Income Taxes

Components of income (loss) from continuing operations before income taxes are as follows:



	Year Ended December 31,
(millions)	2013		2012		2011
Domestic	$	202	$	92	$	(537	)
Foreign	1,142		1,264		1,039
Total	$	1,344	$	1,356	$	502

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



	Year Ended December 31,
(millions)	2013			2012			2011
Current Taxes
Federal	$	21		$	14		$	11
State	1			1			2
Foreign	144			143			155
Total Current	166			158			168
Deferred Taxes
Federal	96			60			(130		)
State	1			1			(3		)
Foreign	174			172			55
Total Deferred	271			233			(78		)
Total Income Tax Provision	$	437		$	391		$	90
Effective Tax Rate	32.5		%	28.8		%	17.9		%

A reconciliation of the federal statutory tax rate to the effective tax rate is as follows:



	Year Ended December 31,
(percentages)	2013		2012		2011
Federal Statutory Rate	35.0		35.0		35.0
Effect of
Earnings of Equity Method Investees	(5.3	)	(4.9	)	(13.3	)
State Taxes, Net of Federal Benefit	0.1		0.2		(0.1	)
Difference Between US and Foreign Rates	(6.3	)	(4.9	)	(7.0	)
Foreign Exploration Loss	2.7		(3.8	)	(4.2	)
Change in Valuation Allowance	3.8		4.3		6.6
Oil Profits Tax - Israel	0.3		0.9		2.6
Tax Contingency	0.4		1.8		—
Other, Net	1.8		0.2		(1.7	)
Effective Rate	32.5		28.8		17.9

Deferred tax assets and liabilities resulted from the following:



	December 31,
(millions)	2013			2012
Deferred Tax Assets
Loss Carryforwards	$	174		$	235
Employee Compensation & Benefits	143			134
Foreign Tax Credits	31			38
Other	56			81
Total Deferred Tax Assets	404			488
Valuation Allowance - Foreign Loss Carryforwards	(135		)	(81		)
Valuation Allowance - Foreign Tax Credits	(31		)	(38		)
Valuation Allowance - Capital Loss Carryforwards	(2		)	—
Net Deferred Tax Assets	236			369
Deferred Tax Liabilities
Property, Plant and Equipment, Principally Due to Differences in Depreciation, Amortization, Lease Impairment and Abandonments	(2,615		)	(2,481		)
Total Deferred Tax Liability	(2,615		)	(2,481		)
Net Deferred Tax Liability	$	(2,379	)	$	(2,112	)

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
(millions)	2013			2012
Deferred Income Tax Asset - Current	$	62		$	106
Deferred Income Tax Liability - Noncurrent	(2,441		)	(2,218		)
Net Deferred Tax Liability	$	(2,379	)	$	(2,112	)

Deferred Tax Assets In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the appropriate tax jurisdictions during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2013. The amount of the deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.

The valuation allowance on the deferred tax assets associated with foreign loss carryforwards totaled $135 million in 2013, $81 million in 2012, and $65 million in 2011. The changes to the valuation allowance for the loss carryforwards between periods were attributable to changes in losses on projects in new venture activities which are not yet commercial.

During 2013, as a result of execution of tax planning strategies, we reversed a $27 million deferred tax asset for future foreign tax credits from our foreign branch operations along with the corresponding valuation allowance. Additionally, we recorded a $20 million valuation allowance on excess foreign tax credits.

During 2012, as a result of execution of tax planning strategies, we reversed a $57 million deferred tax asset for future foreign tax credits from our foreign branch operations along with the corresponding valuation allowance. Additionally, we recorded a $38 million valuation allowance on excess foreign tax credits and released $12 million of deferred tax liability for a net increase in deferred income tax expense.

Effective Tax Rate Our effective tax rate increased in 2013 as compared with 2012 primarily due to a change in the funding of foreign exploration projects and an increase in the Israeli corporate income tax rate. The increase was partially offset by a release of the valuation allowance on foreign tax credits utilized on the 2012 tax return, a change to the tax contingencies, and an increase in the difference between the higher US statutory rate and lower statutory rates in jurisdictions where we are generating income, including Israel and Equatorial Guinea.

Our effective tax rate increased in 2012 as compared with 2011, primarily due to reduced impact of equity method earnings, which had the effect of decreasing the 2011 rate. The rate also increased due to additional valuation allowances and nondeductible allocation of goodwill to assets sold in 2012.

Changes in Israeli Tax Law In July 2013, the Israeli government increased the corporate income tax rate from 25% to 26.5%, effective January 2014. The change increased the deferred tax expense for 2013 by $12 million, which is reported in other, net within our effective rate reconciliation above.

Accumulated Undistributed Earnings of Foreign Subsidiaries As of December 31, 2013, the accumulated undistributed earnings of the foreign subsidiaries that have been permanently reinvested were approximately $3.7 billion. No US taxes have been recorded on these earnings. Upon distribution of earnings classified as permanently reinvested in the form of dividends or otherwise, we would likely be subject to US income taxes and foreign withholding taxes. It is not practicable, however, to determine precisely the amount of taxes that may be payable on the eventual remittance of these earnings because of the possible application of US foreign tax credits. Although we are currently claiming foreign tax credits, we may not be in a credit position when any future remittance of foreign earnings takes place, or the limitations imposed by the Internal Revenue Code and IRS Regulations may not allow the credits to be utilized during the applicable carryback and carryforward periods. However, if full use of tax credits is assumed, we estimate that the future US taxes on eventual remittance would be approximately $700 million.

Unrecognized Tax Benefits We file a consolidated income tax return in the US federal jurisdiction, and we file income tax returns in various states and foreign jurisdictions. Our income tax returns are routinely audited by the applicable revenue authorities, and provisions are routinely made in the financial statements for differences between positions taken in tax returns and amounts recognized in the financial statements in anticipation of the results of these audits.

In our major tax jurisdictions, the earliest years remaining open to examination are: U.S. - 2010, Equatorial Guinea - 2008, Israel - 2009, and China - 2010.

Our policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense. However, we did not accrue penalties at December 31, 2012 or 2011, because we believe that we are below the minimum statutory threshold for imposition of penalties.

A reconciliation of our beginning and ending amounts of unrecognized tax benefits follows:



(millions)	Twelve Months Ended December 31, 2013
Unrecognized Tax Benefits, Beginning Balance	$	23
Additions for tax positions related to current year	—
Additions for tax positions of prior years	7
Reductions for tax positions of prior years	(2		)
Settlements	—
Unrecognized Tax Benefits, Ending Balance	$	28

As of December 31, 2013, approximately $28 million of unrecognized tax benefits would impact our effective tax rate if recognized. The changes to our unrecognized tax benefits during the twelve months ended December 31, 2013 primarily resulted from changes in various foreign tax return filings and positions. The adjustments to our reserves for uncertain tax positions had a de minimis impact on our net income.

During the year ended December 31, 2013, we recognized and accrued a de minimis amount of interest and none in penalties.

We expect that our unrecognized tax benefits could continue to change due to the settlement of audits and the expiration of statutes of limitation in the next twelve months; however, we do not anticipate any such change to have a significant impact on our results of operations, financial position or cash flows in the next twelve months.