INCOME TAXES

12 Months Ended

Dec. 31, 2019

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



	For the Year Ended December 31,
	2019			2018			2017
	(In millions)
U.S.	$	(4,397	)	$	(723	)	$	(3,620	)
Foreign	1,389			1,681			4,538
Total	$	(3,008	)	$	958		$	918

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



	For the Year Ended December 31,
	2019			2018			2017
	(In millions)
Current income taxes:
Federal	$	1		$	(1	)	$	(38	)
State	—			—			(8		)
Foreign	659			895			641
	660			894			595
Deferred income taxes:
Federal	67			(65		)	(1,010		)
State	—			2			—
Foreign	(53		)	(159		)	(170		)
	14			(222		)	(1,180		)
Total	$	674		$	672		$	(585	)

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) before income taxes and total tax expense is shown below:



	For the Year Ended December 31,
	2019			2018			2017
	(In millions)
Income tax expense (benefit) at U.S. statutory rate	$	(631	)	$	201		$	321
State income tax, less federal effect⁽¹⁾	1			2			(6		)
Taxes related to foreign operations	328			436			(105		)
Tax credits	(6		)	(13		)	(33		)
Tax on deemed repatriation of foreign earnings	—			103			419
Foreign tax credits	—			(336		)	(201		)
Deferred tax on undistributed foreign earnings	—			—			(1,872		)
Change in U.S. tax rate	—			161			516
Net change in tax contingencies	1			(2		)	(1		)
Sale of Canadian assets	—			—			279
Sale of North Sea assets	—			(30		)	(48		)
Valuation allowances⁽¹⁾	972			118			161
All other, net	9			32			(15		)
	$	674		$	672		$	(585	)


(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,
	2019			2018
	(In millions)
Deferred tax assets:
U.S. and state net operating losses	$	2,108		$	1,633
Capital losses	626			636
Tax credits and other tax incentives	32			39
Foreign tax credits	2,241			2,241
Accrued expenses and liabilities	97			117
Asset retirement obligation	618			649
Equity investments	—			4
Investment in Altus Midstream LP	107			—
Net interest expense limitation	162			65
Lease liability	108			—
Other	88			97
Total deferred tax assets	6,187			5,481
Valuation allowance	(4,959		)	(3,947		)
Net deferred tax assets	1,228			1,534
Deferred tax liabilities:
Deferred income	1			10
Investment in Altus Midstream LP	—			73
Property and equipment	1,432			1,747
Right-of-use asset	106			—
Other	6			4
Total deferred tax liabilities	1,545			1,834
Net deferred income tax liability	$	317		$	300

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



	December 31,
	2019		2018
	(In millions)
Assets:
Deferred charges and other	$	29	$	91
Liabilities:
Deferred income taxes	346		391
Net deferred income tax liability	$	317	$	300

On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA) 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 TCJA 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 TCJA.

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 TCJA. SAB 118 provides a measurement period which should not extend beyond one year of the enactment date of the TCJA. 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 TCJA in the fourth quarter of 2018.

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 2019, 2018, and 2017, the Company’s valuation allowance increased by $1.0 billion, increased by $131 million, and decreased by $1.6 billion, respectively, as detailed in the table below:



	2019		2018			2017
	(In millions)
Balance at beginning of year	$	3,947	$	3,816		$	5,401
State⁽¹⁾	41		15			139
U.S.	971		124			905
Foreign⁽²⁾	—		(8		)	(2,629		)
Balance at end of year	$	4,959	$	3,947		$	3,816


(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, 2019, the Company had net operating losses as follows:



	Amount		Expiration
	(In millions)
Net operating losses:
U.S.	$	8,052	2019 - Indefinite
State	6,090		Various

The Company has a U.S. net operating loss carryforward of $8.1 billion, which includes $196 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 with indefinite carryover under the TCJA. The Company also has a net interest expense carryover of $735 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 expiring in 2023 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, 2019, 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:



	2019		2018			2017
	(In millions)
Balance at beginning of year	$	24	$	26		$	15
Additions based on tax positions related to prior year	49		—			—
Additions based on tax positions related to the current year	9		—			12
Reductions for tax positions of prior years	—		(2		)	(1		)
Balance at end of year	$	82	$	24		$	26

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, 2019, 2018, and 2017, the Company recorded tax expense of $1 million, $1 million, and nil, respectively, for interest and penalties. At December 31, 2019, 2018, and 2017, the Company had an accrued liability for interest and penalties of $2 million, $1 million, and nil, respectively.

In 2019, 2018, and 2017, the Company recorded a $58 million net increase, $2 million net reduction, and an $11 million net increase, respectively, in its reserve for uncertain tax positions. The 2019 increase of unrecognized tax benefits is primarily related to the Company’s interpretation of certain proposed regulations issued since the passage of the TCJA. The Company is currently under IRS audit for the 2014 through 2017 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.	2018

Expiration

(In millions)

Foreign tax credits