Income Taxes

9 Months Ended

Sep. 30, 2018

Note 22—Income Taxes

Our effective tax rates for the three- and nine-month periods ended September 30, 2018, were 36 percent and 39 percent, respectively, compared with 33 percent and 39 percent for the same periods of 2017. The amounts of U.S. and foreign income (loss) before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes were:

		Millions of Dollars					Percent of Pre-Tax Income (Loss)
		Three Months Ended			Nine Months Ended		Three Months Ended			Nine Months Ended
		September 30			September 30		September 30			September 30
			2018	2017	2018	2017	2018		2017	2018	2017
Income (loss) before income taxes
	United States	$	893	(197)	2,799	(5,259)	30.7	%	(30.2)	38.3	133.5
	Foreign		2,013	850	4,502	1,319	69.3		130.2	61.7	(33.5)
		$	2,906	653	7,301	(3,940)	100.0	%	100.0	100.0	100.0

Federal statutory income tax		$	610	228	1,533	(1,379)	21.0	%	35.0	21.0	35.0
Non-U.S. effective tax rates			479	137	1,339	503	16.5		21.0	18.3	(12.8)
Canada disposition			-	(8)	-	(1,176)	-		(1.2)	-	29.8
Recovery of outside basis			(16)	(118)	(19)	(957)	(0.6)		(18.1)	(0.2)	24.3
Adjustment to tax reserves			(3)	(17)	2	764	(0.1)		(2.6)	-	(19.4)
Adjustment to valuation allowance			(29)	-	13	24	(1.0)		-	0.2	(0.6)
APLNG impairment			-	-	-	834	-		-	-	(21.2)
State income tax			38	14	83	(98)	1.3		2.1	1.1	2.5
Enhanced oil recovery credit			(36)	(5)	(73)	(49)	(1.3)		(0.8)	(1.0)	1.2
Other			(10)	(14)	(4)	(15)	(0.3)		(2.2)	-	0.5
		$	1,033	217	2,874	(1,549)	35.5	%	33.2	39.4	39.3

The effective tax rate represents a blend of federal, state and foreign taxes and includes the impact of certain nondeductible items and adjustments to our valuation allowance. The effective tax rate for the three- and nine-month periods ended September 30, 2018, also reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Legislation) in December 2017 and the impact of a change in the mix of our domestic and foreign earnings.

In the third quarter of 2018, we recognized $53 million of U.S. Federal tax benefit related to previously unrecognized deferred tax assets associated with the income from the PDVSA settlement agreement. This benefit is included in the “Adjustment to Valuation Allowance” and “Recovery of Outside Basis” lines of the table above. Any future amounts received under the PDVSA settlement should result in nominal U.S. income tax implications due to the availability of unrecognized U.S. tax attributes to offset the receipts. For additional information, see Note 13—Contingencies and Commitments.

Our effective tax rate for the three- and nine-month periods ended September 30, 2017, was favorably impacted by a tax benefit of $114 million related to our prior decision to exit Nova Scotia deepwater exploration. This benefit is included in the “Recovery of Outside Tax Basis” line of the table above.

Our effective tax rate for the nine-month period ended September 30, 2017, was also favorably impacted by a tax benefit of $1,176 million, associated with our 2017 disposition of various assets in Canada. This tax benefit was primarily associated with a deferred tax recovery related to the Canadian capital gains exclusion component of the 2017 Canada disposition and the recognition of previously unrealizable Canadian capital asset tax basis. The Canada disposition, along with the associated restructuring of our Canadian operations, may generate an additional tax benefit of $822 million. However, since we believe it is not likely we will receive a corresponding cash tax savings, this $822 million benefit has been offset by a full tax reserve.

The impairment of our APLNG investment in the second quarter of 2017 did not generate a tax benefit. See the “APLNG” section of Note 6—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment.

We have not significantly revised the tax accounting impacts of our 2017 provisional estimates under Staff Accounting Bulletin 118 and ASU No. 2018-05, “Income Taxes” (Topic 740), but we are continuing to gather information and are waiting for further guidance from the Internal Revenue Service, Securities Exchange Commission and FASB on the Tax Legislation.

The Tax Legislation subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income,” states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At September 30, 2018, the current-year U.S. income tax impact related to GILTI activities is immaterial.