Note 11. Income Taxes

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



	Year Ended December 31,
(millions)	2015			2014		2013
Domestic	$	(2,338	)	$	282	$	202
Foreign	119			1,428		1,142
Total	$	(2,219	)	$	1,710	$	1,344

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



	Year Ended December 31,
(millions)	2015			2014			2013
Current Taxes
Federal	$	(1	)	$	19		$	21
State	—			1			1
Foreign	107			208			144
Total Current	106			228			166
Deferred Taxes
Federal	216			237			96
State	(5		)	13			1
Foreign	(95		)	18			174
Total Deferred	116			268			271
Total Income Tax Provision	$	222		$	496		$	437
Effective Tax Rate	(10.0		)%	29.0		%	32.5		%

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



	Year Ended December 31,
(percentages)	2015		2014		2013
Federal Statutory Rate	35.0	%	35.0	%	35.0	%
Effect of
Earnings of Equity Method Investees	0.6		(3.3	)	(5.3	)
State Taxes, Net of Federal Benefit	0.3		0.8		0.1
Difference Between US and Foreign Rates	2.6		(14.2	)	(6.3	)
Foreign Exploration Loss	2.7		—		2.7
Change in Valuation Allowance	—		1.9		3.8
Oil Profits Tax - Israel	0.1		0.2		0.3
Tax Contingency	0.4		0.1		0.4
Accumulated Undistributed Foreign Earnings	(37.7	)	8.2		—
Goodwill Impairment	(12.3	)	—		—
Other, Net	(1.7	)	0.3		1.8
Effective Rate	(10.0	)%	29.0	%	32.5	%

Deferred tax assets and liabilities resulted from the following:



	December 31,
(millions)	2015			2014
Deferred Tax Assets
Loss Carryforwards	$	468		$	170
Employee Compensation and Benefits	151			149
Foreign Tax Credits	—			67
Other	81			51
Total Deferred Tax Assets	$	700		$	437
Valuation Allowance - Foreign Loss Carryforwards	(206		)	(145		)
Valuation Allowance - Foreign Tax Credits	—			(67		)
Valuation Allowance - Capital Loss Carryforwards	—			(1		)
Net Deferred Tax Assets	$	494		$	224
Deferred Tax Liabilities
Mark to Market of Commodity Derivative Instruments	(128		)	(209		)
Accumulated Undistributed Foreign Earnings	(368		)	(141		)
Property, Plant and Equipment, Principally Due to Differences in Depreciation, Amortization, Lease Impairment and Abandonments	(2,824		)	(2,548		)
Total Deferred Tax Liability	$	(3,320	)	$	(2,898	)
Net Deferred Tax Liability	$	(2,826	)	$	(2,674	)

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



	December 31,
(millions)	2015			2014
Deferred Income Tax Liability - Current ⁽¹⁾	$	—		$	(158	)
Deferred Income Tax Liability - Noncurrent ⁽¹⁾	(2,826		)	(2,516		)
Net Deferred Tax Liability	$	(2,826	)	$	(2,674	)

⁽¹⁾As discussed in Note 1. Summary of Significant Accounting Policies, we have elected to early adopt and apply the presentation requirements of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, as of December 31, 2015. Prior periods have not been retrospectively adjusted.

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, 2015. 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 $206 million in 2015 and $145 million in 2014. 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 2015, as a result of cash repatriation, we released a valuation allowance of $60 million on our foreign tax credits.

During fourth quarter 2014, fluctuations in crude oil and natural gas prices resulted in an inability to determine whether we would be able to utilize all of our foreign tax credits in the future. Therefore, we set up a deferred tax liability of $141 million on our accumulated undistributed foreign earnings and a corresponding valuation allowance of $36 million on our foreign tax credits.

Rosetta Merger On July 20, 2015, we completed the Rosetta Merger. For federal income tax purposes, the merger qualified as a tax free merger and we acquired carryover tax basis in Rosetta’s assets and liabilities. Rosetta had a net deferred tax asset resulting from its federal net operating loss (NOL) estimated at $681 million through the date of acquisition. The merger resulted in a change of control for federal income tax purposes, and the NOL’s usage will be subject to an annual limitation in part based on Rosetta’s value at the date of the merger. We anticipate full utilization of the total NOL prior to its expiration.

Accumulated Undistributed Earnings of Foreign Subsidiaries Our foreign subsidiaries’ undistributed earnings of approximately $1.6 billion at December 31, 2015 are no longer considered to be indefinitely reinvested outside the United States and, accordingly, we recorded$227 million in deferred income taxes in 2015, net of estimated foreign tax credits. We based our change in the indefinite reinvestment assertion on the continued and prolonged decline in global commodity prices and an evaluation of our operations’ anticipated capital requirements and projected foreign cash positions given the adoption of the Israel Natural Gas Framework in December 2015. The actual tax impact upon distribution would depend on our tax positions at the time of repatriation and could be significantly different from this estimate.

Effective Tax Rate Our effective tax rate decreased in 2015 as compared with 2014 primarily due to a shift from pre-tax earnings in 2014 to a pre-tax loss in 2015 and the removal of our permanent reinvestment assertion discussed above. In the case of a pre-tax loss, our favorable permanent differences, such as income from equity method investees, have the effect of increasing the tax benefit which, in turn, increases the effective tax rate. Unfavorable permanent differences, such as non-deductible goodwill impairment expense, have the effect of decreasing the tax benefit which, in turn, decreases the effective tax rate. The decrease in the effective tax rate was partially offset by a release of the valuation allowance on foreign tax credits due to usage and losses from funding foreign exploration projects.

Our effective tax rate decreased in 2014 as compared with 2013 primarily due to our ability to benefit from previously unrecognized foreign tax credits, increased earnings in our foreign jurisdictions with rates that vary from the US statutory rate, and a decrease in our Israeli oil profits tax, offset by a change in our state tax estimates and foreign dividend repatriation.

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.

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: US - 2012, Equatorial Guinea - 2010 and Israel - 2011.

Our policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense.

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



(millions)	Twelve Months Ended December 31, 2015
Unrecognized Tax Benefits, Beginning Balance	$	29
Additions for Tax Positions Related to Current Year	—
Additions for Tax Positions of Prior Years	3
Reductions for Tax Positions of Prior Years	(4		)
Settlements	(20		)
Unrecognized Tax Benefits, Ending Balance	$	8

As of December 31, 2015, approximately $8 million of unrecognized tax benefits would impact our effective tax rate if recognized. The changes to our unrecognized tax benefits during 2015 primarily resulted from changes in various foreign tax return filings, positions and audit settlements. The adjustments to our reserves for uncertain tax positions had a de minimis impact on our net income.

During 2015, we recognized and accrued a de minimis amount of interest and none in penalties.

As of December 31, 2014, approximately $29 million of unrecognized tax benefits would impact our effective tax rate if recognized. The changes to our unrecognized tax benefits during 2014 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 2014, 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.