Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

15.

INCOME TAXES

Income Statement Components

Income before income tax expense (benefit) was as follows (in millions):

	Year Ended December 31,
	2019		2018		2017
U.S. operations	$	2,496	$	3,168	$	2,283
International operations	990		1,064		924
Income before income tax expense (benefit)	$	3,486	$	4,232	$	3,207

Statutory income tax rates applicable to the countries in which we operate were as follows:

	Year Ended December 31,
	2019		2018		2017
U.S.	21	%	21	%	35	%
Canada	15	%	15	%	15	%
U.K.	19	%	19	%	19	%
Ireland	13	%	13	%	13	%
Peru	30	%	30	%	n/a
Mexico	30	%	30	%	n/a

The following is a reconciliation of income tax expense (benefit) computed by applying statutory income tax rates as reflected in the preceding table to actual income tax expense (benefit) (in millions):

	U.S.					International					Total
	Amount			Percent		Amount			Percent		Amount			Percent
Year ended December 31, 2019
Income tax expense at statutory rates	$	524		21.0	%	$	147		14.8	%	$	671		19.2	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	16			0.7	%	88			8.9	%	104			3.0	%
Permanent differences	(36		)	(1.5	)%	10			1.0	%	(26		)	(0.7	)%
GILTI tax (a)	115			4.6	%	—			—		115			3.3	%
Foreign tax credits	(95		)	(3.8	)%	—			—		(95		)	(2.7	)%
Repatriation withholding tax	45			1.8	%	—			—		45			1.3	%
Tax effects of income associated with noncontrolling interests	(77		)	(3.1	)%	2			0.2	%	(75		)	(2.2	)%
Other, net	(36		)	(1.4	)%	(1		)	(0.1	)%	(37		)	(1.1	)%
Income tax expense	$	456		18.3	%	$	246		24.8	%	$	702		20.1	%

^{__________________________} 

(a) See note on page 112.

	U.S.					International				Total
	Amount			Percent		Amount		Percent		Amount			Percent
Year ended December 31, 2018
Income tax expense at statutory rates	$	665		21.0	%	$	163	15.3	%	$	828		19.6	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	44			1.4	%	80		7.5	%	124			2.9	%
Permanent differences	(9		)	(0.3	)%	—		—		(9		)	(0.2	)%
GILTI tax (a)	67			2.1	%	—		—		67			1.6	%
Foreign tax credits	(50		)	(1.6	)%	—		—		(50		)	(1.2	)%
Effects of Tax Reform (a)	(12		)	(0.4	)%	—		—		(12		)	(0.3	)%
Tax effects of income associated with noncontrolling interests	(49		)	(1.5	)%	—		—		(49		)	(1.2	)%
Other, net	(23		)	(0.7	)%	3		0.3	%	(20		)	(0.5	)%
Income tax expense	$	633		20.0	%	$	246	23.1	%	$	879		20.7	%
Year ended December 31, 2017
Income tax expense at statutory rates	$	799		35.0	%	$	158	17.1	%	$	957		29.8	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	37			1.6	%	46		5.0	%	83			2.6	%
Permanent differences:
Manufacturing deduction	(42		)	(1.8	)%	—		—		(42		)	(1.3	)%
Other	(9		)	(0.4	)%	—		—		(9		)	(0.3	)%
Change in tax law (a)	(1,862		)	(81.6	)%	—		—		(1,862		)	(58.1	)%
Tax effects of income associated with noncontrolling interests	(31		)	(1.4	)%	—		—		(31		)	(1.0	)%
Other, net	(52		)	(2.3	)%	7		0.8	%	(45		)	(1.4	)%
Income tax expense (benefit)	$	(1,160	)	(50.9	)%	$	211	22.9	%	$	(949	)	(29.7	)%

^{__________________________} 

(a) See “Tax Reform” below for a discussion of the changes in tax law in the U.S. that were enacted in December 2017.

