Taxes

Income Taxes



	Year ended December 31
	2012			2011		2010
Taxes on income
U.S. federal
Current	$	1,703		$	1,893	$	1,501
Deferred	673			877		162
State and local
Current	652			596		376
Deferred	(145		)	41		20
Total United States	2,883			3,407		2,059
International
Current	15,626			16,548		10,483
Deferred	1,487			671		377
Total International	17,113			17,219		10,860
Total taxes on income	$	19,996		$	20,626	$	12,919

In 2012, before-tax income for U.S. operations, including related corporate and other charges, was $8,456, compared with before-tax income of $10,222 and $6,528 in 2011 and 2010, respectively. For international operations, before-tax income was $37,876, $37,412 and $25,527 in 2012, 2011 and 2010, respectively. U.S. federal income tax expense was reduced by $165, $191 and $162 in 2012, 2011 and 2010, respectively, for business tax credits.
The reconciliation between the U.S. statutory federal income tax rate and the company’s effective income tax rate is detailed in the following table:



	Year ended December 31
	2012			2011			2010
U.S. statutory federal income tax rate	35.0		%	35.0		%	35.0		%
Effect of income taxes from international operations at rates different from the U.S. statutory rate	7.8			7.5			5.2
State and local taxes on income, net of U.S. federal income tax benefit	0.6			0.9			0.8
Prior-year tax adjustments	(0.2	)		(0.1	)		(0.6	)
Tax credits	(0.4	)		(0.4	)		(0.5	)
Effects of changes in tax rates	0.3			0.5			—
Other	0.1			(0.1	)		0.4
Effective tax rate	43.2		%	43.3		%	40.3		%

The company’s effective tax rate decreased slightly from 43.3 percent in 2011 to 43.2 percent in 2012. The impact of lower effective tax rates in international upstream operations was essentially offset by foreign currency remeasurement impacts between periods. For international upstream, the lower effective tax rates in the current period were driven primarily by the effects of asset sales, one-time tax benefits and reduced withholding taxes, which were partially offset by a lower utilization of tax credits during the current year.

The company records its deferred taxes on a tax-jurisdiction basis and classifies those net amounts as current or noncurrent based on the balance sheet classification of the related assets or liabilities. The reported deferred tax balances are composed of the following:



	At December 31
	2012			2011
Deferred tax liabilities
Properties, plant and equipment	$	24,295		$	23,597
Investments and other	2,276			2,271
Total deferred tax liabilities	26,571			25,868
Deferred tax assets
Foreign tax credits	(10,817		)	(8,476		)
Abandonment/environmental reserves	(5,728		)	(5,387		)
Employee benefits	(5,100		)	(4,773		)
Deferred credits	(2,891		)	(1,548		)
Tax loss carryforwards	(738		)	(828		)
Other accrued liabilities	(381		)	(531		)
Inventory	(281		)	(360		)
Miscellaneous	(1,835		)	(1,595		)
Total deferred tax assets	(27,771		)	(23,498		)
Deferred tax assets valuation allowance	15,443			11,096
Total deferred taxes, net	$	14,243		$	13,466

Deferred tax liabilities at the end of 2012 increased by approximately $700 from year-end 2011. The increase was related to increased temporary differences for property, plant and equipment.

Deferred tax assets increased by approximately $4,300 in 2012. Increases primarily related to additional U.S. foreign tax credits arising from earnings in high-tax-rate international jurisdictions (which were substantially offset by a valuation allowance) and to future international tax benefits earned.

The overall valuation allowance relates to deferred tax assets for U.S. foreign tax credit carryforwards, tax loss carryforwards and temporary differences. It reduces the deferred tax assets to amounts that are, in management’s assessment, more likely than not to be realized. At the end of 2012, the company had tax loss carryforwards of approximately $2,009 and tax credit carryforwards of approximately $1,146 primarily related to various international tax jurisdictions. Whereas some of these tax loss carryforwards do not have an expira-

tion date, others expire at various times from 2013 through 2029. U.S. foreign tax credit carryforwards of $10,817 will expire between 2013 and 2022.

