7. INCOME TAXES

Income before income taxes is composed of the following:


	For the Year Ended December 31,
	2013		2012		2011
	(In millions)
U.S.	$	1,191	$	1,605	$	2,373
Foreign		3,025		3,272		5,720

Total	$	4,216	$	4,877	$	8,093

The total provision for income taxes consists of the following:


	For the Year Ended December 31,
	2013			2012			2011
	(In millions)
Current taxes:
Federal	$	(29	)	$	(150	)	$	64
State		—			—			2
Foreign		1,694			2,349			2,197

		1,665			2,199			2,263

Deferred taxes:
Federal		509			596			656
State		44			10			17
Foreign		(290	)		71			573

		263			677			1,246

Total	$	1,928		$	2,876		$	3,509

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,
	2013			2012			2011
	(In millions)
Income tax expense at U.S. statutory rate	$	1,476		$	1,707		$	2,833
State income tax, less federal benefit		29			6			12
Taxes related to foreign operations		200			773			568
Tax credits		6			(4	)		(15	)
Deferred tax on distributed foreign earnings		225			—			—
Current and deferred taxes related to currency fluctuations		(154	)		16			(66	)
Change in U.K. tax rate		—			118			218
Net change in tax contingencies		(10	)		(115	)		(6	)
Valuation allowances		199			355			8
All other, net		(43	)		20			(43	)

	$	1,928		$	2,876		$	3,509

The net deferred tax liability consists of the following:


	December 31,
	2013			2012
	(In millions)
Deferred tax assets:
Deferred income	$	153		$	33
Federal and state net operating loss carryforwards		900			932
Foreign net operating loss carryforwards		156			61
Tax credits		66			78
Accrued expenses and liabilities		162			2
Asset retirement obligation		1,231			1,677

Total deferred tax assets		2,668			2,783
Valuation allowance		(651	)		(419	)

Net deferred tax assets		2,017			2,364

Deferred tax liabilities:
Other		29			23
Depreciation, depletion and amortization		10,224			10,213

Total deferred tax liabilities		10,253			10,236

Net deferred income tax liability	$	8,236		$	7,872

The Company has recorded a valuation allowance against the net deferred tax asset in Argentina and Canada and against certain state net operating losses. The Company has assessed the future potential realization of these deferred tax assets and has concluded that it is more likely than not that these deferred tax assets will not be realized based on current economic conditions. In 2013, 2012, and 2011, the Company increased its valuation allowance by $232 million, $359 million, and $7 million, respectively.

On November 14, 2013, the Company completed the formation of its strategic partnership with Sinopec, whereby the Company received $2.95 billion in exchange for a one-third minority participation interest in Apache’s Egypt oil and gas business. As a result of the transaction, the Company reassessed its position with respect to certain current year untaxed foreign earnings to treat the reinvestment of these earnings as not permanent in duration. As such, the Company recorded a $225 million deferred tax charge on current year foreign earnings deemed not permanently reinvested. The Company repatriated approximately $643 million of cash from foreign subsidiaries and utilized net operating losses to offset any U.S. current income tax expense.

The Company considers the undistributed earnings of its foreign subsidiaries to be permanently reinvested, as it has no current intention to repatriate these earnings. As such, deferred income taxes are not provided for temporary differences of approximately $17 billion at December 31, 2013, representing unremitted earnings of subsidiaries outside the United States intended to be permanently reinvested. Upon an actual or deemed 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 practicable, 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, 2013, the Company had net operating losses as follows:


	December 31, 2013
	Amount		Expiration
	(In millions)
Net operating losses:
U.S. — Federal	$	1,558		2032 - 2034
U.S. — Federal (Mariner IRC §382 limited)		520		2018 - 2030
U.S. — Federal (Cordillera IRC §382 limited)		183		2026 - 2032
U.S. — State		2,242		Various
Canada		5		2014
Australia		59		Indefinite
Argentina		299		2014

The Company has a federal net operating loss carryforward of $2.3 billion. Included in the federal net operating loss carryforward is $520 million of federal net operating losses related to the 2010 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 has $186 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 discussed above, the Company does not believe the utilization of the Argentine net operating losses, Canadian capital losses, and certain state net operating losses to be “more likely than not.” As such, a valuation allowance was provided against these deferred tax assets.

The Company 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:


	2013		2012			2011
	(In millions)
Balance at beginning of year	$	3	$	97		$	110
Additions based on tax positions related to the current year		—		4			13
Reductions for tax positions of prior years		—		(33	)		(4	)
Settlements		—		(65	)		(22	)

Balance at end of year	$	3	$	3		$	97

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, 2013, 2012, and 2011 the Company recorded tax expense of $1 million, $5 million, and $6 million, respectively, for interest and penalties. As of December 31, 2013 and 2012, the Company had approximately $1 million and $5 million, respectively, accrued for payment of interest and penalties.

The Company is under IRS audit for 2011 and 2012 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 2013, the Company reached an agreement with the IRS regarding an audit of the 2009 and 2010 tax years. There was no change in the Company’s unrecognized tax benefit as a result of the 2009 and 2010 IRS settlement. In 2012, the Company reached an agreement with the IRS Administrative Appeals office regarding the audits of tax years 2004 through 2008. As a result of this agreement, the Company reduced its 2012 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.			2010
Canada			2009
Egypt			1998
Australia			2009
U.K.			2011
Argentina			2006