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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
INCOME TAXES |
14. | INCOME TAXES
Tax Reform On December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code) and was effective beginning on January 1, 2018. The most significant changes affecting us are as follows:
• | reduction in the statutory income tax rate from 35 percent to 21 percent;
• | repeal of the manufacturing deduction;
• | deduction for all of the costs to acquire or construct certain business assets in the year they are placed in service through 2022;
• | shift from a worldwide system of taxation to a territorial system of taxation, resulting in a minimum tax on the income of international subsidiaries (the global intangible low-taxes income (GILTI) tax) rather than a tax deferral on such earnings in certain circumstances; and
• | assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries.
We reflected an overall income tax benefit of $1.9 billion for the year ended December 31, 2017 with respect to Tax Reform as a result of the following:
• | We remeasured our U.S. deferred tax assets and liabilities using the 21 percent rate, which resulted in a tax benefit and a reduction to our net deferred tax liabilities of $2.6 billion.
• | We recognized a one-time transition tax of $734 million on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries based on approximately $4.7 billion of the combined earnings and profits of our international subsidiaries that have not been distributed to us. This transition tax will be remitted to the Internal Revenue Service (IRS) over the eight-year period provided in the Code beginning in 2018.
• | We accrued withholding tax of $47 million on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country.
Because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidance from the IRS to properly account for many of the provisions, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” (SAB 118) to provide for a measurement period of up to one year for adjustments to be made to account for the effects of Tax Reform. Specifically, SAB 118 requires that the effects of Tax Reform be recorded for items where the accounting is complete, as well as for items where a reasonable estimate can be made (referred to as provisional amounts). For items where reasonable estimates cannot be made, provisional amounts should not be recorded and those items should continue to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate can be made. See “Details of the Tax Reform Adjustment” below, which more fully describes the components of our $1.9 billion adjustment, including the components for which we recorded a provisional amount and the components that are incomplete. Income Statement Components Income before income tax expense (benefit) was as follows (in millions):
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
U.S. operations | $ | 2,283 |  |  | $ | 1,733 |  |  | $ | 5,327 |
International operations | 924 |  |  | 1,449 |  |  | 644 |
Income before income tax expense (benefit) | $ | 3,207 |  |  | $ | 3,182 |  |  | $ | 5,971 |
Statutory income tax rates applicable to the countries in which we operate were as follows:
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
U.S. (a) | 35 | % |  | 35 | % |  | 35 | %
Canada | 15 | % |  | 15 | % |  | 15 | %
U.K. | 19 | % |  | 20 | % |  | 20 | %
Ireland | 13 | % |  | 13 | % |  | 13 | %
Aruba (b) | n/a |  |  | 7 | % |  | 7 | %
___________________________
(a) | Statutory income tax rate was reduced to 21 percent effective January 1, 2018 as described in “Tax Reform” above.
(b) | Statutory income tax rate applicable through the date of the Aruba Disposition as described in Note 2.
