Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE 4. INCOME TAXES

The provision for income taxes is comprised of the following for the years ended December 31:

	2011			2010			2009
Current:
United States	$	609		$	179		$	65
Foreign		479			472			381
Total current		1,088			651			446
Deferred:
United States		(315	)		(107	)		(210	)
Foreign		(177	)		(81	)		(46	)
Total deferred		(492	)		(188	)		(256	)
Provision for income taxes	$	596		$	463		$	190

The geographic sources of income before income taxes are as follows for the years ended December 31:

	2011		2010		2009
United States	$	1,466	$	534	$	(18	)
Foreign		873		748		629
Income before income taxes	$	2,339	$	1,282	$	611

The provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to income before income taxes for the reasons set forth below for the years ended December 31:

	2011			2010			2009
Statutory income tax at 35%	$	819		$	449		$	214
Effect of foreign operations		(11	)		(54	)		(53	)
Net tax charge related to foreign losses		51			64			38
Adjustments of prior years’ tax positions		(51	)		(35	)		(26	)
State income taxes - net of U.S. tax benefit		40			19			6
Impact of reorganization of foreign subsidiaries		(214	)		-			-
Other - net		(38	)		20			11
Provision for income taxes	$	596		$	463		$	190

During the third quarter of 2011, we reorganized certain of our foreign subsidiaries. As a result of the reorganization, previously accrued U.S. deferred income taxes related to those subsidiaries were reduced by $214 million to account for certain foreign tax credits that existed prior to the acquisition of BJ Services and are now available to offset future U.S. taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards.

The tax effects of our temporary differences and carryforwards are as follows at December 31:

	2011			2010
Deferred tax assets:
Receivables	$	42		$	37
Inventory		228			213
Employee benefits		131			120
Other accrued expenses		173			148
Operating loss carryforwards		228			186
Tax credit carryforwards		372			329
Other		84			92
Subtotal		1,258			1,125
Valuation allowances		(318	)		(232	)
Total		940			893
Deferred tax liabilities:
Goodwill and other intangibles		423			578
Property		273			377
Undistributed earnings of foreign subsidiaries		366			583
Other		42			87
Total		1,104			1,625
Net deferred tax liability	$	(164	)	$	(732	)

We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. We have provided a valuation allowance for operating loss and foreign tax credit carryforwards in certain non-U.S. jurisdictions. The increase in the valuation allowances of $86 million resulted primarily from net tax charges related to foreign losses. The operating loss carryforwards without a valuation allowance will expire in varying amounts over the next twenty years.

We have provided for U.S. and additional foreign taxes for the anticipated repatriation of certain earnings of our foreign subsidiaries. The reduction in the deferred tax liability for undistributed earnings of foreign subsidiaries of $217 million resulted primarily from the reorganization of certain foreign subsidiaries that resulted in certain foreign tax credits that existed prior to the acquisition of BJ Services to now be available to offset future U.S. taxes. We consider the undistributed earnings of our foreign subsidiaries above the amount for which taxes have already been provided to be indefinitely reinvested, as we have no current intention to repatriate these earnings. As such, deferred income taxes are not provided for temporary differences of approximately $1.0 billion, $2.5 billion and $2.3 billion at December 31, 2011, 2010 and 2009, respectively, representing earnings of non-U.S. subsidiaries intended to be permanently reinvested. These additional foreign earnings could become subject to additional tax, if remitted, or deemed remitted, as a dividend. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis differences, is not practicable.

The reduction in the deferred tax liability for goodwill and other intangibles of $155 million includes a reduction of $95 million related to the impairment of the BJ Services trade name.

At December 31, 2011, we had approximately $92 million of foreign tax credits which may be carried forward indefinitely under applicable foreign law and $278 million of foreign tax credits available to offset future payments of U.S. federal income taxes, primarily expiring in 2018 through 2021. In addition, at December 31, 2011, we had approximately $2 million of state tax credits expiring in varying amounts between 2016 and 2021.

At December 31, 2011, we had $379 million of tax liabilities for gross unrecognized tax benefits, which includes liabilities for interest and penalties of $64 million and $32 million, respectively. If we were to prevail on all uncertain tax positions, the net effect would be a benefit to our effective tax rate of approximately $349 million. The remaining approximately $30 million is offset by deferred tax assets that represent tax benefits that would be received in different taxing jurisdictions in the event that we did not prevail on all uncertain tax positions.

The following table presents the changes in our unrecognized tax benefits and associated interest and penalties included in the consolidated balance sheet.

	Gross Unrecognized Tax Benefits, Excluding Interest and Penalties	Interest and Penalties			Total Gross Unrecognized Tax Benefits
Balance at December 31, 2008	$      323		$      78			$      401
Increase (decrease) in prior year tax positions	(75)		10			(65	)
Increase in current year tax positions	16		6			22
Decrease related to settlements with taxing authorities	(6)		(2	)		(8	)
Decrease related to lapse of statute of limitations	(9)		(4	)		(13	)
Increase due to effects of foreign currency translation	1		1			2
Balance at December 31, 2009	250		89			339
Acquisition of BJ Services	102		28			130
Increase (decrease) in prior year tax positions	(16)		4			(12	)
Increase in current year tax positions	4		3			7
Decrease related to settlements with taxing authorities	(7)		(5	)		(12	)
Decrease related to lapse of statute of limitations	(6)		(1	)		(7	)
Decrease due to effects of foreign currency translation	(3)		(4	)		(7	)
Balance at December 31, 2010	324		114			438
Increase (decrease) in prior year tax positions	(5)		12			7
Increase in current year tax positions	8		11			19
Decrease related to settlements with taxing authorities	(3)		(1	)		(4	)
Decrease related to lapse of statute of limitations	(38)		(38	)		(76	)
Decrease due to effects of foreign currency translation	(3)		(2	)		(5	)
Balance at December 31, 2011	$       283		$      96			$      379

It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing, or final decisions in matters that are the subject of litigation in various taxing jurisdictions in which we operate. At December 31, 2011, we had approximately $159 million of tax liabilities, net of $17 million of tax assets, related to uncertain tax positions, each of which are individually insignificant, and each of which are reasonably possible of being settled within the next twelve months.

At December 31, 2011, approximately $203 million of total gross unrecognized tax benefits were included in the noncurrent portion of our income tax liabilities, for which the settlement period cannot be determined; however, it is not expected to be within the next twelve months.

We operate in more than 80 countries and are subject to income taxes in most taxing jurisdictions in which we operate. The following table summarizes the earliest tax years that remain subject to examination by the major taxing jurisdictions in which we operate. These jurisdictions are those we project to have the highest tax liability for 2012.

Jurisdiction	Earliest Open Tax Period	Jurisdiction	Earliest Open Tax Period
Canada	1998	Norway	1999
Germany	2003	United Kingdom	2007
Netherlands	2006	United States	2004