Income Taxes

As previously discussed, the U.S. enacted the TCJA in December 2017. Under the Income Taxes Topic of the ASC, the effects of new legislation are recognized upon enactment. Accordingly, recognition of the tax effects of the TCJA is required in the consolidated financial statements for the fiscal year ended December 31, 2017. Shortly after enactment of the TCJA, the SEC staff issued SAB 118 addressing the application of U.S. GAAP in situations when the registrant does not have the necessary information available or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA. Under SAB 118, an entity would use a similar approach as the measurement period provided in the Business Combinations Topic of the ASC. An entity will recognize those matters for which the accounting can be completed. For matters that have not been completed, the entity would either (1) recognize provisional amounts to the extent that they are reasonably estimable and adjust them over time as more information becomes available or (2) for any specific income tax effects of the TCJA for which a reasonable estimate cannot be determined, continue to apply the Income Taxes Topic of the ASC on the basis of the provisions of the tax laws that were in effect immediately before the TCJA was signed into law. EOG has prepared its consolidated financial statements for the fiscal year ended December 31, 2017 in accordance with the Income Taxes Topic of the ASC as allowed by SAB 118.

EOG has not completed the determination of the accounting impact of the TCJA on its tax accruals, but believes that it has made reasonable estimates of the effects of the TCJA with the information currently available. Following is a description of each of the principal changes enacted by the TCJA affecting EOG, the impact of such change on EOG's results of operations, cash flows and consolidated financial statements, and, to the extent that the amount is provisional, an explanation of the reasons the initial accounting is incomplete.

The TCJA reduces the corporate income tax rate from 35% to 21% effective January 1, 2018. As provided in the Income Taxes Topic of the ASC, EOG remeasured its U.S. deferred tax assets and liabilities to reflect the effects of the tax rate change. EOG recorded a provisional reduction in the 2017 income tax provision in the amount of approximately $2.2 billion, most of which related to the decrease in the tax rate. However, this amount may change based on further analysis of tax elections available to EOG, as well as any additional clarification provided by the Internal Revenue Service (IRS).

In addition, the TCJA repeals the corporate alternative minimum tax (AMT) for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers from 2017 and prior years can be applied against regular tax liabilities beginning in 2018. To the extent that AMT credit carryovers are not used to offset regular tax liabilities, these credits are refundable over four years beginning in 2018. EOG estimates that its AMT credits being carried over to 2018 will total approximately $798 million (inclusive of the expected IRS settlement discussed below). The exact amount of the AMT credit carryover cannot be currently determined, however, due to a federal budgetary provision known as "sequestration," in which a portion of certain refunds are permanently withheld by the government. The sequestration rate, currently at 6.6%, is revised each year, and EOG cannot precisely estimate the rate that might be applicable during the next four years. In addition, the AMT credits may be applied against future regular tax liabilities, which would reduce the amount of AMT credit refunds, as well as the corresponding amount of the sequestration charge. In 2017, EOG recorded an accrual in the amount of $42 million related to the possible sequestration of refundable tax credits.

The TCJA further provides for a tax on the deemed repatriation of accumulated foreign earnings for the year ended December 31, 2017. The deemed repatriation tax is based on the amount of post-1986 earnings and profits of EOG's foreign subsidiaries and the amount of foreign cash and cash equivalents. At the election of the taxpayer, the deemed repatriation tax liability can be paid over eight years beginning with 2017 on an interest-free basis. EOG expects that it will pay its estimated deemed repatriation tax of approximately $179 million under this election. EOG cannot finalize the amount of the repatriation tax due to the possible impact of certain tax elections that require further analysis, the completion of its foreign earnings and profits study, and further clarification provided by the IRS.

Also, the TCJA makes fundamental changes to the taxation of multinational companies, including a shift beginning in 2018 to a so-called territorial system of taxation that features a participation exemption regime. EOG believes that under this new system it will not incur any significant amount of U.S. federal income taxes with respect to its foreign operating earnings. Prior to this change being enacted, EOG had accrued U.S. federal deferred income taxes in the amount of $260 million related to its accumulated foreign earnings. Due to this tax law change, EOG reversed this accrual in 2017, resulting in a provisional reduction in its 2017 federal tax provision of approximately $43 million, net of the earnings impact of the repatriation tax described above. However, although future foreign dividends should be exempt from U.S. federal income taxes, EOG must still account for the tax consequences of outside basis differences in its investments in non-U.S. subsidiaries. While EOG believes that no U.S. federal deferred income tax liabilities should be recorded for such outside basis differences, future IRS pronouncements may require that EOG make certain adjustments to the tax basis of its non-U.S. subsidiaries, resulting in EOG having to record additional U.S. federal deferred income tax liabilities.

