INCOME TAXES

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



	For the Year Ended December 31,
	2018			2017			2016
	(In millions)
U.S.	$	(723	)	$	(3,620	)	$	(997	)
Foreign	1,681			4,538			(685		)
Total	$	958		$	918		$	(1,682	)

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



	For the Year Ended December 31,
	2018			2017			2016
	(In millions)
Current income taxes:
Federal	$	(1	)	$	(38	)	$	(14	)
State	—			(8		)	(30		)
Foreign	895			641			435
	894			595			391
Deferred income taxes:
Federal	(65		)	(1,010		)	(257		)
State	2			—			—
Foreign	(159		)	(170		)	(576		)
	(222		)	(1,180		)	(833		)
Total	$	672		$	(585	)	$	(442	)

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,
	2018			2017			2016
	(In millions)
Income tax expense (benefit) at U.S. statutory rate	$	201		$	321		$	(589	)
State income tax, less federal effect⁽¹⁾	2			(6		)	(19		)
Taxes related to foreign operations	436			(105		)	303
Tax credits	(13		)	(33		)	(1		)
Tax on distributed foreign earnings	—			—			80
Tax on deemed repatriation of foreign earnings	103			419			—
Foreign tax credits	(336		)	(201		)	(136		)
Deferred tax on undistributed foreign earnings	—			(1,872		)	(31		)
Change in U.K. tax rate	—			—			(238		)
Change in U.S. tax rate	161			516			—
Net change in tax contingencies	(2		)	(1		)	(19		)
Canadian USD functional currency election	—			—			158
Sale of Canadian assets	—			279			—
Sale of North Sea assets	(30		)	(48		)	—
Valuation allowances⁽¹⁾	118			161			10
All other, net	32			(15		)	40
	$	672		$	(585	)	$	(442	)


(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,
	2018			2017
	(In millions)
Deferred tax assets:
Deferred income	$	—		$	13
U.S. and state net operating losses	1,633			1,230
Capital losses	636			620
Foreign net operating losses	—			6
Tax credits and other tax incentives	39			28
Foreign tax credits	2,241			2,427
Accrued expenses and liabilities	117			110
Asset retirement obligation	649			629
Equity investments	4			—
Net interest expense limitation	65			—
Other	97			42
Total deferred tax assets	5,481			5,105
Valuation allowance	(3,947		)	(3,816		)
Net deferred tax assets	1,534			1,289
Deferred tax liabilities:
Deferred income	10			—
Equity investments	—			18
Investment in Altus Midstream LP	73			—
Property and equipment	1,747			1,798
Other	4			—
Total deferred tax liabilities	1,834			1,816
Net deferred income tax liability	$	300		$	527

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



	December 31,
	2018		2017
	(In millions)
Assets:
Deferred charges and other	$	91	$	18
Liabilities:
Deferred income taxes	391		545
Net deferred income tax liability	$	300	$	527

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 were 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 $419 million provisional deferred tax expense attributable to the deemed repatriation of foreign earnings required under the Act.

Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) which provides guidance for the application of ASC Topic 740, Income Taxes, for the income tax effects of the Act. SAB 118 provides a measurement period which should not extend beyond one year of the enactment date of the Act. In 2018, the Company recorded an additional $103 million deferred tax expense attributable to the deemed repatriation of foreign earnings. This deferred tax expense combined with the provisional amount recorded in 2017 were fully offset by available foreign tax credits. Additional guidance issued by the Internal Revenue Service in 2018 clarified, among other things, the ability for taxpayers generating current tax losses to utilize foreign tax credits to fully offset taxes attributable to the deemed repatriation of foreign earnings, rather than utilizing 2017 current year losses. In light of the new guidance, the Company increased its 2017 net operating losses by $1.2 billion, which resulted in incremental $161 million deferred tax expense associated with the remeasurement of the 2017 net operating loss deferred tax asset from 35 percent to 21 percent. The Company completed its analysis of the income tax effects of the Act in the fourth quarter of 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.

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 2018, 2017, and 2016, the Company’s valuation allowance increased by $131 million, decreased by $1.6 billion, and decreased by $33 million, respectively, as detailed in the table below:



	2018			2017			2016
	(In millions)
Balance at beginning of year	$	3,816		$	5,401		$	5,434
State⁽¹⁾	15			139			(43		)
U.S.	124			905			139
Foreign⁽²⁾	(8		)	(2,629		)	(129		)
Balance at end of year	$	3,947		$	3,816		$	5,401


(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.

On December 31, 2018, the Company had net operating losses as follows:



	Amount		Expiration
	(In millions)
Net operating losses:
U.S.	$	5,888	2018 - Indefinite
State	5,664		Various

The Company has a U.S. net operating loss carryforward of $5.9 billion, which includes $197 million of net operating loss subject to annual limitation under Section 382 of the Internal Revenue Code (Code). Net operating losses generated in tax years beginning after 2017 are subject to an 80 percent taxable income limitation under the Act. The Company also has a net interest expense carryover of $289 million under Section 163(j) of the Code subject to indefinite carryover, 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 net interest expense carryover, the U.S. capital loss, and the Canadian capital loss because it is probable that these attributes will not be realized.

On December 31, 2018, 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 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:



	2018			2017			2016
	(In millions)
Balance at beginning of year	$	26		$	15		$	19
Additions based on tax positions related to the current year	—			12			15
Reductions for tax positions of prior years	(2		)	(1		)	(19		)
Balance at end of year	$	24		$	26		$	15

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, 2018, 2017, and 2016, the Company recorded tax expense of $1 million, nil, and nil, respectively, for interest and penalties. At December 31, 2018, 2017, and 2016, the Company had an accrued liability for interest and penalties of $1 million, nil, and nil, respectively.

In 2018, 2017, and 2016, the Company recorded a $2 million net reduction, $11 million net increase, and a $4 million net reduction in its reserve for uncertain tax positions, respectively. The Company is currently under IRS audit for the 2014, 2015, and 2016 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.	2014
Egypt	2005
U.K.	2017

Expiration

(In millions)

Foreign tax credits