INCOME TAXES

Loss from continuing operations before income taxes is composed of the following:



	For the Year Ended December 31,
	2016			2015			2014
	(In millions)
U.S.	$	(997	)	$	(9,386	)	$	(4,807	)
Foreign	(685		)	(2,783		)	(2,023		)
Total	$	(1,682	)	$	(12,169	)	$	(6,830	)

The total income tax provision (benefit) from continuing operations consists of the following:



	For the Year Ended December 31,
	2016			2015			2014
	(In millions)
Current income taxes:
Federal	$	(14	)	$	363		$	(10	)
State	(30		)	41			1
Foreign	435			31			1,290
	391			435			1,281
Deferred income taxes:
Federal	(257		)	(1,123		)	(671		)
State	—			(51		)	(45		)
Foreign	(576		)	(271		)	(1,083		)
	(833		)	(1,445		)	(1,799		)
Total	$	(442	)	$	(1,010	)	$	(518	)

The total income tax provision (benefit) differs from the amounts computed by applying the U.S. statutory income tax rate to loss before income taxes. A reconciliation of the tax on the Company’s loss from continuing operations before income taxes and total tax expense is shown below:



	For the Year Ended December 31,
	2016			2015			2014
	(In millions)
Income tax expense (benefit) at U.S. statutory rate	$	(589	)	$	(4,259	)	$	(2,391	)
State income tax, less federal effect⁽¹⁾	(19		)	(7		)	(28		)
Taxes related to foreign operations	303			(662		)	(147		)
Tax credits	(1		)	(6		)	—
Tax on distributed foreign earnings	80			726			311
Foreign tax credits	(136		)	(2,090		)	—
Deferred tax on undistributed foreign earnings	(31		)	1,903			560
Tax impact of goodwill adjustments	—			82			161
Change in U.K. tax rate	(238		)	(414		)	—
Net change in tax contingencies	(19		)	20			(3		)
Canadian USD functional currency election	158			—			—
Valuation allowances⁽¹⁾	10			3,746			1,021
All other, net	40			(49		)	(2		)
	$	(442	)	$	(1,010	)	$	(518	)


(1)	The change in state valuation allowance is included as a component of state income tax.

The net deferred income tax liability reflects the net tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under the U.S. GAAP method of accounting and amounts utilized for income tax purposes. The net deferred income tax liability consists of the following:



	December 31,
	2016			2015
	(In millions)
Deferred tax assets:
Deferred income	$	105		$	20
U.S. and state net operating losses	1,095			329
Foreign net operating losses	1,424			1,507
Tax credits and other tax incentives	62			82
Foreign tax credits	2,226			2,090
Accrued expenses and liabilities	153			136
Asset retirement obligation	875			1,037
Property and equipment	1,189			1,534
Total deferred tax assets	7,129			6,735
Valuation allowance	(5,401		)	(5,434		)
Net deferred tax assets	1,728			1,301
Deferred tax liabilities:
Deferred income	—			140
Investment in foreign subsidiaries	1,872			1,903
Equity investments	23			5
Property and equipment	1,533			1,773
Other	5			4
Total deferred tax liabilities	3,433			3,825
Net deferred income tax liability	$	1,705		$	2,524

Net deferred tax assets and liabilities are included in the consolidated balance sheet as follows:



	December 31,
	2016		2015
	(In millions)
Assets:
Deferred charges and other	$	5	$	5
Liabilities:
Deferred income taxes	1,710		2,529
Net deferred income tax liability	$	1,705	$	2,524

In 2016, the U.K. government enacted Finance Bill 2016, which provides tax relief to E&P companies operating in the North Sea through a reduction of Supplementary Charge from 20 percent to 10 percent, effective January 1, 2016. As a result of the enacted legislation, in 2016, Apache recorded a deferred tax benefit of $238 million related to the remeasurement of the Company’s December 31, 2015 U.K. deferred income tax liability.

