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INCOME TAXES | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXES Geographic sources of income (losses) before income taxes and equity in affiliated companies’ net earnings for the years ended December 31 consist of the following:
| 2018 |  | 2017 |  | 2016
U.S. | $ | 390 |  |  | $ | 20 |  |  | $ | (5,179 | )
Foreign | 3,502 |  |  | 2,882 |  |  | 1,707 |
Total | $ | 3,892 |  |  | $ | 2,902 |  |  | $ | (3,472 | )
Income taxes are provided on the earnings of FCX’s material foreign subsidiaries under the assumption that these earnings will be distributed. FCX has not provided deferred income taxes for other differences between the book and tax carrying amounts of its investments in material foreign subsidiaries as FCX considers its ownership positions to be permanent in duration, and quantification of the related deferred tax liability is not practicable. FCX’s (provision for) benefit from income taxes for the years ended December 31 consist of the following:
| 2018 |  | 2017 |  | 2016 |
Current income taxes: |  |  |  |  |  |
Federal | $ | 46 |  | a | $ | (3 | ) |  | $ | 164 |  |
State | 1 |  |  | (10 | ) |  | 17 |  |
Foreign | (1,445 | ) | a | (1,426 | ) |  | (352 | ) |
Total current | (1,398 | ) |  | (1,439 | ) |  | (171 | ) |
Deferred income taxes: |  |  |  |  |  |
Federal | (106 | ) |  | 64 |  |  | 137 |  |
State | (8 | ) |  | 10 |  |  | 41 |  |
Foreign | (102 | ) |  | 89 |  |  | (451 | ) |
Total deferred | (216 | ) |  | 163 |  |  | (273 | ) |
Adjustments | 504 |  | b | 393 |  | c | 13 |  | d
Operating loss carryforwards | 119 |  |  | — |  |  | 60 |  |
Provision for income taxes | $ | (991 | ) |  | $ | (883 | ) |  | $ | (371 | ) |
a. | In 2018, FCX completed its analysis of the Act and recognized benefits totaling $123 million ($76 million to the U.S. tax provision and $47 million to PT-FI’s tax provision) associated with alternative minimum tax (AMT) credit refunds.
b. | Includes net tax credits totaling $504 million resulting from the reduction in PT-FI's statutory tax rates in accordance with PT-FI’s new special mining license (IUPK).
c. | Includes net tax credits totaling $393 million associated with the Act, including $272 million for the reversal of valuation allowances associated with AMT credit refunds and $121 million for a decrease in corporate income tax rates.
d. | Benefit related to changes in Peruvian tax rules.
A reconciliation of the U.S. federal statutory tax rate to FCX’s effective income tax rate for the years ended December 31 follows:
| 2018 |  | 2017 |  | 2016
| Amount |  | Percent |  | Amount |  | Percent |  | Amount |  | Percent
U.S. federal statutory tax rate | $ | (817 | ) |  | (21 | )% |  | $ | (1,016 | ) |  | (35 | )% |  | $ | 1,215 |  |  | (35 | )%
Valuation allowance, net | 129 |  | a | 3 |  |  | 28 |  |  | 1 |  |  | (1,680 | ) | b | 48 |
Foreign tax credit limitation | (195 | ) |  | (5 | ) |  | (159 | ) |  | (5 | ) |  | (598 | ) |  | 17 |
U.S. tax reform c | 123 |  |  | 3 |  |  | 393 |  |  | 14 |  |  | — |  |  | — |
Cerro Verde royalty dispute d | (55 | ) |  | (1 | ) |  | (129 | ) |  | (5 | ) |  | — |  |  | — |
Change in PT-FI tax rates | 504 |  |  | 13 |  |  | — |  |  | — |  |  | — |  |  | — |
Impairment of oil and gas properties | — |  |  | — |  |  | — |  |  | — |  |  | 520 |  | e | (15 | )
Percentage depletion | 141 |  |  | 4 |  |  | 227 |  |  | 8 |  |  | 211 |  |  | (6 | )
Withholding and other impacts on |  |  |  |  |  |  |  |  |  |  |
foreign earnings | (232 | ) |  | (6 | ) |  | (216 | ) |  | (7 | ) |  | (93 | ) |  | 3 |
Effect of foreign rates different than the U.S. |  |  |  |  |  |  |  |  |  |  |
federal statutory rate | (494 | ) |  | (13 | ) |  | 17 |  |  | 1 |  |  | 45 |  |  | (1 | )
State income taxes | 7 |  |  | 1 |  |  | (5 | ) |  | (1 | ) |  | 46 |  | b | (1 | )
Other items, net | (102 | ) |  | (3 | ) |  | (23 | ) |  | (1 | ) |  | (37 | ) |  | 1 |
Provision for income taxes | $ | (991 | ) |  | (25 | )% |  | $ | (883 | ) |  | (30 | )% |  | $ | (371 | ) |  | 11 | %
a. | Refer to “Valuation Allowance” below for discussion of changes.
