Income Taxes

Income tax expense is estimated using the tax rate in effect or to be in effect during the relevant periods in the jurisdictions in which we operate. Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. We review contingent tax liabilities for estimated exposures on a more likely than not standard related to our current tax positions.

Pursuant to FASB guidance related to accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position and also the past administrative practices and precedents of the taxing authority. As of December 31, 2017 and 2016, we had not recognized any material amounts in connection with uncertainty in income taxes.

U.S. Federal and State Taxes

As an MLP, we are not subject to U.S. federal income taxes; rather the tax effect of our operations is passed through to our unitholders. Although we are subject to state income taxes in some states, the impact to the years ended December 31, 2017, 2016, and 2015 was immaterial.

Canadian Federal and Provincial Taxes

All of our Canadian operations are conducted by entities that are treated as corporations for Canadian tax purposes (flow through for U.S. income tax purposes) and that are subject to Canadian federal and provincial taxes. Additionally, payments of interest and dividends from our Canadian entities to other Plains entities are subject to Canadian withholding tax that is treated as income tax expense.

Tax Components

Components of income tax expense are as follows (in millions):



	Year Ended December 31,
	2017		2016			2015
Current income tax expense:
State income tax	$	1	$	2		$	1
Canadian federal and provincial income tax	27		83			83
Total current income tax expense	$	28	$	85		$	84

Deferred income tax expense/(benefit):
Canadian federal and provincial income tax	$	16	$	(60	)	$	16
Total deferred income tax expense/(benefit)	$	16	$	(60	)	$	16
Total income tax expense	$	44	$	25		$	100

The difference between income tax expense based on the statutory federal income tax rate and our effective income tax expense is summarized as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Income before tax	$	902		$	755		$	1,006
Partnership earnings not subject to current Canadian tax	(756		)	(723		)	(773		)
	$	146		$	32		$	233
Canadian federal and provincial corporate tax rate	27		%	27		%	26		%
Income tax at statutory rate	$	39		$	8		$	61

Canadian withholding tax	$	2		$	13		$	14
Canadian permanent differences and rate changes	2			2			24
State income tax	1			2			1
Total income tax expense	$	44		$	25		$	100

Deferred tax assets and liabilities are aggregated by the applicable tax paying entity and jurisdiction and result from the following (in millions):



	December 31,
	2017			2016
Deferred tax assets:
Derivative instruments	$	74		$	49
Book accruals in excess of current tax deductions	22			24
Net operating losses	3			4
Total deferred tax assets	99			77

Deferred tax liabilities:
Property and equipment in excess of tax values	(455		)	(394		)
Other	(50		)	(41		)
Total deferred tax liabilities	(505		)	(435		)
Net deferred tax liabilities	$	(406	)	$	(358	)

Balance sheet classification of deferred tax assets/(liabilities):
Other long-term assets, net	$	3		$	4
Other long-term liabilities and deferred credits	(409		)	(362		)
	$	(406	)	$	(358	)

As of December 31, 2017, we had foreign net operating loss carryforwards of $9 million, which will expire beginning in 2034.

Generally, tax returns for our Canadian entities are open to audit from 2008 through 2017. Our U.S. and state tax years are generally open to examination from 2014 to 2017.