Income Taxes

As described in Note 1, EOG finalized the accounting impact of the TCJA on its provisional income tax accruals during 2018 in accordance with ASU 2018-05. Following is a description of each provisional tax accrual and the reason it was adjusted.

During the third quarter of 2018, EOG filed its consolidated 2017 U.S. federal income tax return, along with certain tax elections, and finalized its foreign earnings and profits study. The deemed repatriation tax decreased from the provisional amount of $179 million to $40 million mostly as a result of reducing the repatriation taxable income by net operating losses (NOLs). EOG previously expected to pay the repatriation tax in installments over eight years and preserve NOLs for utilization in future years, as allowed by the TCJA. However, the Internal Revenue Service (IRS) stated in recent guidance that no tax refunds would be issued until the entire repatriation tax liability is satisfied, regardless of the installment election. As a result, EOG did not make the installment election and instead utilized NOLs to reduce the repatriation taxable income. EOG has reviewed the tax consequences of the repatriation tax on its outside basis differences in its investment in non-U.S. subsidiaries and no U.S. federal deferred tax liability is currently required.

EOG recorded a provisional amount in 2017 for its refundable alternative minimum tax (AMT) credits due to the lack of guidance, at that time, on whether any portion of these credits would be sequestered due to a federal budgetary provision. In the first quarter of 2018, the IRS affirmed that any refundable AMT credits resulting from the TCJA would be subject to sequestration. However, in the fourth quarter of 2018, the IRS reversed their decision. Accordingly, EOG eliminated the provisional sequestration accrual and recognized a $42 million tax benefit for the year.

The remeasurement of U.S. deferred tax assets and liabilities resulted in a provisional net tax benefit of $2.2 billion in 2017, which was increased by approximately $52 million in the third quarter of 2018 due to the utilization of the aforementioned NOLs at the 2017 U.S. federal corporate income tax rate of 35% instead of the future tax rate of 21%. This tax benefit, along with the sequestration benefit and other less significant tax reform adjustments, lowered the 2018 full year effective tax rate approximately three percentage points.

The principal components of EOG's total net deferred income tax liabilities at December 31, 2018 and 2017 were as follows (in thousands):



	2018			2017
Deferred Income Tax Assets (Liabilities)
Foreign Oil and Gas Exploration and Development Costs Deducted for Tax Under Book Depreciation, Depletion and Amortization	$	4,359		$	(40,851	)
Foreign Net Operating Loss	55,175			423,258
Foreign Valuation Allowances	(58,932		)	(365,379		)
Foreign Other	175			478
Total Net Deferred Income Tax Assets	$	777		$	17,506
Deferred Income Tax (Assets) Liabilities
Oil and Gas Exploration and Development Costs Deducted for Tax Over Book Depreciation, Depletion and Amortization	$	4,819,222		$	3,894,739
Commodity Hedging Contracts	4,883			(12,008		)
Deferred Compensation Plans	(39,086		)	(35,832		)
Accrued Expenses and Liabilities	(19,097		)	12,094
Net Operating Loss - Federal	—			(69,262		)
Non-Producing Leasehold Costs	(88,594		)	(47,981		)
Seismic Costs Capitalized for Tax	(164,932		)	(109,423		)
Equity Awards	(93,977		)	(92,696		)
Capitalized Interest	17,821			51,345
Alternative Minimum Tax Credit Carryforward	—			(77,114		)
Undistributed Foreign Earnings	22,945			19,684
Other	(45,787		)	(15,332		)
Total Net Deferred Income Tax Liabilities	$	4,413,398		$	3,518,214
Total Net Deferred Income Tax Liabilities	$	4,412,621		$	3,500,708

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



	2018		2017		2016

United States	$	4,084,156	$	621,610	$	(1,520,573	)
Foreign	156,842		39,572		(36,932		)
Total	$	4,240,998	$	661,182	$	(1,557,505	)