b. | Includes tax charges totaling $1.6 billion in 2016 as a result of the impairment to U.S. oil and gas properties to establish valuation allowances against U.S. federal and state deferred tax assets that will not generate a future benefit.
c. | Refer to discussion of 2017 U.S. Tax Reform below.
d. | Refer to Note 12 for further discussion of the Cerro Verde royalty dispute.
e. | Reflects a loss under U.S. federal income tax law related to the impairment of investments in oil and gas properties.
FCX paid federal, state and foreign income taxes totaling $2 billion in 2018, $702 million in 2017 and $203 million in 2016 (including $27 million for discontinued operations). FCX received refunds of federal, state and foreign income taxes of $108 million in 2018, $329 million in 2017 and $247 million in 2016. The components of deferred taxes follow:
| December 31,
| 2018 |  | 2017
Deferred tax assets: |  |  |
Foreign tax credits | $ | 1,814 |  |  | $ | 2,129 |
Accrued expenses | 881 |  |  | 789 |
Oil and gas properties | — |  |  | 236 |
Net operating losses | 2,235 |  |  | 2,043 |
Employee benefit plans | 245 |  |  | 248 |
Other | 212 |  |  | 260 |
Deferred tax assets | 5,387 |  |  | 5,705 |
Valuation allowances | (4,507 | ) |  | (4,575 | )
Net deferred tax assets | 880 |  |  | 1,130 |
Deferred tax liabilities: |  |  |
Property, plant, equipment and mine development costs | (4,200 | ) |  | (3,754 | )
Undistributed earnings | (578 | ) |  | (811 | )
Other | (130 | ) |  | (223 | )
Total deferred tax liabilities | (4,908 | ) |  | (4,788 | )
Net deferred tax liabilities | $ | (4,028 | ) |  | $ | (3,658 | )
Tax Attributes. At December 31, 2018, FCX had (i) U.S. foreign tax credits of $1.8 billion that will expire between 2019 and 2027, (ii) U.S. federal net operating losses of $6.0 billion that expire between 2036 and 2037, (iii) U.S. state net operating losses of $10.5 billion that expire between 2019 and 2038, (iv) Spanish net operating losses of $537 million that can be carried forward indefinitely and (v) Indonesian net operating losses of $975 million that expire between 2020 and 2025. Valuation Allowance. On the basis of available information at December 31, 2018, including positive and negative evidence, FCX has provided valuation allowances for certain of its deferred tax assets where it believes it is more likely than not that some portion or all of such assets will not be realized. Valuation allowances totaled $4.5 billion at December 31, 2018, and $4.6 billion at December 31, 2017, and covered all of FCX’s U.S. foreign tax credits, U.S. federal net operating losses, foreign net operating losses and substantially all of its U.S. state net operating losses. FCX’s valuation allowances at December 31, 2017, also covered all of its U.S. federal capital losses. The valuation allowance related to FCX’s U.S. foreign tax credits totaled $1.8 billion at December 31, 2018. FCX has operations in tax jurisdictions where statutory income taxes and withholding taxes are in excess of the U.S. federal income tax rate. Valuation allowances are recorded on foreign tax credits for which no benefit is expected to be realized. The valuation allowance related to FCX’s U.S. federal, state and foreign net operating losses and foreign deferred tax assets totaled $2.2 billion and $458 million, respectively, at December 31, 2018. Net operating losses and deferred tax assets represent future deductions for which a benefit will only be realized to the extent these deductions offset future income. FCX develops an estimate of which future tax deductions will be realized and provides a valuation allowance to the extent these deductions are not expected to be realized in future periods. Valuation allowances will continue to be carried on U.S. foreign tax credits, U.S. federal, state and foreign net operating losses and U.S. federal, state and foreign deferred tax assets, until such time that (i) FCX generates taxable income against which any of the assets, credits or net operating losses can be used, (ii) forecasts of future income provide sufficient positive evidence to support reversal of the valuation allowances or (iii) FCX identifies a prudent and feasible means of securing the benefit of the assets, credits or net operating losses that can be implemented. The $68 million net decrease in the valuation allowances during 2018 primarily related to decreases totaling $305 million in U.S. foreign tax credits associated with expirations and 2017 tax reform adjustments, and $54 million in U.S. federal net operating losses associated with 2018 usage and 2017 tax reform adjustments, partly offset by a $244 million increase in foreign net operating losses for which no benefit is expected to be realized. 