.6
Foreign Exploration Loss	—		0.1		2.7
Change in Valuation Allowance ⁽¹⁾	(17.4	)	(2.0	)	—
Oil Profits Tax - Israel	(0.1	)	—		0.1
Tax Contingency	0.1		0.2		0.4
Accumulated Undistributed Foreign Earnings ⁽¹⁾	11.0		7.2		(37.7	)
Goodwill Impairment	—		—		(12.3	)
Other, Net	(0.3	)	(0.3	)	(1.7	)
Effective Rate	52.1	%	44.4	%	(10.0	)%

⁽¹⁾See Recent Changes in US Tax Law, above. Rate will decrease to 21.0% for fiscal year 2018. In addition, see discussion regarding accumulated undistributed foreign earnings above.

Deferred tax assets and liabilities resulted from the following:



	December 31,
(millions)	2017			2016
Deferred Tax Assets
Loss Carryforwards	$	902		$	474
Employee Compensation and Benefits	97			150
Mark to Market of Commodity Derivative Instruments	7			44
Foreign Tax Credits	366			—
Other	104			49
Total Deferred Tax Assets	$	1,476		$	717
Valuation Allowance - Foreign Loss Carryforwards and Foreign Tax Credits	(549		)	(242		)
Net Deferred Tax Assets	$	927		$	475
Deferred Tax Liabilities
Accumulated Undistributed Foreign Earnings ⁽¹⁾	—			(240		)
Property, Plant and Equipment, Principally Due to Differences in Depreciation, Amortization, Lease Impairment and Abandonments	(2,029		)	(2,054		)
Total Deferred Tax Liability	$	(2,029	)	$	(2,294	)
Net Deferred Tax Liability	$	(1,102	)	$	(1,819	)

⁽¹⁾ At December 31, 2017, we reversed the deferred tax liability associated with the removal of the assertion of indefinitely reinvested earnings, resulting in recognition of a deferred tax benefit of $240 million.

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



	December 31,
(millions)	2017			2016
Deferred Income Tax Asset - Noncurrent	$	25		$	—
Deferred Income Tax Liability - Noncurrent	(1,127		)	(1,819		)
Net Deferred Tax Liability	$	(1,102	)	$	(1,819	)

Deferred Tax Assets Our estimated US federal income tax net operating loss (NOL) carryforwards totaled approximately $3.2 billion at December 31, 2017. Included in the resulting deferred tax assets are acquired NOLs associated with the Clayton Williams Energy Acquisition in 2017 and the Rosetta Merger in 2015.

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, current financial position, results of operations, projected future taxable income and tax planning strategies as well as current and forecasted business economics in the oil and gas industry. Based on the level of historical taxable income and projections for future taxable income, we believe it is more likely than not that we will realize the benefits of these NOL carryforwards. However, 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.

We currently have a valuation allowance on the deferred tax assets associated with foreign loss carryforwards and foreign tax credits. The valuation allowance on foreign loss carryforwards totaled $183 million in 2017 and $242 million in 2016. The changes to the valuation allowance for the loss carryforwards between periods was attributable to the offset of the valuation allowance against the NOL in a jurisdiction in which we are no longer active. Deemed foreign tax credits of $164 million were recognized along with the additional taxable income associated with the transition tax. A full valuation allowance of $366 million has been recorded against all foreign tax credits based on current interpretation of the Tax Reform Legislation and the expected future utilization of NOL carryforwards.

Clayton Williams Energy Acquisition On April 24, 2017, we completed the Clayton Williams Energy Acquisition. For federal income tax purposes, the transaction qualified as a tax free merger and we acquired carryover tax basis in Clayton Williams Energy's assets and liabilities. After the fair market valuation, we have currently recorded an opening balance sheet deferred tax liability of $307 million, adjusted for the new US statutory tax rate, which includes a deferred tax asset for federal pre-tax net operating losses of approximately $450 million. The merger resulted in a change of control for federal income tax purposes, and the NOL usage will be subject to an annual limitation in part based on Clayton Williams Energy's value at the date of the merger. We anticipate full utilization of the total NOL prior to expiration.

Accumulated Undistributed Earnings of Foreign Subsidiaries In 2015, we changed our indefinite reinvestment assertion (APB 23 assertion) based on the continued and prolonged decline in global commodity prices and an evaluation of our operations’ anticipated capital requirements and projected foreign cash positions given the adoption of the Israel Natural Gas Framework in December 2015.

During 2016, we reviewed capital requirements and foreign cash positions, and reduced the deferred tax liability associated with unremitted earnings, net of foreign tax credits, to $240 million as of December 31, 2016.

In 2017, as a result of Tax Reform Legislation, which establishes a new territorial tax regime, the deferred tax liability recorded as of December 31, 2016 was reversed, resulting in a deferred tax benefit of $240 million for the year ended December 31, 2017. We do not expect a withholding tax impact upon actual distribution of earnings and as such have not recorded any additional tax associated with the unremitted earnings.

Effective Tax Rate Our effective tax rate increased in 2017 as compared with 2016 primarily due to the recognition of a deferred tax benefit related to the Tax Reform Legislation. The deferred tax benefit resulted from the revaluation of the ending deferred tax liability at the reduced future tax rate and the transition to the new territorial tax regime.

Our effective tax rate increased in 2016 as compared with 2015 primarily due to adjustments to deferred taxes for removal of the APB 23 assertion, as noted above, decreased earnings in foreign jurisdictions with rates that vary from the US statutory rate, a decrease in the Israeli income tax rate, and the 2015 impact of foreign dividend repatriation and goodwill impairment.

Israeli Tax Law Effective December 21, 2016, the Israeli government decreased the corporate income tax rate from 25% to 24% for 2017 and announced a further rate decrease from 24% to 23% effective January 2018. The change decreased the deferred tax expense for 2017 by $12 million.

Furthermore, our Israeli operations are subject to the Natural Resources Profits Taxation Law, 2011 (the Law), which imposes a separate additional tax on profits from oil and gas activities (Profits Tax). The Profits Tax is calculated by dividing net accumulated revenue generated by each separate project by its cumulative investments as defined within the Law. Once the revenue factor (R Factor) reaches 1.5, a tax rate of 20% is imposed; as the ratio increases to a maximum of 2.3, the Profits Tax increases progressively up to a maximum rate of 50%. The Profits Tax provides for a corporate tax rate adjustment based on the corporate income tax rate, which is currently 23%. To the extent the corporate income tax rate exceeds 18%, a reduction in the Profits Tax rate is calculated. At the current corporate tax rate, the Profits Tax rate is 46.8%. The Profits Tax is deductible for corporate Israeli tax purposes. Our Tamar and Leviathan projects are both subject to the Profits Tax and are expected to pay at the maximum rate.

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 made in the financial statements for differences between positions taken in tax returns and amounts recognized in the financial statements in anticipation of audit results.

In our major tax jurisdictions, the earliest years remaining open to examination are: US - 2014, Israel - 2015 and Equatorial Guinea - 2012.

Our policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense.

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



(millions)	Twelve Months Ended December 31, 2017
Unrecognized Tax Benefits, Beginning Balance	$	3
Reductions for Tax Positions of Prior Years	(3		)
Unrecognized Tax Benefits, Ending Balance	$	—

The changes to our unrecognized tax benefits during 2017 primarily resulted from changes in various foreign tax return filings, positions and audit settlements. The adjustments to our reserves for uncertain tax positions had a de minimis impact on our net income.

During 2017, we recognized and accrued a de minimis amount of interest and no penalties.