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



	2018				2017				2016
Current:
Federal	$	(303,853	)		$	33,058			$	11,567
State	17,048				(2,502		)		(8,369		)
Foreign	65,615				35,323				51,189
Total	(221,190		)		65,879				54,387
Deferred:
Federal	862,075				(1,504,288		)		(532,979		)
State	43,293				26,942				4,876
Foreign	(11,212		)		3,474				12,897
Total	894,156				(1,473,872		)		(515,206		)
Other Non-Current:
Federal	148,992			(1)	(513,404		)	(2)	—
Income Tax Provision (Benefit)	$	821,958			$	(1,921,397	)		$	(460,819	)


(1)	Includes change in refundable AMT credits and the reversal of the repatriation tax accrued in 2017. See previous discussion regarding the filing of EOG's 2017 U.S. federal income tax return for details.


(2)	Includes refundable AMT credits net of the repatriation tax that was expected to be paid post-2017.

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



	2018			2017			2016
Statutory Federal Income Tax Rate	21.00	%		35.00	%		35.00	%
State Income Tax, Net of Federal Benefit	1.12			3.38			0.15
Income Tax Provision Related to Foreign Operations	0.51			(0.30	)		(1.23	)
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	(2.60	)	(1)	(328.10	)	(2)	—
Share-Based Compensation ⁽³⁾	(0.47	)		(4.63	)		—
Other	(0.18	)		(0.03	)		(0.62	)
Effective Income Tax Rate	19.38	%		(290.60	)%		29.59	%


(1)	Includes impact of utilizing certain tax NOLs ((1.2)%), the IRS's reversal of its sequestration decision ((1.0)%) and other tax reform impacts ((0.4)%).


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


(3)	Effective January 1, 2017, EOG adopted the provisions of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09), which provides that share-based compensation tax benefits and deficiencies are recognized in the income tax provision.

Deferred tax assets are recorded for certain tax benefits, including tax 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 for the years indicated below were as follows (in thousands):



	2018			2017			2016

Beginning Balance	$	466,421		$	383,221		$	506,127
Increase ⁽¹⁾	23,062			67,333			37,221
Decrease ⁽²⁾	(26,219		)	(13,687		)	(12,667		)
Other ⁽³⁾	(296,122		)	29,554			(147,460		)
Ending Balance	$	167,142		$	466,421		$	383,221


(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 and/or foreign exchange rate variances and the effect of statutory income tax rate changes. The United Kingdom operations were sold in the fourth quarter of 2018. The Argentina operations were sold in the third quarter of 2016.

As of December 31, 2018, EOG had state income tax NOLs being carried forward of approximately $1.8 billion, which, if unused, expire between 2019 and 2037. EOG also has Canadian NOLs of $183 million which can be carried forward 20 years. As described above, these NOLs as well as other less significant future 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.

The balance of unrecognized tax benefits at December 31, 2018, was $29 million, resulting from the tax treatment of its research and experimental expenditures related to certain innovations in its horizontal drilling and completion projects, of which $12 million may potentially have an earnings impact. EOG records interest and penalties related to unrecognized tax benefits to its income tax provision. Currently $2 million of interest has been recognized in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). EOG does not anticipate that the amount of the unrecognized tax benefits will change materially during the next twelve months. EOG and its subsidiaries file income tax returns and are subject to tax audits in the U.S. and various state, local and foreign jurisdictions. EOG's earliest open tax years in its principal jurisdictions are as follows: U.S. federal (2016), Canada (2014), Trinidad (2013) and China (2008).

EOG's foreign subsidiaries' undistributed earnings are not considered to be permanently reinvested outside of the U.S. Accordingly, EOG may be required to accrue certain U.S. federal, state, and foreign deferred income taxes on these undistributed earnings as well as on any other outside basis differences related to its investments in these subsidiaries. As of December 31, 2018, EOG has cumulatively recorded $23 million of deferred foreign income taxes for withholdings on its undistributed foreign earnings. Additionally, for tax years beginning in 2018 and later, EOG's foreign earnings may be subject to the U.S. federal "global intangible low-taxed income" (GILTI) inclusion. EOG records any GILTI tax as a period expense.