2017 U.S. Tax Reform. The Act, which was enacted on December 22, 2017, included significant modifications to then-existing U.S. tax laws and created many new complex tax provisions. The Act reduced the corporate income tax rate to 21 percent, eliminated the corporate AMT, provided for a refund of AMT credits, maintained hard minerals percentage depletion, allowed for immediate expensing of certain qualified property and generally broadened the tax base. The Act also created a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings), created anti-base erosion rules that require companies to pay a minimum tax on foreign earnings and may disallow certain payments from U.S. corporations to foreign related parties. In December 2018, FCX completed its analysis of the Act and recognized benefits totaling $123 million associated with AMT credit refunds. In 2017, FCX recorded net tax benefits related to specific provisions of the Act totaling $393 million, reflecting the reversal of valuation allowances associated with anticipated refunds of AMT credits through 2021 ($272 million) and a decrease in corporate income tax rates ($121 million). Elimination of Corporate AMT and Refund of AMT Credits. For tax years beginning after December 31, 2017, the corporate AMT was repealed. FCX has historically incurred an AMT liability in excess of regular tax liability, resulting in accumulated AMT credits totaling $490 million as of December 31, 2017. The Act allows the use of existing corporate AMT credits to offset regular tax liability for tax years after December 31, 2017. AMT credits in excess of regular liability are refundable in the years 2018 through 2021. Prior to the Act, FCX recognized a $110 million benefit for AMT credits expected to be refunded. As a result of the Act, FCX recognized a provisional net benefit of $272 million in 2017, consisting of a $380 million tax benefit for historical AMT credits expected to be refunded, partially offset by a $108 million tax charge to establish a reserve for uncertain tax positions. At December 31, 2018, FCX recognized an additional $123 million net benefit for historical AMT credits consisting of $51 million in additional refundable credits and $72 million in reduction to reserves. Reduction in Corporate Income Tax Rate. The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent. While applicable for years after December 31, 2017, existing income tax accounting guidance requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. In fourth-quarter 2017, FCX recognized this change in the federal statutory rate and recorded a provisional net benefit of $121 million, consisting of a $1.1 billion tax benefit associated with changes in related valuation allowances, partly offset by a $975 million tax charge related to existing net U.S. federal deferred tax assets and liabilities. In fourth-quarter 2018, FCX finalized the impact of this change in federal statutory rate resulting in a net zero impact, consisting of a $32 million tax benefit associated with changes in related valuation allowances offset by a $32 million tax charge related to existing net U.S. federal deferred tax assets and liabilities. Transition Tax on Previously Deferred Foreign Earnings. Under the Act, U.S. shareholders owning at least 10 percent of a foreign subsidiary generally must recognize taxable income equal to the shareholder’s pro rata share of accumulated post-1986 historical Earnings and Profits (E&P). The portion of any E&P associated with cash or cash equivalents is taxed at a rate of 15.5 percent, while any remaining E&P is taxed at a reduced rate of 8 percent. The resulting tax liability (Transition Tax) may be reduced by available foreign tax credits. Because FCX operates in foreign jurisdictions with statutory tax rates in excess of the U.S. historical statutory tax rate of 35 percent, the December 31, 2017, Transition Tax was