The following is a reconciliation of income tax expense (benefit) computed by applying statutory income tax rates as reflected in the preceding table to actual income tax expense (benefit) related to our operations (in millions):
| Year Ended December 31, 2017
| U.S. |  | International |  | Total
| Amount |  | Percent |  | Amount |  | Percent |  | Amount |  | Percent
Income tax expense at statutory rates | $ | 799 |  |  | 35.0 | % |  | $ | 158 |  |  | 17.1 | % |  | $ | 957 |  |  | 29.8 | %
U.S. state and Canadian provincial tax expense, net of federal income tax effect | 37 |  |  | 1.6 | % |  | 46 |  |  | 5.0 | % |  | 83 |  |  | 2.6 | %
Permanent differences: |  |  |  |  |  |  |  |  |  |  |
Manufacturing deduction | (42 | ) |  | (1.8 | )% |  | — |  |  | — |  |  | (42 | ) |  | (1.3 | )%
Other | (9 | ) |  | (0.4 | )% |  | — |  |  | — |  |  | (9 | ) |  | (0.3 | )%
Change in tax law | (1,862 | ) |  | (81.6 | )% |  | — |  |  | — |  |  | (1,862 | ) |  | (58.1 | )%
Tax effects of income associated with noncontrolling interests | (31 | ) |  | (1.4 | )% |  | — |  |  | — |  |  | (31 | ) |  | (1.0 | )%
Other, net | (52 | ) |  | (2.3 | )% |  | 7 |  |  | 0.8 | % |  | (45 | ) |  | (1.4 | )%
Income tax expense (benefit) | $ | (1,160 | ) |  | (50.9 | )% |  | $ | 211 |  |  | 22.9 | % |  | $ | (949 | ) |  | (29.7 | )%
| Year Ended December 31, 2016
| U.S. |  | International |  | Total
| Amount |  | Percent |  | Amount |  | Percent |  | Amount |  | Percent
Income tax expense at statutory rates | $ | 606 |  |  | 35.0 | % |  | $ | 256 |  |  | 17.7 | % |  | $ | 862 |  |  | 27.1 | %
U.S. state and Canadian provincial tax expense, net of federal income tax effect | 5 |  |  | 0.3 | % |  | 31 |  |  | 2.1 | % |  | 36 |  |  | 1.1 | %
Permanent differences: |  |  |  |  |  |  |  |  |  |  |  |
Manufacturing deduction | (22 | ) |  | (1.3 | )% |  | — |  |  | — |  |  | (22 | ) |  | (0.7 | )%
Other | (3 | ) |  | (0.2 | )% |  | (10 | ) |  | (0.7 | )% |  | (13 | ) |  | (0.4 | )%
Change in tax law | — |  |  | — |  |  | (7 | ) |  | (0.5 | )% |  | (7 | ) |  | (0.2 | )%
Tax effects of income associated with noncontrolling interests | (44 | ) |  | (2.5 | )% |  | — |  |  | — |  |  | (44 | ) |  | (1.4 | )%
Other, net | (37 | ) |  | (2.1 | )% |  | (10 | ) |  | (0.7 | )% |  | (47 | ) |  | (1.5 | )%
Income tax expense | $ | 505 |  |  | 29.2 | % |  | $ | 260 |  |  | 17.9 | % |  | $ | 765 |  |  | 24.0 | %
| Year Ended December 31, 2015
| U.S. |  | International |  | Total
| Amount |  | Percent |  | Amount |  | Percent |  | Amount |  | Percent
Income tax expense at statutory rates | $ | 1,864 |  |  | 35.0 | % |  | $ | 92 |  |  | 14.3 | % |  | $ | 1,956 |  |  | 32.8 | %
U.S. state and Canadian provincial tax expense, net of federal income tax effect | 45 |  |  | 0.8 | % |  | 73 |  |  | 11.3 | % |  | 118 |  |  | 2.0 | %
Permanent differences: |  |  |  |  |  |  |  |  |  |  |  |
Manufacturing deduction | (102 | ) |  | (1.9 | )% |  | — |  |  | — |  |  | (102 | ) |  | (1.7 | )%
Other | (18 | ) |  | (0.3 | )% |  | (5 | ) |  | (0.8 | )% |  | (23 | ) |  | (0.4 | )%
Change in tax law | — |  |  | — |  |  | (17 | ) |  | (2.6 | )% |  | (17 | ) |  | (0.3 | )%
Tax effects of income associated with noncontrolling interests | (39 | ) |  | (0.7 | )% |  | — |  |  | — |  |  | (39 | ) |  | (0.7 | )%
Other, net | (25 | ) |  | (0.5 | )% |  | 2 |  |  | 0.3 | % |  | (23 | ) |  | (0.4 | )%
Income tax expense | $ | 1,725 |  |  | 32.4 | % |  | $ | 145 |  |  | 22.5 | % |  | $ | 1,870 |  |  | 31.3 | %
Components of income tax expense (benefit) related to our operations were as follows (in millions):
| Year Ended December 31, 2017
| U.S. |  | International |  | Total
Current: |  |  |  |  |
Country | $ | 1,305 |  |  | $ | 194 |  |  | $ | 1,499 |
U.S. state / Canadian provincial | 34 |  |  | 61 |  |  | 95 |
Total current | 1,339 |  | (a) | 255 |  |  | 1,594 |
Deferred: |  |  |  |  |
Country | (2,522 | ) |  | (29 | ) |  | (2,551 | )
U.S. state / Canadian provincial | 23 |  |  | (15 | ) |  | 8 |
Total deferred | (2,499 | ) | (b) | (44 | ) |  | (2,543 | )
Income tax expense (benefit) | $ | (1,160 | ) |  | $ | 211 |  |  | $ | (949 | )