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

	U.S.				International			Total
Year ended December 31, 2019
Current:
Country	$	145			$	186		$	331
U.S. state / Canadian provincial	37				100			137
Total current	182				286			468
Deferred:
Country	290				(28		)	262
U.S. state / Canadian provincial	(16		)		(12		)	(28		)
Total deferred	274				(40		)	234
Income tax expense	$	456			$	246		$	702
Year ended December 31, 2018
Current:
Country	$	432			$	141		$	573
U.S. state / Canadian provincial	37				66			103
Total current	469			(a)	207			676
Deferred:
Country	145				25			170
U.S. state / Canadian provincial	19				14			33
Total deferred	164			(b)	39			203
Income tax expense	$	633			$	246		$	879
Year ended December 31, 2017
Current:
Country	$	1,305			$	194		$	1,499
U.S. state / Canadian provincial	34				61			95
Total current	1,339			(a)	255			1,594
Deferred:
Country	(2,522		)		(29		)	(2,551		)
U.S. state / Canadian provincial	23				(15		)	8
Total deferred	(2,499		)	(b)	(44		)	(2,543		)
Income tax expense (benefit)	$	(1,160	)		$	211		$	(949	)

^{___________________________} 

(a) Current income tax expense includes a $21 million benefit and a $781 million expense related to our Tax Reform adjustment for the years ended December 31, 2018 and 2017, respectively, as described in “Tax Reform” below.

(b) Deferred income tax expense (benefit) includes a $9 million expense and a $2.6 billion benefit related to our Tax Reform adjustment for the years ended December 31, 2018 and 2017, respectively, as described in “Tax Reform” below.

Income Taxes Paid (Refunded)

Income taxes paid to (received from) U.S. and international taxing authorities were as follows (in millions):

	Year Ended December 31,
	2019				2018		2017
U.S.	$	(298	)	(a)	$	1,016	$	239
International	182				345		171
Income taxes paid (refunded), net	$	(116	)		$	1,361	$	410

^{__________________________} 

(a) This amount includes a refund of $348 million, including interest, that we received related to the settlement of the combined audit of our U.S. federal income tax returns for 2010 and 2011. See “Tax Returns Under Audit – U.S. Federal” below.

Deferred Income Tax Assets and Liabilities

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):

	December 31,
	2019			2018
Deferred income tax assets:
Tax credit carryforwards	$	683		$	644
Net operating losses (NOLs)	582			523
Inventories	141			101
Compensation and employee benefit liabilities	213			175
Environmental liabilities	69			71
Other	156			141
Total deferred income tax assets	1,844			1,655
Valuation allowance	(1,200		)	(1,111		)
Net deferred income tax assets	644			544
Deferred income tax liabilities:
Property, plant, and equipment	4,924			4,589
Deferred turnaround costs	331			316
Inventories	217			287
Investments	122			142
Other	153			172
Total deferred income tax liabilities	5,747			5,506
Net deferred income tax liabilities	$	5,103		$	4,962

We had the following income tax credit and loss carryforwards as of December 31, 2019 (in millions):

	Amount		Expiration
U.S. state income tax credits (gross amount)	$	89	2020 through 2033
U.S. state income tax credits (gross amount)	17		Unlimited
U.S. foreign tax credits	598		2027
U.S. state NOLs (gross amount)	10,913		2020 through 2039

We have recorded a valuation allowance as of December 31, 2019 and 2018 due to uncertainties related to our ability to utilize some of our deferred income tax assets associated with our U.S. foreign tax credits and certain U.S. state income tax credits and NOLs before they expire. The valuation allowance is based on our estimates of future taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. The valuation allowance increased by $89 million in 2019 primarily due to an increase in excess U.S. foreign tax credits as well as U.S. state income tax NOLs.

As a part of completing our accounting for Tax Reform in 2018 as described in “Tax Reform” below, we assessed our ability to use our foreign tax credits to offset the tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries and concluded that our foreign tax credit carryforwards were not more likely than not to be realized, and we recorded a full valuation allowance against the deferred income tax asset associated with those carryforwards.

