Income Taxes

Income tax provisions (benefits) for continuing operations were:



	2013							2012									2011
(In millions)	Current		Deferred			Total		Current			Deferred			Total			Current			Deferred			Total
Federal	$	63	$	(46	)	$	17	$	(80	)	$	(30	)	$	(110	)	$	(193	)	$	(217	)	$	(410	)
State and local	44		1			45		(23		)	47			24			24			82			106
Foreign	3,290		(15		)	3,275		4,844			(241		)	4,603			3,088			(58		)	3,030
Total	$	3,397	$	(60	)	$	3,337	$	4,741		$	(224	)	$	4,517		$	2,919		$	(193	)	$	2,726

A reconciliation of the federal statutory income tax rate applied to income from continuing operations before income taxes to the provision for income taxes follows:



	2013		2012		2011
Statutory rate applied to income from continuing operations before income taxes	35	%	35	%	35	%
Effects of foreign operations, including foreign tax credits	14		18		6
Change in permanent reinvestment assertion	—		—		5
Adjustments to valuation allowances	18		21		14
Tax law changes	—		—		1
Other	1		—		—
Effective income tax rate on continuing operations	68	%	74	%	61	%

The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income, the relative magnitude of these sources of income, and foreign currency remeasurement effects. The provision for income taxes is allocated on a discrete, stand-alone basis to pretax segment income and to individual items not allocated to segments. The difference between the total provision and the sum of the amounts allocated to segments appears in the "Not Allocated to Segments" column of the tables in Note 8.

Effects of foreign operations – The effects of foreign operations on our effective tax rate decreased in 2013 as compared to 2012, primarily due to decreased sales in Libya in 2013 as a result of third-party labor strikes at the Es Sider oil terminal. The effects of foreign operations on our effective tax rate increased in 2012 from 2011, primarily due to the resumption of sales of Libyan production in 2012.

Change in permanent reinvestment assertion – In the second quarter of 2011, we recorded $716 million of deferred U.S. tax on undistributed earnings of $2,046 million that we previously intended to permanently reinvest in foreign operations. Offsetting this tax expense were associated foreign tax credits of $488 million. In addition, we reduced our valuation allowance related to foreign tax credits by $228 million due to recognizing deferred U.S. tax on previously undistributed earnings.

Adjustments to valuation allowances – In 2013, 2012 and 2011, we increased the valuation allowance against foreign tax credits because it is more likely than not that we will be unable to realize all U.S. benefits on foreign taxes accrued in those years.

Tax law changes – The U.K. enacted Finance Bill 2013 in July 2013 and Finance Bill 2012 in July 2012, which did not change the rate of corporation tax or the supplementary corporation tax for U.K. ring-fenced activities in the oil and gas sector. As such, this legislation did not have a material impact on our consolidated income tax provision. In July 2011, the U.K. enacted Finance Bill 2011 which increased the rate of the supplementary charge levied on profits from U.K. oil and gas production from 20 percent to 32 percent. As a result of this legislation, we recorded deferred tax expense of $10 million in 2011.

On May 25, 2011, Michigan enacted legislation that replaced the Michigan Business Tax ("MBT") with a corporate income tax ("CIT"), effective January 1, 2012. The CIT legislation eliminated the "book-tax difference deduction" that was provided under the MBT to mitigate the net increase in a taxpayer’s deferred tax liability resulting when Michigan moved from the Single Business Tax, a non-income tax, to the MBT, an income tax, on July 12, 2007. Such a change in the tax law must be recognized in earnings in the period enacted regardless of the effective date. The total effect of tax law changes on deferred tax balances is recorded as income tax expense related to continuing operations in the period the law is enacted, even if a portion of the deferred tax balances relates to discontinued operations. As a result of the new CIT legislation, we recorded deferred tax expense of $32 million in the second quarter of 2011.