___________________________ See notes on page 116.
| Year Ended December 31, 2016
| U.S. |  | International |  | Total
Current: |  |  |  |  |
Country | $ | 294 |  |  | $ | 194 |  |  | $ | 488 |
U.S. state / Canadian provincial | 12 |  |  | 35 |  |  | 47 |
Total current | 306 |  |  | 229 |  |  | 535 |
Deferred: |  |  |  |  |
Country | 203 |  |  | 35 |  |  | 238 |
U.S. state / Canadian provincial | (4 | ) |  | (4 | ) |  | (8 | )
Total deferred | 199 |  |  | 31 |  |  | 230 |
Income tax expense | $ | 505 |  |  | $ | 260 |  |  | $ | 765 |
| Year Ended December 31, 2015
| U.S. |  | International |  | Total
Current: |  |  |  |  |
Country | $ | 1,513 |  |  | $ | 64 |  |  | $ | 1,577 |
U.S. state / Canadian provincial | 85 |  |  | 43 |  |  | 128 |
Total current | 1,598 |  |  | 107 |  |  | 1,705 |
Deferred: |  |  |  |  |
Country | 143 |  |  | 8 |  |  | 151 |
U.S. state / Canadian provincial | (16 | ) |  | 30 |  |  | 14 |
Total deferred | 127 |  |  | 38 |  |  | 165 |
Income tax expense | $ | 1,725 |  |  | $ | 145 |  |  | $ | 1,870 |
___________________________
(a) | Current income tax expense includes the effect of our $781 million Tax Reform adjustment as described in “Tax Reform” above.
(b) | Deferred income tax benefit includes the effect of our $2.6 billion Tax Reform adjustment as described in “Tax Reform” above.
Income Taxes Paid Income taxes paid to U.S. and international taxing authorities were as follows (in millions):
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
U.S. | $ | 239 |  |  | $ | 241 |  |  | $ | 2,092 |
International | 171 |  |  | 203 |  |  | 1 |
Income taxes paid, net | $ | 410 |  |  | $ | 444 |  |  | $ | 2,093 |
Deferred Income Tax Assets and Liabilities The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):
| December 31,
| 2017 |  | 2016
Deferred income tax assets: |  |  |
Tax credit carryforwards | $ | 69 |  |  | $ | 65 |
Net operating losses (NOLs) | 492 |  |  | 374 |
Inventories | 135 |  |  | 93 |
Compensation and employee benefit liabilities | 179 |  |  | 344 |
Environmental liabilities | 47 |  |  | 69 |
Other | 112 |  |  | 100 |
Total deferred income tax assets | 1,034 |  |  | 1,045 |
Valuation allowance | (498 | ) |  | (374 | )
Net deferred income tax assets | 536 |  |  | 671 |
Deferred income tax liabilities: |  |  |
Property, plant, and equipment | 4,545 |  |  | 6,900 |
Deferred turnaround costs | 272 |  |  | 450 |
Inventories | 243 |  |  | 356 |
Investments | 77 |  |  | 253 |
Other | 107 |  |  | 73 |
Total deferred income tax liabilities | 5,244 |  |  | 8,032 |
Net deferred income tax liabilities | $ | 4,708 |  |  | $ | 7,361 |
Our deferred income tax assets and liabilities as of December 31, 2017 were impacted by the remeasurement of our U.S. temporary differences using the 21 percent statutory income tax rate as more fully described in “Tax Reform” above and “Details of the Tax Reform Adjustment” below. We had the following income tax credit and loss carryforwards as of December 31, 2017 (in millions):
| Amount |  | Expiration
U.S. state income tax credits | $ | 76 |  |  | 2018 through 2031
U.S. state income tax credits | 11 |  |  | Unlimited
U.S. state NOLs (gross amount) | 9,441 |  |  | 2018 through 2037
We have recorded a valuation allowance as of December 31, 2017 and 2016 due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of certain U.S. state income tax credits and NOLs, before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. During 2017, the valuation allowance increased by $124 million, primarily due to increases in State NOLs. The realization of net deferred income tax assets recorded as of December 31, 2017 is primarily dependent upon our ability to generate future taxable income in certain U.S. states. As described in “Tax Reform” above, one of the most significant changes in Tax Reform is the shift from a worldwide system of taxation to a territorial system. The shift to a territorial system allows us to distribute cash via a dividend from our international subsidiaries with a full dividend received deduction. As a result, we will not recognize U.S. federal deferred taxes for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and the respective tax basis for our international subsidiaries. As of December 31, 2017, we recognized a one-time transition tax of $734 million on approximately $4.7 billion of combined earnings and profits of our international subsidiaries. Because of the deemed repatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the $3.2 billion of cash and temporary cash investments held by our international subsidiaries as of December 31, 2017. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cash distributed outside of those countries. We have accrued for withholding taxes on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country. Details of the Tax Reform Adjustment The following table details the components of our adjustment (in millions) to reflect the effects of Tax Reform for the year ended December 31, 2017, including (i) whether such amounts are complete, provisional, or incomplete, and (ii) the additional information that we need to obtain in order to complete the accounting as required by SAB 118. See “Tax Reform” above for a discussion of the provisions of SAB 118.
| Accounting Status |  | Amount
Income tax benefit from the remeasurement of U.S. deferred income tax assets and liabilities | Complete |  | $ | (2,643 | )
Tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries | Provisional |  | 734 |
Recognition of foreign withholding tax, net of U.S. federal tax benefit | Complete |  | 47 |
Deductibility of certain executive compensation expense | Incomplete |  | — |
Income tax expense associated with the statutory income tax rate differential on accrual to return adjustments that may be identified upon completion of our U.S. federal income tax return in 2018 | Incomplete |  | — |
Foreign tax credit available to offset the tax on deemed repatriation of the accumulated earnings and profits of our international subsidiaries | Incomplete |  | — |
Estimated Tax Reform benefit |  |  | $ | (1,862 | )
We recorded a provisional amount of $734 million for the tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries. We continue to gather additional information in order to more accurately compute this tax. Any associated U.S. state taxes will be recorded once the federal estimate is finalized. We anticipate this information will be available in the second half of 2018. Our accounting for the following items of Tax Reform are incomplete, and we have not yet been able to make reasonable estimates of the effects of these items. Therefore, no provisional amounts were recorded.
• | Deductibility of certain executive compensation: It is unclear from Tax Reform if the future payments related to existing deferred compensation plans to the covered executives will be subject to the $1 million deduction limitation or if such plans are considered grandfathered. We currently have deferred tax assets related to certain benefit plans that may be determined to be subject to the excess compensation limitations; however, the impact is not expected to be material. Additional clarifying guidance from the IRS is necessary to determine the proper treatment, and we expect such guidance will be released by the IRS in the near future.
• | Tax rate differential amount related to accrual to return adjustments: We use estimates to compute certain adjustments related to current and deferred income taxes. Upon the filing of our U.S. federal income tax return in the third quarter of 2018, adjustments will be recorded in our financial statements to reflect our actual payment. The U.S. tax rate differential (35 percent for current vs. 21 percent for deferred items) cannot be practically estimated until such true-up adjustments are known.
• | Foreign tax credits on deemed repatriation amount: Additional information is required to determine the amount of available foreign tax credits, if any, that can be used to reduce our tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries. This includes information needed to compute any foreign tax credit limitations and information to accurately compute the income taxes paid from our various foreign subsidiaries. We anticipate this information will be available in the second half of 2018.
