7. INCOME TAXES

Income before income taxes is composed of the following:


	For the Year Ended December 31,
	2012		2011		2010
	(In millions)
U.S.	$	1,605	$	2,373	$	1,328
Foreign		3,272		5,720		3,878

Total	$	4,877	$	8,093	$	5,206

The total provision for income taxes consists of the following:


	For the Year Ended December 31,
	2012			2011		2010
	(In millions)
Current taxes:
Federal	$	(150	)	$	64	$	25
State		—			2		4
Foreign		2,349			2,197		1,193

		2,199			2,263		1,222

Deferred taxes:
Federal		596			656		431
State		10			17		7
Foreign		71			573		514

		677			1,246		952

Total	$	2,876		$	3,509	$	2,174

A reconciliation of the tax on the Company’s income before income taxes and total tax expense is shown below:


	For the Year Ended December 31,
	2012			2011			2010
	(In millions)
Income tax expense at U.S. statutory rate	$	1,707		$	2,833		$	1,822
State income tax, less federal benefit		6			12			6
Taxes related to foreign operations		773			568			245
Tax credits		(4	)		(15	)		(8	)
Non-deductible merger costs		—			—			6
Current and deferred taxes related to currency fluctuations		16			(66	)		111
Increase in U.K. tax rate		118			218			—
Net change in tax contingencies		(115	)		(6	)		(2	)
Increase in valuation allowance		355			8			12
All other, net		20			(43	)		(18	)

	$	2,876		$	3,509		$	2,174

The net deferred tax liability consists of the following:


	December 31,
	2012			2011
	(In millions)
Deferred tax assets:
Deferred income	$	(33	)	$	(89	)
Federal and state net operating loss carryforwards		(932	)		(236	)
Foreign net operating loss carryforwards		(61	)		(55	)
Tax credits		(78	)		(66	)
Accrued expenses and liabilities		(2	)		(90	)

Total deferred tax assets		(1,106	)		(536	)
Valuation allowance		419			60

Net deferred tax assets		(687	)		(476	)

Deferred tax liabilities:
Other		23			21
Depreciation, depletion and amortization		8,536			7,443

Total deferred tax liabilities		8,559			7,464

Net deferred income tax liability	$	7,872		$	6,988

The Company has recorded a valuation allowance against the net deferred tax asset in Canada. The deferred tax position in Canada changed from a net deferred tax liability as of December 31, 2011 to a net deferred tax asset as of December 31, 2012 on $1.9 billion in non-cash ceiling test write-downs. The Company has assessed the realizability of the net deferred tax asset in Canada and has concluded that it is more likely than not that the net deferred tax asset in Canada will not be realized based on current economic conditions.

The Company has not recorded U.S. deferred income taxes on the undistributed earnings of its foreign subsidiaries, as management intends to permanently reinvest such earnings. As of December 31, 2012, the undistributed earnings of the foreign subsidiaries amounted to approximately $15.9 billion. Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings after consideration of available foreign tax credits. Presently, limited foreign tax credits are available to reduce the U.S. taxes on such amounts if repatriated.

On December 31, 2012, the Company had net operating losses as follows:


	December 31, 2012
	Amount		Expiration
	(In millions)
Net operating losses:
U.S. — Federal	$	2,393	2027
U.S. — State		1,648	Various
Canada		6	2014
Australia		94	Indefinite
Argentina		55	2013

The Company has a federal net operating loss carryforward of $2.4 billion. Included in the federal net operating loss carryforward is $543 million of federal net operating losses related to the merger with Mariner and $183 million of federal net operating losses related to the Cordillera acquisition. The Mariner and Cordillera net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code. The Company also had $170 million of capital loss carryforwards in Canada, which have an indefinite carryover period.

The tax benefits of carryforwards are recorded as assets to the extent that management assesses the utilization of such carryforwards to be “more likely than not.” When the future utilization of some portion of the carryforwards is determined to not meet the “more likely than not” standard, a valuation allowance is provided to reduce the tax benefits from such assets. As the Company does not believe the utilization of certain state net operating losses, Argentinian net operating losses, and Canadian capital losses to be “more likely than not,” a valuation allowance was provided to reduce the tax benefit from these deferred tax assets.

Apache accounts for income taxes in accordance with ASC Topic 740, “Income Taxes,” which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2012			2011			2010
	(In millions)
Balance at beginning of year	$	97		$	110		$	123
Additions based on tax positions related to the current year		—			13			(1	)
Reductions for tax positions of prior years		(29	)		(4	)		(12	)
Settlements		(65	)		(22	)		—

Balance at end of year	$	3		$	97		$	110

The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter the Company assesses the amounts provided for and, as a result, may increase (expense) or reduce (benefit) the amount of interest and penalties. During the years ended December 31, 2012, 2011, and 2010 the Company recorded tax expense of $5 million, $6 million, and $12 million, respectively, for interest and penalties. As of December 31, 2012 and 2011, the Company had approximately $6 million and $42 million, respectively, accrued for payment of interest and penalties.

The Company is under IRS audit for 2009 and 2010 and under audit in various states as well as in most of the Company’s foreign jurisdictions as part of its normal course of business. In 2012, the Company reached an agreement with IRS Administrative Appeals office regarding the audits of tax years 2004 through 2008. As a result of this agreement, the Company has reduced the unrecognized tax benefit by $65 million. The resolution of unagreed tax issues in the Company’s open tax years cannot be predicted with absolute certainty, and differences between what has been recorded and the eventual outcomes may occur. The Company believes that it has adequately provided for income taxes and any related interest and penalties for all open tax years.

Apache and its subsidiaries are subject to U.S. federal income tax as well as income tax in various states and foreign jurisdictions. The Company’s uncertain tax positions are related to tax years that may be subject to examination by the relevant taxing authority. Apache’s earliest open tax years in its key jurisdictions are as follows:


Jurisdiction
U.S.			2004
Canada			2008
Egypt			1998
Australia			2008
U.K.			2011
Argentina			2005