fully offset by foreign tax credits generated in 2017. During fourth-quarter 2018, additional guidance was released by the IRS clarifying the computation of Transition Tax liability. As a result of this additional guidance, FCX recognized a $29 million tax charge related to Transition Tax for 2018. Anti-Base Erosion Rules. For tax years that begin after December 31, 2017, applicable taxpayers are required to pay the Base Erosion Anti-Abuse Tax (BEAT). BEAT is an alternative tax calculation that disallows deduction of certain amounts paid or accrued by a U.S. taxpayer to a foreign related party. The BEAT provisions do not currently impact FCX’s computation of U.S. federal taxable income. The Act also included provisions to tax a new class of income called Global Intangible Low-Taxed Income (GILTI). Under the new GILTI provisions, FCX will use U.S. federal net operating loss carryforwards in current and future tax years against income that would otherwise not generate a net tax liability absent the availability of net operating losses. As a result, FCX does not consider GILTI to be a source of income against which a benefit for U.S. federal net operating losses can be realized. Under U.S. generally accepted accounting principles, FCX is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (ii) factoring such amounts into the measurement of deferred taxes. FCX has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. Executive Compensation Limitation. For tax years beginning after December 31, 2017, tax deductible compensation of covered employees is limited to $1 million. In addition, the definition of covered employees is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee for a tax year beginning after December 31, 2016, the individual remains a covered employee for all future years. Under a transition rule, the changes do not apply to any remuneration under specified contracts in effect on November 2, 2017. During fourth-quarter 2018, FCX determined that only immaterial adjustments were needed in relation to future disallowance of deferred executive compensation balances as of December 31, 2017. Other. As of December 31, 2018, FCX has offset $5.4 billion of foreign source income with U.S. source losses. Under existing U.S. tax law, FCX has the ability to re-characterize $5.4 billion of future U.S. source income into foreign source income. While utilization of U.S. foreign tax credits is dependent upon FCX generating future U.S. tax liabilities within the carryforward period, this re-sourcing may permit FCX to utilize up to $1.1 billion of the $1.8 billion foreign tax credits that would otherwise expire unused. Other Events. On December 21, 2018, FCX completed the transaction with the Indonesian government regarding PT-FI’s long-term mining rights and share ownership. Concurrent with closing the transaction, the Indonesian government granted PT-FI an IUPK to replace its former COW. Under the terms of the IUPK, PT-FI is subject to a 25 percent corporate income tax rate and a 10 percent profits tax on net income beginning in 2019. As a result of the change in statutory tax rate applicable to deferred income tax liabilities, during fourth-quarter 2018, FCX recognized a tax credit of $504 million. SUNAT, the Peru national tax authority, has assessed mining royalties on ore processed by the Cerro Verde concentrator for the period December 2006 to December 2013, which Cerro Verde has contested on the basis that its 1998 stability agreement exempts from royalties all minerals extracted from its mining concessions, irrespective of the method used for processing those minerals. Refer to Note 12 for further discussion of the Cerro Verde royalty dispute and net charges recorded in 2018 and 2017. In December 2016, the Peruvian parliament passed tax legislation that, in part, modified the applicable tax rates established in its December 2014 tax legislation, which progressively decreased the corporate income tax rate from 30 percent in 2014 to 26 percent in 2019 and thereafter, and also increased the dividend tax rate on distributions from 4.1 percent in 2014 to 9.3 percent in 2019 and thereafter. Under the tax legislation, which was effective January 1, 2017, the corporate income tax rate was 29.5 percent, and the dividend tax rate on distributions of earnings was 5 