Other significant Tax Reform provisions that are not yet effective, but may impact our income tax expense in future years include:
• | an exemption from U.S. tax on dividends of future foreign earnings;
• | a limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income;
• | a limitation of net operating losses generated after fiscal 2018 to 80 percent of taxable income;
• | an incremental tax (base erosion anti-abuse tax, or BEAT) on excessive amounts paid to international related parties;
• | a minimum tax on certain foreign earnings in excess of 10 percent of the international subsidiaries’ tangible assets (the GILTI tax); and
• | a deduction equal to 37.5 percent of our foreign-derived intangible income.
We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on temporary differences that are expected to generate GILTI income when they reverse in future years. Unrecognized Tax Benefits The following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties and interest, (in millions):
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
Balance as of beginning of year | $ | 936 |  |  | $ | 964 |  |  | $ | 989 |
Additions based on tax positions related to the current year | 33 |  |  | 36 |  |  | 36 |
Additions for tax positions related to prior years | 15 |  |  | 11 |  |  | 83 |
Reductions for tax positions related to prior years | (42 | ) |  | (46 | ) |  | (82 | )
Reductions for tax positions related to the lapse of applicable statute of limitations | (1 | ) |  | (3 | ) |  | (3 | )
Settlements | — |  |  | (237 | ) |  | (59 | )
Reclassification of uncertain tax receivable to long-term receivable from IRS | — |  |  | 211 |  |  | — |
Balance as of end of year | $ | 941 |  |  | $ | 936 |  |  | $ | 964 |
As of December 31, 2017, the balance in unrecognized tax benefits included $274 million of tax refunds that we intend to claim by amending various of our income tax returns for 2010 through 2016. We intend to propose that incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products be excluded from taxable income during these periods. However, due to the complexity of this matter and uncertainties with respect to the interpretation of the Code, we concluded that the refund claims included in the following table cannot be recognized in our financial statements. As a result, these amounts are not included in our uncertain tax position liabilities as of December 31, 2017, 2016, and 2015 even though they are reflected in the preceding table. The following is a reconciliation of unrecognized tax benefits reflected in the preceding table to our uncertain tax position liabilities that are presented in our balance sheets (in millions).
| December 31,
| 2017 |  | 2016
Unrecognized tax benefits | $ | 941 |  |  | $ | 936 |
Tax refund claim not presented in our balance sheets | (274 | ) |  | (433 | )
Other | 77 |  |  | (5 | )
Uncertain tax position liabilities presented in our balance sheets | $ | 744 |  |  | $ | 498 |
Amounts recognized in our balance sheets for uncertain tax positions include (in millions):
| December 31,
| 2017 |  | 2016
Income taxes payable | $ | — |  |  | $ | (7 | )
Other long-term liabilities | (723 | ) |  | (465 | )
Deferred tax liabilities | (21 | ) |  | (26 | )
Uncertain tax position liabilities presented in our balance sheets | $ | (744 | ) |  | $ | (498 | )
As of December 31, 2017 and 2016, there were $793 million and $756 million, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate. Penalties and interest during the years ended December 31, 2017, 2016, and 2015 were immaterial. Accrued penalties and interest totaled $77 million and $70 million as of December 31, 2017 and 2016, respectively, excluding the U.S. federal and state income tax effects related to interest. During the next 12 months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits, excluding interest, either because the tax positions are sustained on audit or because we agree to their disallowance. We do not expect these reductions to have a significant impact on our financial statements because such reductions would not significantly affect our annual effective tax rate. U.S. Tax Returns Under Audit Federal As of December 31, 2017, our tax years for 2010 through 2015 were under audit by the IRS. The IRS has proposed adjustments to our taxable income for certain open years. We are currently contesting the proposed adjustments with the Office of Appeals of the IRS for certain open years and do not expect that the ultimate disposition of these adjustments will result in a material change to our financial position, results of operations, or liquidity. We are continuing to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with recorded amounts of unrecognized tax benefits associated with these matters. State As of December 31, 2017, our tax years for 2004 through 2008 and 2011 through 2014 were under audit by the state of California for certain tax issues. We do not expect the ultimate disposition of these issues will result in a material change to our financial position, results of operations, or liquidity. We believe these matters will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these matters.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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