The TCJA also provides for 100% bonus depreciation on tangible personal property acquired and placed in service after September 27, 2017, and before December 31, 2023. It also provides for a phase down of bonus depreciation for the years 2023 through 2026. The impact of this provision will depend on EOG's future domestic capital spending, which cannot be precisely determined at this time, but it is expected to have a favorable effect on EOG's cash tax position prospectively.

In addition, the TCJA includes certain limitations on the federal tax deductibility of interest expense, net operating losses and executive compensation. Although EOG does not currently believe that these changes will have a significant impact on EOG's tax provision in the foreseeable future, additional analysis is required.

The IRS has recently issued several pronouncements addressing certain aspects of the TCJA and EOG expects that the IRS will continue providing clarifying guidance, some of which could have a significant impact on EOG's reported amounts.

The principal components of EOG's net deferred income tax liabilities at December 31, 2017 and 2016 were as follows (in thousands):



	2017 ⁽¹⁾			2016 ^{(1) (2)}
Noncurrent Deferred Income Tax Assets (Liabilities)
Foreign Oil and Gas Exploration and Development Costs Deducted for Tax Under Book Depreciation, Depletion and Amortization	$	(40,851	)	$	(39,852	)
Foreign Net Operating Loss	423,258			352,150
Foreign Valuation Allowances	(365,379		)	(296,596		)
Foreign Other	478			438
Total Net Noncurrent Deferred Income Tax Assets	$	17,506		$	16,140
Noncurrent Deferred Income Tax (Assets) Liabilities
Oil and Gas Exploration and Development Costs Deducted for Tax Over Book Depreciation, Depletion and Amortization	$	3,894,739		$	5,899,533
Commodity Hedging Contracts	(12,008		)	(22,206		)
Deferred Compensation Plans	(35,832		)	(43,984		)
Accrued Expenses and Liabilities	12,094			(13,754		)
Net Operating Loss - Federal	(69,262		)	—
Non-Producing Leasehold Costs	(47,981		)	(64,898		)
Seismic Costs Capitalized for Tax	(109,423		)	(161,920		)
Equity Awards	(92,696		)	(139,787		)
Capitalized Interest	51,345			86,504
Alternative Minimum Tax Credit Carryforward ⁽³⁾	(77,114		)	(757,631		)
Undistributed Foreign Earnings ⁽⁴⁾	19,684			280,099
Other	(15,332		)	(33,548		)
Total Net Noncurrent Deferred Income Tax Liabilities	$	3,518,214		$	5,028,408
Total Net Deferred Income Tax Liabilities	$	3,500,708		$	5,012,268


(1)	United States federal deferred tax assets and liabilities tax effected at 21% and 35% for 2017 and 2016, respectively.


(2)	As described in Note 1, ASU 2015-17 eliminated the requirement to separate deferred tax assets and liabilities into current and noncurrent amounts.


(3)	Pursuant to the TCJA, $721 million of federal AMT credit carryforwards are expected to be refundable over four years and are presented as noncurrent tax receivables in Other Assets on the Consolidated Balance Sheet at December 31, 2017.


(4)	Undistributed foreign earnings have been deemed repatriated in 2017 in accordance with the TCJA. A portion of the associated federal taxes are now reflected as a noncurrent tax payable as a result of the eight year installment election.

The components of Income (Loss) Before Income Taxes for the years indicated below were as follows (in thousands):



	2017		2016			2015

United States	$	621,610	$	(1,520,573	)	$	(6,840,119	)
Foreign	39,572		(36,932		)	(81,437		)
Total	$	661,182	$	(1,557,505	)	$	(6,921,556	)

The principal components of EOG's Income Tax Benefit for the years indicated below were as follows (in thousands):



	2017			2016			2015
Current:
Federal	$	33,058		$	11,567		$	21,719
State	(2,502		)	(8,369		)	9,404
Foreign	35,323			51,189			54,143
Total	65,879			54,387			85,266
Deferred:
Federal	(1,504,288		)	(532,979		)	(2,362,926		)
State	26,942			4,876			(127,444		)
Foreign	3,474			12,897			8,063
Total	(1,473,872		)	(515,206		)	(2,482,307		)
Other Non-Current:
Federal ⁽¹⁾	(513,404		)	—			—
Income Tax Benefit	$	(1,921,397	)	$	(460,819	)	$	(2,397,041	)


(1)	As described previously, under the TCJA, a deemed repatriation tax is to be paid over eight years beginning with respect to taxable year 2017. In addition, EOG expects to receive refunds of AMT credits over a four-year period beginning with respect to taxable year 2018. Other Non-Current includes the portion of these two items that relates to years after 2017.

