7.Income Taxes

Income Tax Expense (Benefit)

Devon’s income tax components are presented in the following table.


	Year Ended December 31,
	2014		2013		2012

	(In millions)
Current income tax expense (benefit):
U.S. federal	$	152	$	73	$	60
Various states		18		(5)		(3)
Canada and various provinces		307		4		(5)
Total current tax expense (benefit)		477		72		52
Deferred income tax expense (benefit):
U.S. federal		1,610		198		(188)
Various states		93		59		34
Canada and various provinces		188		(160)		(30)
Total deferred tax expense (benefit)		1,891		97		(184)
Total income tax expense (benefit)	$	2,368	$	169	$	(132)

Total income tax expense (benefit) differed from the amounts computed by applying the United States federal income tax rate to earnings from continuing operations before income taxes as a result of the following:



	Year Ended December 31,
	2014		2013		2012

Total income tax expense (benefit) (in millions)	$	2,368	$	169	$	(132)

U.S. statutory income tax rate		35%		35%		(35%)
Non-deductible goodwill transactions		23%		0%		0%
Taxation on Canadian operations		(4%)		9%		(6%)
State income taxes		2%		23%		6%
Repatriations		2%		65%		0%
Taxes on EnLink formation		1%		0%		0%
Other		(1%)		(19%)		(7%)
Effective income tax rate		58%		113%		(42%)

During 2014, Devon had non-deductible goodwill transactions. Goodwill was removed in conjunction with the Canadian conventional asset divestiture to Canadian Natural Resources Limited, and there was a goodwill impairment in the Canadian reporting unit. See Note 12 for further discussion.

Additionally, during 2014, Devon repatriated to the U.S. $2.8 billion of cash relating to the Canadian asset divestiture. In conjunction with the repatriation, Devon recognized approximately $105 million of additional income tax expense for the full year. Prior to the repatriation, Devon had recognized a $143 million deferred income tax liability associated with the planned repatriation. When the repatriation was made, Devon retained a larger property basis in Canada than was previously estimated, resulting in the incremental tax. After the use of foreign tax credits, the current income tax on the repatriation was $67 million.

Furthermore, Devon completed its divestiture program of certain assets in the U.S. In conjunction with the divestiture closing and due to the availability of additional tax deductions, Devon recognized $294 million of current income tax expense. The current tax expense was entirely offset by the recognition of deferred tax benefits.

Devon also recorded a $46 million deferred tax liability in conjunction with the formation of EnLink in 2014.

In the second and fourth quarters of 2013, Devon repatriated to the U.S. a total of $4.3 billion of its cash held outside of the U.S. In the fourth quarter of 2013, Devon announced plans to divest of its Canadian conventional assets. These events resulted in an incremental income tax expense of $97 million. The incremental expense included $180 million of current income tax expense offset by $83 million of deferred income tax benefit. The $83 million deferred tax benefit was comprised of $180 million of deferred tax benefits that offset the incremental current income tax expense and an additional $97 million of deferred income tax expense accrued in the fourth quarter for assumed repatriations.

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities are presented below:


	December 31,
	2014		2013

Deferred tax assets:	(In millions)
Asset retirement obligations	$	458	$	673
Foreign tax credits		-		248
Net operating loss carryforwards		200		183
Alternative minimum tax credits		57		105
Pension benefit obligations		113		104
Other		273		163
Total deferred tax assets		1,101		1,476
Deferred tax liabilities:
Property and equipment		(6,940)		(5,895)
Long-term debt		(115)		(161)
Taxes on unremitted foreign earnings		(6)		(157)
Fair value of financial instruments		(699)		(7)
Other		(154)		(52)
Total deferred tax liabilities		(7,914)		(6,272)
Net deferred tax liability	$	(6,813)	$	(4,796)

Devon has recognized $200 million of deferred tax assets related to various net operating loss carryforwards available to offset future income taxes. The carryforwards consist of $621 million of Canadian net operating loss carryforwards, which expire between 2029 and 2034, $180 million of state net operating loss carryforwards, which expire primarily between 2018 and 2032 and $135 million of net operating loss carryforwards related to EnLink’s operations, which expire between 2028 and 2034. Devon expects the tax benefits from the Canadian net operating loss carryforwards to be utilized between 2015 and 2017 and the state net operating loss carryforwards to be utilized between 2017 and 2029. The EnLink net operating losses are expected to be utilized during 2015. Devon has also recognized a $57 million deferred tax asset related to alternative minimum tax credits which have no expiration date and will be available for use against tax on future taxable income.

The expected utilization of Devon’s carryforwards and credits is based upon current estimates of taxable income, considering limitations on the annual utilization of these benefits as set forth by tax regulations. Significant changes in such estimates caused by variables such as future oil, gas and NGL prices or capital expenditures could alter the timing of the eventual utilization of such carryforwards. There can be no assurance that Devon will generate any specific level of continuing taxable earnings. However, management believes that Devon's future taxable income will more likely than not be sufficient to utilize its tax carryforwards and credits prior to their expiration.

As of December 31, 2014, Devon’s unremitted foreign earnings totaled approximately $1.8 billion. All but $22 million of the $1.8 billion was deemed to be indefinitely reinvested into the development and growth of Devon’s Canadian business. Therefore, Devon has not recognized a deferred tax liability for United States income taxes associated with such earnings. If such earnings were to be repatriated to the U.S., Devon may be subject to United States income taxes and foreign withholding taxes. However, it is not practical to estimate the amount of such additional taxes that may be payable due to the inter-relationship of the various factors involved in making such an estimate.

For the remaining $22 million of unremitted earnings deemed not to be indefinitely reinvested, Devon has recognized a $6 million deferred tax liability associated with such unremitted earnings as of December 31, 2014.

Unrecognized Tax Benefits

The following table presents changes in Devon's unrecognized tax benefits.


	December 31,
	2014		2013

	(In millions)
Balance at beginning of year	$	243	$	216
Tax positions taken in prior periods		-		(17)
Tax positions taken in current year		-		42
Accrual of interest related to tax positions taken		2		5
Foreign currency translation		(4)		(3)
Balance at end of year	$	241	$	243

Devon’s unrecognized tax benefit balance at December 31, 2014 and 2013 included $34 million and $32 million, respectively, of interest and penalties. If recognized, $223 million of Devon's unrecognized tax benefits as of December 31, 2014 would affect Devon's effective income tax rate. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.


Jurisdiction		Tax Years Open
U.S. Federal		2008-2014
Various U.S. states		2008-2014
Canada Federal		2004-2014
Various Canadian provinces		2004-2014

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process. As a result, Devon cannot reasonably anticipate the extent that the liabilities for unrecognized tax benefits will increase or decrease within the next twelve months.