Income Taxes

Income tax provisions (benefits) for continuing operations were:



	Year Ended December 31,
	2014								2013							2012
(In millions)	Current		Deferred			Total			Current		Deferred			Total		Current			Deferred			Total
Federal	$	15	$	62		$	77		$	83	$	(47	)	$	36	$	(47	)	$	43		$	(4	)
State and local	8		(58		)	(50		)	39		(6		)	33		(34		)	48			14
Foreign	281		84			365			1,374		19			1,393		2,363			(125		)	2,238
Total	$	304	$	88		$	392		$	1,496	$	(34	)	$	1,462	$	2,282		$	(34	)	$	2,248

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:



	Year Ended December 31,
	2014		2013		2012
Statutory rate applied to income from continuing operations before income taxes	35	%	35	%	35	%
Effects of foreign operations, including foreign tax credits	(6	)	26		36
Change in permanent reinvestment assertion	(19	)	—		—
Adjustments to valuation allowances	21		(1	)	—
Other	(2	)	1		1
Effective income tax rate on continuing operations	29	%	61	%	72	%

The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. 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 7.

Effects of foreign operations – The effects of foreign operations on our effective tax rate decreased in 2014 and 2013 as compared to 2012, due to a shift in pretax income mix between high and low tax jurisdictions. This is primarily related to decreased sales in Libya in 2014 and 2013 where the tax rate is in excess of 90 percent. Excluding Libya, the effective tax rates on continuing operations for 2014, 2013 and 2012 would be 27 percent, 38 percent and 37 percent.

Change in permanent reinvestment assertion – In the second quarter of 2014, we reviewed our foreign operations, including the disposition of our Norway business, and concluded that our foreign operations do not have the same level of immediate capital needs as previously expected. Therefore, we no longer intend for previously unremitted foreign earnings associated with our U.K. operations to be permanently reinvested outside the U.S. The U.K. statutory tax rate is in excess of the U.S. statutory tax rate and therefore foreign tax credits associated with these earnings exceeds any incremental U.S. tax liabilities.

Adjustments to valuation allowances – In 2014, we increased the valuation allowance against foreign tax credits as a result of removing the permanent reinvestment assertion on our U.K. operations since the U.K. statutory tax rate is in excess of the U.S. statutory tax rate per discussion above. In 2013, valuation allowances decreased primarily due to the disposal of our Indonesian assets.

Deferred tax assets and liabilities resulted from the following:



	Year Ended December 31,
(In millions)	2014			2013
Deferred tax assets:
Employee benefits	$	364		$	387
Operating loss carryforwards	245			284
Capital loss carryforwards	89			3
Foreign tax credits	4,062			5,730
Other	116			95
Valuation allowances:
Federal	(2,775		)	(2,997		)
State, net of federal benefit	(58		)	(67		)
Foreign	(108		)	(149		)
Total deferred tax assets	1,935			3,286
Deferred tax liabilities:
Property, plant and equipment	3,737			4,018
Investments in subsidiaries and affiliates	66			794
Other	67			67
Total deferred tax liabilities	3,870			4,879
Net deferred tax liabilities	$	1,935		$	1,593

Tax carryforwards – At December 31, 2014 our operating loss carryforwards included $570 million from Canada that expire in 2029 through 2032, $180 million from the Kurdistan Region of Iraq that expire in 2016 through 2019 and $41 million from E.G. that expire in 2017 through 2019. State operating loss carryforwards of $1,293 million expire in 2015 through 2033. Foreign tax credit carryforwards of $3,550 million expire in 2022 through 2024.

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 decreased $222 million in 2014 primarily due to the sale of our Norway and Angola businesses. Federal valuation allowances increased $930 million and $1,277 million in 2013 and 2012, 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 $41 million in 2014 primarily due to the disposal of our Angola assets. Foreign valuation allowances decreased $61 million in 2013 primarily due the disposal of our Indonesian assets. Foreign valuation allowances increased $16 million in 2012 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)	2014		2013
Assets:
Other current assets	$	29	$	53
Other noncurrent assets	525		847
Liabilities:
Other current liabilities	3		1
Noncurrent deferred tax liabilities	2,486		2,492
Net deferred tax liabilities	$	1,935	$	1,593

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, 2014 our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:



United States^(a)	2004-2013
Canada	2009-2013
Equatorial Guinea	2007-2013
Libya	2012-2013
United Kingdom	2008-2013


^(a)	Includes federal and state jurisdictions.

The following table summarizes the activity in unrecognized tax benefits:



(In millions)	2014			2013			2012
Beginning balance	$	146		$	98		$	157
Additions for tax positions related to the current year	—			14			—
Additions for tax positions of prior years	11			66			81
Reductions for tax positions of prior years	(68		)	(25		)	(67		)
Settlements	(9		)	(5		)	(72		)
Statute of limitations	—			(2		)	(1		)
Ending balance	$	80		$	146		$	98

If the unrecognized tax benefits as of December 31, 2014 were recognized, $37 million would affect our effective income tax rate. There were $5 million of uncertain tax positions as of December 31, 2014 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 $6 million, $13 million and $4 million related to unrecognized tax benefits in 2014, 2013 and 2012. As of December 31, 2014 and 2013, $16 million and $15 million of interest and penalties were accrued related to income taxes.

Pretax income from continuing operations included amounts attributable to foreign sources of $1,180 million, $2,336 million and $3,356 million in 2014, 2013 and 2012.

Undistributed income of certain Canadian foreign subsidiaries at December 31, 2014 amounted to $1,019 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 $357 million would be recorded, not including potential utilization of foreign tax credits.