As described in “Tax Reform” below, one of the most significant changes in Tax Reform was the shift from a worldwide system of taxation to a hybrid territorial system. The shift to a hybrid territorial system allows us to distribute cash via a dividend from our international subsidiaries with a full dividend received deduction in the U.S. As a result, we will not recognize U.S. federal deferred taxes for the future tax consequences attributable to undistributed earnings of our international subsidiaries. However, there may be a cost to repatriate the undistributed earnings of certain of our international subsidiaries to us, including, but not limited to, withholding taxes imposed by certain international jurisdictions and U.S. state income taxes. As of December 31, 2019, the cumulative undistributed earnings of these subsidiaries that is considered permanently reinvested in those countries were approximately $4.2 billion. It is not practicable to estimate the amount of additional tax that would be payable on those earnings, if distributed.

Unrecognized Tax Benefits

Change in Unrecognized Tax Benefits

The following is a reconciliation of the change in unrecognized tax benefits, excluding related interest and penalties, (in millions):

	Year Ended December 31,
	2019			2018			2017
Balance as of beginning of year	$	970		$	941		$	936
Additions for tax positions related to the current year	19			23			33
Additions for tax positions related to prior years	30			28			15
Reductions for tax positions related to prior years	(101		)	(19		)	(42		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(14		)	(1		)	(1		)
Settlements	(7		)	(2		)	—
Balance as of end of year	$	897		$	970		$	941

Liability for Unrecognized Tax Benefits

The following is a reconciliation of unrecognized tax benefits to our liability for unrecognized tax benefits presented in our balance sheets (in millions).

	December 31,
	2019			2018
Unrecognized tax benefits	$	897		$	970
Tax refund claims not yet filed but that we intend to file	(29		)	(277		)
Interest and penalties	100			88
Liability for unrecognized tax benefits presented in our balance sheets	$	968		$	781

Our liability for unrecognized tax benefits is reflected in the following balance sheet line items (in millions):

	December 31,
	2019		2018
Income taxes payable	$	—	$	42
Other long-term liabilities	954		721
Deferred tax liabilities	14		18
Liability for unrecognized tax benefits presented in our balance sheets	$	968	$	781

As of December 31, 2019, our liability for unrecognized tax benefits includes $525 million of refund claims associated with taxes paid on incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products. We recorded a tax refund receivable of $525 million in connection with our refund claims, but we also recorded a liability for unrecognized tax benefits of $525 million due to the complexity of this matter and uncertainties with respect to sustaining these refund claims. Therefore, our

financial position, results of operations, and liquidity will not be negatively impacted if we are unsuccessful in sustaining these refund claims.

Other Disclosures

As of December 31, 2019 and 2018, there was $762 million and $807 million, respectively, of unrecognized tax benefits that if recognized would reduce our annual effective tax rate.

Interest and penalties incurred during the years ended December 31, 2019, 2018, and 2017 was immaterial.

Although reasonably possible, we do not anticipate that any of our tax audits will be resolved in 2020 that would result in a reduction in our liability for unrecognized tax benefits due to the tax positions being sustained or due to our agreement of their disallowance. Should any reductions occur, we do not expect they would have a significant impact on our financial statements because such reductions would not significantly affect our annual effective tax rate.

Tax Returns Under Audit

U.S. Federal

In 2019, we settled the combined audit related to our U.S. federal income tax returns for 2010 and 2011 and received a refund of $348 million, including interest. We did not have a significant change to our liability for unrecognized tax benefits upon settlement of the audit. As of December 31, 2019, our U.S. federal income tax returns for 2012 through 2015 were under audit by the IRS. The IRS has proposed adjustments and we are working with the IRS to resolve these matters. We believe that these matters will be resolved for amounts consistent with our liability for unrecognized tax benefits associated with these matters.

