7. Income Tax

In connection with the Separation, the Company and NOV entered into a Tax Matters Agreement, dated as of May 29, 2014 (the “Tax Matters Agreement”), which governs the Company’s and NOV’s respective rights, responsibilities and obligations. The Tax Matters Agreement sets forth the Company and NOV’s rights and obligations related to the allocation of federal, state, local and foreign taxes for periods before and after the Spin-Off, as well as taxes attributable to the Spin-Off, and related matters such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the Tax Matters Agreement, NOV will prepare and file the consolidated federal income tax return, and any other tax returns that include both NOV and the Company for all taxable periods ending on or prior to May 30, 2014. NOV will indemnify and hold harmless the Company for any income tax liability for periods before the Separation date. The Company will prepare and file all tax returns that include solely the Company for all taxable periods ending after that date. Settlements of tax payments between NOV and the Company were generally treated as contributions from or distributions to NOV in periods prior to the Separation date.

The effective tax rate for the Company was 34.7% and 35.3% for the three and nine months ended September 30, 2014, respectively, and 33.9% and 35.0% for the same periods of the prior year, respectively. Compared to the U.S. statutory rate, the effective tax rate is increased in the periods by the effect of state income taxes and certain non-deductible expenses that is offset by the effect of lower tax rates on income earned in foreign jurisdictions which are permanently reinvested. The provision for income taxes for periods prior to the Separation has been computed as if NOW were a stand-alone company.

The difference between the effective tax rate reflected in the provision for income taxes and the U.S. federal statutory rate of 35% was as follows (in millions):


	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Federal income tax at the U.S. federal statutory rate	$	17		$	21		$	54		$	61
Foreign income tax rate differential		(1	)		(2	)		(3	)		(4	)
State income tax, net of federal benefit		1			1			2			2
Nondeductible expenses/foreign inclusions		1			1			3			5
Foreign tax credit		(1	)		(1	)		(3	)		(4	)
Other		—			—			1			1

Provision for income taxes	$	17		$	20		$	54		$	61

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions including the United Kingdom, Indonesia and Norway. Tax years that remain subject to examination by major tax jurisdictions vary by legal entity, but are generally open in the U.S. for the tax years ending after 2009 and outside the U.S. for the tax years ending after 2006. The Company is indemnified for any income tax expense exposures related to periods prior to the Separation.

To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts will continue to be classified as a component of income tax expense in the financial statements.