percent. Cerro Verde’s current mining stability agreement subjects FCX to a stable income tax rate of 32 percent through the expiration of the agreement on December 31, 2028. The tax rate on dividend distributions is not stabilized by the agreement. In September 2014, the Chilean legislature approved a tax reform package that implemented a dual tax system, which was amended in January 2016. Under previous rules, FCX’s share of income from Chilean operations was subject to an effective 35 percent tax rate allocated between income taxes and dividend withholding taxes. Under the amended tax reform package, FCX’s Chilean operation is subject to the “Partially-Integrated System,” resulting in FCX’s share of income from El Abra being subject to progressively increasing effective tax rates of 35 percent through 2019 and 44.5 percent in 2020 and thereafter. In November 2017, the progression of increasing tax rates was delayed by the Chilean legislature so that the 35 percent rate continues through 2021 increasing to 44.5 percent in 2022 and thereafter. In 2010, the Chilean legislature approved an increase in mining royalty taxes to help fund earthquake reconstruction activities, education and health programs. Mining royalty taxes at FCX’s El Abra mine were 4 percent for the years 2013 through 2017. Beginning in 2018, and through 2023, rates moved to a sliding scale of 5 to 14 percent (depending on a defined operational margin). Uncertain Tax Positions. FCX accounts for uncertain income tax positions using a threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FCX’s policy associated with uncertain tax positions is to record accrued interest in interest expense and accrued penalties in other income and expense rather than in the provision for income taxes. A summary of the activities associated with FCX’s reserve for unrecognized tax benefits for the years ended December 31 follows:
| 2018 |  | 2017 |  | 2016
Balance at beginning of year | $ | 390 |  |  | $ | 101 |  |  | $ | 110 |
Additions: |  |  |  |  |
Prior year tax positions | 100 |  |  | 302 |  |  | 5 |
Current year tax positions | 14 |  |  | 6 |  |  | 28 |
Decreases: |  |  |  |  |
Prior year tax positions | (86 | ) |  | (1 | ) |  | (3 | )
Settlements with taxing authorities | (9 | ) |  | (17 | ) |  | — |
Lapse of statute of limitations | (5 | ) |  | (1 | ) |  | (39 | )
Balance at end of year | $ | 404 |  |  | $ | 390 |  |  | $ | 101 |
The total amount of accrued interest and penalties associated with unrecognized tax benefits included in the consolidated balance sheets was $186 million at December 31, 2018, primarily relating to unrecognized tax benefits associated with royalties and other related mining taxes, and $22 million at December 31, 2017, and $19 million at December 31, 2016. The reserve for unrecognized tax benefits of $404 million at December 31, 2018, included $296 million ($147 million net of income tax benefits and valuation allowances) that, if recognized, would reduce FCX’s provision for income taxes. Changes to the reserve for unrecognized tax benefits associated with current year tax positions were primarily related to uncertainties associated with FCX’s tax treatment of social welfare payments and cost recovery methods. Changes in the reserve for unrecognized tax benefits associated with prior year tax positions were primarily related to uncertainties associated with royalties and other related mining taxes and AMT credit refunds. Changes to the reserve for unrecognized tax benefits associated with the lapse of statute of limitations were primarily related to social welfare payments. There continues to be uncertainty related to the timing of settlements with taxing authorities, but if additional settlements are agreed upon during 2019, FCX could experience a change in its reserve for unrecognized tax benefits. FCX or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years for FCX’s major tax jurisdictions that remain subject to examination are as follows:
Jurisdiction |  | Years Subject to Examination |  | Additional Open Years
U.S. Federal |  | N/A |  | 2014-2018
Indonesia |  | 2008, 2011-2016 |  | 2017-2018
Peru |  | 2012-2013 |  | 2014-2018
Chile |  | 2016-2017 |  | 2018

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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