INCOME TAXES

Income (loss) from continuing operations before income taxes is composed of the following:



	For the Year Ended December 31,
	2017			2016			2015
	(In millions)
U.S.	$	(3,620	)	$	(997	)	$	(9,386	)
Foreign	4,538			(685		)	(2,783		)
Total	$	918		$	(1,682	)	$	(12,169	)

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



	For the Year Ended December 31,
	2017			2016			2015
	(In millions)
Current income taxes:
Federal	$	(38	)	$	(14	)	$	363
State	(8		)	(30		)	41
Foreign	641			435			31
	595			391			435
Deferred income taxes:
Federal	(1,010		)	(257		)	(1,123		)
State	—			—			(51		)
Foreign	(170		)	(576		)	(271		)
	(1,180		)	(833		)	(1,445		)
Total	$	(585	)	$	(442	)	$	(1,010	)

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



	For the Year Ended December 31,
	2017			2016			2015
	(In millions)
Income tax expense (benefit) at U.S. statutory rate	$	321		$	(589	)	$	(4,259	)
State income tax, less federal effect⁽¹⁾	(6		)	(19		)	(7		)
Taxes related to foreign operations	(105		)	303			(662		)
Tax credits	(33		)	(1		)	(6		)
Tax on distributed foreign earnings	—			80			726
Tax on deemed repatriation of foreign earnings	419			—			—
Foreign tax credits	(201		)	(136		)	(2,090		)
Deferred tax on undistributed foreign earnings	(1,872		)	(31		)	1,903
Tax impact of goodwill adjustments	—			—			82
Change in U.K. tax rate	—			(238		)	(414		)
Change in U.S. tax rate	516			—			—
Net change in tax contingencies	(1		)	(19		)	20
Canadian USD functional currency election	—			158			—
Sale of Canadian assets	279			—			—
Sale of North Sea GTP assets	(48		)	—			—
Valuation allowances⁽¹⁾	161			10			3,746
All other, net	(15		)	40			(49		)
	$	(585	)	$	(442	)	$	(1,010	)


(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 GAAP and amounts utilized for income tax purposes. The net deferred income tax liability consists of the following:



	December 31,
	2017			2016
	(In millions)
Deferred tax assets:
Deferred income	$	13		$	105
U.S. and state net operating losses	1,230			1,095
Capital losses	620			—
Foreign net operating losses	6			1,424
Tax credits and other tax incentives	28			62
Foreign tax credits	2,427			2,226
Accrued expenses and liabilities	110			153
Asset retirement obligation	629			875
Property and equipment	—			1,189
Other	42			—
Total deferred tax assets	5,105			7,129
Valuation allowance	(3,816		)	(5,401		)
Net deferred tax assets	1,289			1,728
Deferred tax liabilities:
Investment in foreign subsidiaries	—			1,872
Equity investments	18			23
Property and equipment	1,798			1,533
Other	—			5
Total deferred tax liabilities	1,816			3,433
Net deferred income tax liability	$	527		$	1,705

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



	December 31,
	2017		2016
	(In millions)
Assets:
Deferred charges and other	$	18	$	5
Liabilities:
Deferred income taxes	545		1,710
Net deferred income tax liability	$	527	$	1,705

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. In addition to reducing the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018, certain provisions in the Act move the U.S. away from a worldwide tax system and closer to a territorial system for earnings of foreign corporations, establishing a participation exemption system for taxation of foreign income. The new law includes a transition rule to effect this participation exemption regime. As a result of the enacted legislation, taxpayers are required to include in taxable income for the tax year ending December 31, 2017, the pro rata share of deferred income of each specified foreign corporation with respect to which the taxpayer is a U.S. shareholder. In 2017, the Company recorded a provisional net deferred tax benefit of $822 million to reverse a previously recorded deferred tax liability for unrepatriated earnings and to account for the transition rule under the new law.

In addition and as a result of the decrease in the corporate income tax rate, the Company recorded a provisional $516 million deferred tax expense in 2017 related to the remeasurement of the Company’s December 31, 2017 deferred tax asset.

The Company continues to assess other provisions of the Act including, among other items, the interaction between the deemed repatriation of foreign earnings and 2017 net operating losses as well as the applicability of new taxes on certain future foreign earnings. Provisional amounts for the income tax effects of the Act have been recorded as of December 31, 2017 and are subject to change during 2018.

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.

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 2017, 2016, and 2015, the Company’s valuation allowance decreased by $1.6 billion, decreased by $33 million, and increased by $3.9 billion, respectively, as detailed in the table below:



	2017			2016			2015
	(In millions)
Balance at beginning of year	$	5,401		$	5,434		$	1,564
State⁽¹⁾	139			(43		)	151
U.S.	905			139			2,159
Foreign⁽²⁾	(2,629		)	(129		)	1,560
Balance at end of year	$	3,816		$	5,401		$	5,434


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

(2)

In 2017, the Company completed the sale of its Canadian assets. As such, except for capital losses incurred on the sale, the deferred tax assets, liabilities, and valuation allowance related to these assets were removed for 2017. 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.

On December 31, 2017, the Company had net operating losses as follows:



	Amount		Expiration
	(In millions)
Net operating losses:
U.S.	$	4,037	2018 - 2038
State	5,301		Various

The Company has a U.S. net operating loss carryforward of $4.0 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 a U.S. capital loss carryforward of $1.8 billion, which has a five year carryover period and a Canadian capital loss carryforward of $836 million which has an indefinite carryover. The Company has recorded a full valuation allowance against the U.S. net operating losses, the state net operating losses, the U.S. capital loss and the Canadian capital loss because it is probable that these attributes will not be realized.

On December 31, 2017, the Company had foreign tax credits as follows:

The Company has a $2.4 billion U.S. foreign tax credit carryforward. The Company has recorded a full 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:



	2017			2016			2015
	(In millions)
Balance at beginning of year	$	15		$	19		$	—
Additions based on tax positions related to the current year	12			15			19
Reductions for tax positions of prior years	(1		)	(19		)	—
Balance at end of year	$	26		$	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 or reduce the amount of interest and penalties. During the years ended December 31, 2017 and 2016, the Company recorded no tax expense for interest and penalties. During the year ended December 31, 2015, the Company recorded tax expense of $1 million for interest and penalties. At December 31, 2017 and 2016, the Company had no accrued liability for interest and penalties. At December 31, 2015, the Company had an accrued liability for interest and penalties of $1 million.

In 2017, 2016 and 2015, the Company recorded an $11 million net increase, $4 million net reduction, and a $19 million increase in its reserve for uncertain tax positions, respectively. In April 2017, the Internal Revenue Service (IRS) began their audit of the Company’s 2014 income tax year.

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
Egypt	1998
U.K.	2016

Expiration

(In millions)

Foreign tax credits