We have amended our U.S federal income tax returns for 2005 through 2011 to exclude from taxable income incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products, and we have claimed $525 million in refunds. The 2005 through 2009 amended return refund claims have been disallowed by the IRS and we are currently evaluating our options to contest the disallowance of these adjustments. As noted above in the discussion of our liability for unrecognized tax benefits, an ultimate disallowance of these refund claims would not negatively impact our financial position, results of operations, and liquidity.

U.S. State

As of December 31, 2019, our California tax returns for 2004 through 2008 and 2011 through 2016 were under audit by the state of California. We do not expect the ultimate disposition of these audits will result in a material change to our financial position, results of operations, or liquidity. We believe these audits will be resolved for amounts consistent with the liability for unrecognized tax benefits associated with these audits.

International

As of December 31, 2019, our Canadian subsidiary’s federal tax returns for 2013 through 2016 were under audit by the Canada Revenue Agency (CRA) and our Quebec provincial tax returns for 2013 through 2016 were under audit by Revenue Quebec. We are currently protesting the proposed adjustments by the CRA for 2013 and 2014 and we do not expect the ultimate disposition of these adjustments will result in a material change to our financial position, results of operations, or liquidity.

Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (Tax Reform) was enacted, which resulted in significant changes to the Code and was effective beginning on January 1, 2018. The most significant changes affecting us are as follows:

• reduction in the statutory income tax rate from 35 percent to 21 percent;

• assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries;

• shift from a worldwide system of taxation to a hybrid territorial system of taxation, resulting in a minimum tax on the income of international subsidiaries (the GILTI tax) rather than a tax deferral on such earnings in certain circumstances;

• deduction for all of the costs to acquire or construct certain business assets in the year they are placed in service through 2022; and

• repeal of the manufacturing deduction;

The following narrative describes the activity that occurred with respect to Tax Reform for the years ended December 31, 2017 and 2018.

We reflected an overall income tax benefit of $1.9 billion for the year ended December 31, 2017 with respect to Tax Reform as a result of the following:

• We remeasured our U.S. deferred tax assets and liabilities using the 21 percent rate, which resulted in a tax benefit and a reduction to our net deferred tax liabilities of $2.6 billion.

• We recognized a one-time transition tax of $734 million on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries based on approximately $4.7 billion of the combined earnings and profits of our international subsidiaries that had not been distributed to us. This transition tax will be remitted to the Internal Revenue Service (IRS) over the eight-year period provided in the Code, with the first annual remittance paid in 2018.

• We accrued withholding tax of $47 million on a portion of the earnings of one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country.

Because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidance from the IRS to properly account for many of the provisions, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which required that the effects of Tax Reform be recorded for items where the accounting was complete, as well as for items where a reasonable estimate could be made (referred to as provisional amounts). For items where reasonable estimates could not be made, provisional amounts were not recorded and those items continued to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate could be made.

The following table summarizes the components of our adjustment (in millions) to reflect the effects of Tax Reform for the years ended December 31, 2018 and 2017, including whether such amounts were complete, provisional, or incomplete. The amounts presented for 2018 were completed during the fourth quarter of 2018.

	Year Ended December 31,								Cumulative Tax Reform Adjustment
	2017				2018
	Accounting Status	Amount			Accounting Status	Amount
Income tax benefit from the remeasurement of U.S. deferred income tax assets and liabilities	Complete	$	(2,643	)	Complete	$	—		$	(2,643	)
Tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Provisional	734			Complete	6			740
Recognition of foreign withholding tax, net of U.S. federal tax benefit	Complete	47			Complete	—			47
Deductibility of certain executive compensation expense	Incomplete	—			Complete	5			5
Income tax expense associated with the statutory income tax rate differential on accrual to return adjustments that were identified upon completion of our U.S. federal income tax return in 2018	Incomplete	—			Complete	9			9
Foreign tax credit available to offset the tax on deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Incomplete	—			Complete	(32		)	(32		)
Tax Reform benefit		$	(1,862	)		$	(12	)	$	(1,874	)