In 2015, Apache repatriated the sales proceeds from the divestment of its interest in LNG projects and Australian upstream assets. Upon the repatriation of these proceeds, Apache recognized a U.S. current income tax liability of $560 million. Also in 2015, the U.K. government enacted Finance Bill 2015, which provided a reduction of Supplementary Charge from 32 percent to 20 percent, effective January 1, 2015. As a result of the enacted legislation, in 2015, Apache recorded a deferred tax benefit of $414 million related to the remeasurement of the Company’s December 31, 2014 U.K. deferred income tax liability.

In 2014, Apache evaluated its permanent reinvestment position and determined that undistributed earnings from certain foreign subsidiaries located in Apache’s Australia, Egypt, and North Sea regions will no longer be permanently reinvested. As a result of this change in position, the Company recorded $560 million of U.S. deferred income tax expense on undistributed earnings that were previously considered permanently reinvested as a component of continuing operations. In addition, the Company recorded $311 million of U.S. deferred income tax expense on foreign earnings that were distributed to the U.S. in 2014. The Company’s Canadian subsidiaries do not currently have undistributed earnings.

The Company has recorded an increase in valuation allowance against certain deferred tax assets, primarily driven by asset impairments. The Company has assessed the future potential to realize 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 and expectations for the future.

In 2016, 2015, and 2014, the Company's valuation allowance decreased by $33 million, increased by $3.9 billion, and increased by $966 million, respectively, as detailed in the table below:



	2016			2015		2014
	(In millions)
Balance at beginning of year	$	5,434		$	1,564	$	598
State⁽¹⁾	(43		)	151		62
U.S.	139			2,159		—
Foreign⁽²⁾	(129		)	1,560		1,021
Discontinued operations⁽³⁾	—			—		(117		)
Balance at end of year	$	5,401		$	5,434	$	1,564


(1)	Reported as a component of state income taxes.


(2)	In 2015, Apache’s subsidiaries completed the sale of its interest in the Kitimat LNG project. As such, the deferred tax assets, liabilities, and valuation allowance related to the project were removed for 2015.


(3)	In 2014, Apache’s subsidiaries completed the sale of all of the Company’s operations in Argentina. As such, the deferred tax assets, liabilities, and valuation allowance related to Argentina were removed for 2014.

On December 31, 2016, the Company had net operating losses as follows:



	Amount		Expiration
	(In millions)
Net operating losses:
U.S.	$	2,452	2018 - 2037
State	4,774		Various
Canada	125		2028 - 2035

The Company has a U.S. net operating loss carryforward of $2.5 billion, which includes $197 million of net operating loss subject to annual limitation under Section 382 of the Internal Revenue Code. The Company also has $829 million of capital loss carryforwards in Canada, which have an indefinite carryover period. The Company has recorded a valuation allowance against the U.S. net operating loss subject to Section 382 limitation, the state net operating loss, the Canadian net operating loss, and the Canadian capital loss because it is probable that these attributes will expire unutilized.

On December 31, 2016, the Company had foreign tax credits as follows:

The Company has a $2.2 billion U.S. foreign tax credit carryforward. The Company has recorded a valuation allowance against the U.S. foreign tax credits listed above because it is probable that these attributes will expire unutilized.

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. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2016			2015		2014
	(In millions)
Balance at beginning of year	$	19		$	—	$	3
Additions based on tax positions related to the current year	15			19		—
Reductions for tax positions of prior years	(19		)	—		(3		)
Balance at end of year	$	15		$	19	$	—

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, 2016, 2015, and 2014 the Company recorded tax expense of nil, tax expense of $1 million, and tax benefit of $1 million, respectively, for interest and penalties. At December 31, 2016, 2015, and 2014 the Company had an accrued liability for interest and penalties of nil, $1 million, and nil, respectively.

In 2016 and 2015, the Company recorded a $4 million net reduction and a $19 million increase in its reserve for uncertain tax positions, respectively. In 2014, the Internal Revenue Service concluded its audit of the 2011 and 2012 tax years, and the Company reduced its unrecognized tax benefit by $3 million as a result of the conclusion of this audit.

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.	2012
Canada	2012
Egypt	1998
U.K.	2014

Expiration

(In millions)

Foreign tax credits