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Income Taxes
6 Months Ended
Jun. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

8.

Income Taxes

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

 

 

 

Three Months Ended June 30,

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

Current income tax expense (benefit)

 

$

(27

)

 

$

12

 

 

 

$

(23

)

 

$

32

 

Deferred income tax expense (benefit)

 

 

20

 

 

 

(17

)

 

 

 

(18

)

 

 

(32

)

Total income tax benefit

 

$

(7

)

 

$

(5

)

 

 

$

(41

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

21

%

 

 

35

%

 

 

 

21

%

 

 

35

%

State income taxes

 

 

(1

%)

 

 

0

%

 

 

 

(0

%)

 

 

2

%

Audit settlements

 

 

3

%

 

 

0

%

 

 

 

2

%

 

 

0

%

Other

 

 

(11

%)

 

 

(7

%)

 

 

 

(9

%)

 

 

(3

%)

Deferred tax asset valuation allowance

 

 

(11

%)

 

 

(30

%)

 

 

 

(8

%)

 

 

(34

%)

Effective income tax rate

 

 

1

%

 

 

(2

%)

 

 

 

6

%

 

 

0

%

 

Devon estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. Under the Tax Reform Legislation, the U.S. corporate income tax rate was reduced to 21% effective January 1, 2018.

In the table above, the “other” effect is primarily composed of permanent differences for which dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, such items have an insignificant impact on Devon’s effective income tax rate. However, these items have a more noticeable impact to the rate in the first six months of 2018 due to lower relative earnings during the period.

Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business. In the second quarter of 2018, Devon realized $14 million of income tax benefits in conjunction with favorable tax settlements as a result of these audits. Devon believes that within the next 12 months it is reasonably possible that certain tax examinations will be resolved by settlement with the taxing authorities.

During the first quarter of 2018, Devon repatriated approximately $92 million from certain international entities. This repatriation had no tax impact.

Throughout 2017 and through the first six months of 2018, Devon continued to maintain a 100% valuation allowance against its U.S. deferred tax assets resulting from prior year cumulative financial losses largely due to oil and gas impairments and significant net operating losses for U.S. federal and state income tax. Devon provided an additional $129 million to its U.S. segment valuation allowance in the first six months of 2018 based on the financial losses recorded during the period. Upon closing of the EnLink divestiture in the third quarter of 2018, Devon expects to record a gain of approximately $2.5 billion. This gain is expected to significantly reduce Devon’s U.S. deferred tax valuation allowance and Devon will further evaluate its position in the third quarter of 2018. Furthermore, a partial allowance continues to be held against certain Canadian segment deferred tax assets. During the second quarter of 2018, the Canadian segment reduced its valuation allowance by approximately $74 million.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows Devon to record provisional amounts during a measurement period not to extend beyond one year after the enactment date. As the Tax Reform Legislation was passed late in the fourth quarter of 2017 and ongoing guidance and interpretations are expected over the next 12 months, Devon considers the accounting of the transition tax, deferred tax remeasurements and other items to be incomplete due to the forthcoming guidance and ongoing analysis of Devon’s tax positions. This analysis will be materially complete upon the filing of the 2017 U.S. tax return in the fourth quarter of 2018. Devon expects to complete its analysis within the measurement period in accordance with SAB 118. No material changes to the provisional amounts recorded in the fourth quarter of 2017 have been made during the first six months of 2018.