Deferred tax assets and liabilities resulted from the following:



	December 31,
(In millions)	2013			2012
Deferred tax assets:
Employee benefits	$	387		$	510
Operating loss carryforwards	284			368
Foreign tax credits	5,730			4,351
Other	98			121
Valuation allowances:
Federal	(2,997		)	(2,067		)
State, net of federal benefit	(67		)	(60		)
Foreign	(149		)	(210		)
Total deferred tax assets	3,286			3,013
Deferred tax liabilities:
Property, plant and equipment	4,018			3,691
Investments in subsidiaries and affiliates	794			840
Other	67			12
Total deferred tax liabilities	4,879			4,543
Net deferred tax liabilities	$	1,593		$	1,530

Tax carryforwards – At December 31, 2013, our operating loss carryforwards included $744 million from Canada which expire in 2026 through 2030 and $128 million from the Kurdistan Region of Iraq that expire in 2016 through 2018. State operating loss carryforwards of $1,503 million expire in 2014 through 2033. Foreign tax credit carryforwards of $3,560 million expire in 2022 through 2023.

Valuation allowances – The estimated realizability of the benefit of foreign tax credits is based on certain estimates concerning future operating conditions (particularly as related to prevailing liquid hydrocarbon, natural gas and synthetic crude oil prices), future financial conditions, income generated from foreign sources and our tax profile in the years that such credits may be claimed. Federal valuation allowances increased $930 million, $1,277 million and $585 million in 2013, 2012 and 2011, because it is more likely than not that we will be unable to realize all U.S. benefits on foreign taxes accrued in those years.

Foreign valuation allowances decreased $61 million in 2013, primarily due the disposal of our Indonesian assets. Foreign valuation allowances increased $16 million and $52 million in 2012 and 2011, primarily due to deferred tax assets generated in the Kurdistan Region of Iraq, Angola and Indonesia.

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
(In millions)	2013		2012
Assets:
Other current assets	$	53	$	57
Other noncurrent assets	847		849
Liabilities:
Other current liabilities	1		4
Noncurrent deferred tax liabilities	2,492		2,432
Net deferred tax liabilities	$	1,593	$	1,530

We are continuously undergoing examination of our U.S. federal income tax returns by the IRS. Such audits have been completed through the 2009 tax year. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. Further, we are routinely involved in U.S. state income tax audits and foreign jurisdiction tax audits. We believe all other audits will be resolved within the amounts paid and/or provided for these liabilities.

As of December 31, 2013, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:



United States^(a)	2004-2012
Canada	2008-2012
Equatorial Guinea	2007-2012
Libya	2006-2012
Norway	2008-2012
United Kingdom	2008-2012


^(a)	Includes federal and state jurisdictions.

The following table summarizes the activity in unrecognized tax benefits:



(In millions)	2013			2012			2011
Beginning balance	$	98		$	157		$	103
Additions for tax positions related to the current year	14			—			4
Additions for tax positions of prior years	66			81			87
Reductions for tax positions of prior years	(25		)	(67		)	(29		)
Settlements	(5		)	(72		)	(8		)
Statute of limitations	(2		)	(1		)	—
Ending balance	$	146		$	98		$	157

If the unrecognized tax benefits as of December 31, 2013 were recognized, $98 million would affect our effective income tax rate. There were $11 million of uncertain tax positions as of December 31, 2013 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly increase or decrease during the next twelve months.

Interest and penalties are recorded as part of the tax provision and were $13 million, $4 million and $13 million related to unrecognized tax benefits in 2013, 2012 and 2011. As of December 31, 2013 and 2012, $15 million and $24 million of interest and penalties were accrued related to income taxes.

Pretax income from continuing operations included amounts attributable to foreign sources of $4,874 million, $6,382 million and $4,886 million in 2013, 2012 and 2011.

Undistributed income of certain consolidated foreign subsidiaries at December 31, 2013 amounted to $1,438 million for which no U.S. deferred income tax provision has been recorded because we intend to permanently reinvest such income in our foreign operations. If such income was not permanently reinvested, income tax expense of approximately $503 million would be recorded, not including potential utilization of foreign tax credits.