The differences between taxes computed at the U.S. federal statutory tax rate and EOG's effective rate were as follows:



	2017		2016		2015

Statutory Federal Income Tax Rate	35.00	%	35.00	%	35.00	%
State Income Tax, Net of Federal Benefit	3.38		0.15		1.11
Income Tax Provision Related to Foreign Operations	(0.30	)	(1.23	)	(1.31	)
Income Tax Provision Related to Trinidad Operations	—		(3.71	)	—
Income Tax Provision Related to United Kingdom Operations	1.78		—		—
Income Tax Provision Related to Canadian Operations	2.30		—		—
TCJA ⁽¹⁾	(328.10	)	—		—
Share-Based Compensation ⁽²⁾	(4.63	)	—		—
Other	(0.03	)	(0.62	)	(0.17	)
Effective Income Tax Rate	(290.60	)%	29.59	%	34.63	%


(1)	Includes impact of federal tax rate reduction ((327.8)%), federal repatriation tax ((6.6)%), sequestration (6.4%) and other tax reform impacts ((0.1)%).


(2)	As described in Note 1, ASU 2016-09, adopted by EOG in 2017, provides that share-based compensation tax benefits and deficiencies are recognized in the income tax provision.

The effective tax rate of (291)% in 2017 was lower than the prior year rate of 30% primarily as a result of the remeasurement of the net U.S. deferred income tax liability at 21% due to the enactment of the TCJA previously discussed.

Deferred tax assets are recorded for certain tax benefits, including tax net operating losses (NOLs) and tax credit carryforwards, provided that management assesses the utilization of such assets to be "more likely than not." Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. On the basis of this evaluation, EOG has recorded valuation allowances for the portion of certain foreign and state deferred tax assets that management does not believe are more likely than not to be realized.

The principal components of EOG's rollforward of valuation allowances for deferred income tax assets were as follows (in thousands):



	2017			2016			2015

Beginning Balance	$	383,221		$	506,127		$	463,018
Increase ⁽¹⁾	67,333			37,221			146,602
Decrease ⁽²⁾	(13,687		)	(12,667		)	(4,315		)
Other ⁽³⁾	29,554			(147,460		)	(99,178		)
Ending Balance	$	466,421		$	383,221		$	506,127


(1)	Increase in valuation allowance related to the generation of tax NOLs and other deferred tax assets.


(2)	Decrease in valuation allowance associated with adjustments to certain deferred tax assets and their related allowance.


(3)	Represents dispositions/revisions/foreign exchange rate variances and the effect of statutory income tax rate changes.

As of December 31, 2017, EOG had state income tax NOLs being carried forward of approximately $1.7 billion, which, if unused, expire between 2018 and 2036. During 2017, EOG's United Kingdom subsidiary incurred a tax NOL of approximately $72 million which, along with prior years' NOLs of $857 million, will be carried forward indefinitely. EOG also has United States federal and Canadian NOLs of $335 million and $158 million, respectively, with varying carryforward periods. EOG's remaining AMT credits total $798 million, resulting from AMT paid with respect to prior years and an increase of $41 million in 2017. As described above, these NOLs and credits, as well as other less significant future income tax benefits, have been evaluated for the likelihood of utilization, and valuation allowances have been established for the portion of these deferred income tax assets that do not meet the "more likely than not" threshold.

As further described above, significant changes were made by the TCJA to the corporate AMT that are favorable to EOG, including the refunding of AMT credit carryovers. Due to these legislative changes, EOG intends to settle certain uncertain tax positions related to AMT credits for taxable years 2011 through 2015, resulting in a decrease of uncertain tax positions of $40 million. The amount of unrecognized tax benefits at December 31, 2017, was $39 million, resulting from the tax treatment of its research and experimental expenditures related to certain innovations in its horizontal drilling and completion projects, which is not expected to have an earnings impact. EOG records interest and penalties related to unrecognized tax benefits to its income tax provision. EOG does not anticipate that the amount of the unrecognized tax benefits will increase during the next twelve months. EOG and its subsidiaries file income tax returns and are subject to tax audits in the United States and various state, local and foreign jurisdictions. EOG's earliest open tax years in its principal jurisdictions are as follows: United States federal (2011), Canada (2014), United Kingdom (2016), Trinidad (2011) and China (2008).

EOG's foreign subsidiaries' undistributed earnings are no longer considered to be permanently reinvested outside the U.S. and, accordingly, EOG has cumulatively recorded $20 million of foreign and state deferred income taxes as of December 31, 2017.