At December 31, 2012 and 2011, deferred taxes were classified on the Consolidated Balance Sheet as follows:



	At December 31
	2012			2011
Prepaid expenses and other current assets	$	(1,365	)	$	(1,149	)
Deferred charges and other assets	(2,662		)	(1,224		)
Federal and other taxes on income	598			295
Noncurrent deferred income taxes	17,672			15,544
Total deferred income taxes, net	$	14,243		$	13,466

Income taxes are not accrued for unremitted earnings of international operations that have been or are intended to be reinvested indefinitely. Undistributed earnings of international consolidated subsidiaries and affiliates for which no deferred income tax provision has been made for possible future remittances totaled $26,527 at December 31, 2012. This amount represents earnings reinvested as part of the company’s ongoing international business. It is not practicable to estimate the amount of taxes that might be payable on the possible remittance of earnings that are intended to be reinvested indefinitely. At the end of 2012, deferred income taxes were recorded for the undistributed earnings of certain international operations where indefinite reinvestment of the earnings is not planned. The company does not anticipate incurring significant additional taxes on remittances of earnings that are not indefinitely reinvested.

Uncertain Income Tax Positions Under accounting standards for uncertainty in income taxes (ASC 740-10), a company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” in the accounting standards for income taxes refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

The following table indicates the changes to the company’s unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010. The term “unrecognized tax benefits” in the accounting standards for income taxes refers to the differences between a tax position taken or expected to be taken in a tax return and the benefit measured and recognized in the financial statements. Interest and penalties are not included.



	2012			2011			2010
Balance at January 1	$	3,481		$	3,507		$	3,195
Foreign currency effects	4			(2		)	17
Additions based on tax positions taken in current year	543			469			334
Additions/reductions resulting from current-year asset acquisitions/sales	—			(41		)	—
Additions for tax positions taken in prior years	152			236			270
Reductions for tax positions taken in prior years	(899		)	(366		)	(165		)
Settlements with taxing authorities in current year	(138		)	(318		)	(136		)
Reductions as a result of a lapse of the applicable statute of limitations	(72		)	(4		)	(8		)
Balance at December 31	$	3,071		$	3,481		$	3,507

The decrease in unrecognized tax benefits between December 31, 2011, and December 31, 2012 was primarily due to new information received during the fourth quarter 2012 regarding the sustainability of certain U.S. foreign tax credits. The reduction in unrecognized tax benefits related to these foreign tax credits had no impact on the effective tax rate since the deferred tax asset recognized for these foreign tax credits has been offset with a full valuation allowance.

Approximately 67 percent of the $3,071 of unrecognized tax benefits at December 31, 2012, would have an impact on the effective tax rate if subsequently recognized. Certain of these unrecognized tax benefits relate to tax carryforwards that may require a full valuation allowance at the time of any such recognition.

Tax positions for Chevron and its subsidiaries and affiliates are subject to income tax audits by many tax jurisdictions throughout the world. For the company’s major tax jurisdictions, examinations of tax returns for certain prior tax years had not been completed as of December 31, 2012. For these jurisdictions, the latest years for which income tax examinations had been finalized were as follows: United States – 2007, Nigeria – 2000, Angola – 2001, Saudi Arabia – 2003 and Kazakhstan – 2006.

The company engages in ongoing discussions with tax authorities regarding the resolution of tax matters in the various jurisdictions. Both the outcome of these tax matters and the timing of resolution and/or closure of the tax audits are highly uncertain. However, it is reasonably possible that developments on tax matters in certain tax jurisdictions may result in significant increases or decreases in the company’s total unrecognized tax benefits within the next 12 months. Given the number of years that still remain subject to examination and the number of matters being examined in the various tax jurisdictions, the company is unable to estimate the range of possible adjustments to the balance of unrecognized tax benefits.

The company is currently assessing the potential impact of an August 2012 decision by the U.S. Court of Appeals for the Third Circuit that disallows the Historic Rehabilitation Tax Credits (HRTCs) claimed by an unrelated taxpayer. The company has claimed a significant amount of HRTCs on its U.S. federal income tax returns in open years, and it is reasonably possible that the specific findings from management's ongoing assessment and evaluation could result in a significant increase in the company's unrecognized tax benefit within the next 12 months. Any such increase would impact the effective tax rate.

On the Consolidated Statement of Income, the company reports interest and penalties related to liabilities for uncertain tax positions as “Income tax expense.” As of December 31, 2012, accruals of $293 for anticipated interest and penalty obligations were included on the Consolidated Balance Sheet, compared with accruals of $118 as of year-end 2011. Income tax expense (benefit) associated with interest and penalties was $145, $(64) and $40 in 2012, 2011 and 2010, respectively.

Taxes Other Than on Income



	Year ended December 31
	2012		2011		2010
United States
Excise and similar taxes on products and merchandise	$	4,665	$	4,199	$	4,484
Import duties and other levies	1		4		—
Property and other miscellaneous taxes	782		726		567
Payroll taxes	240		236		219
Taxes on production	328		308		271
Total United States	6,016		5,473		5,541
International
Excise and similar taxes on products and merchandise	3,345		3,886		4,107
Import duties and other levies	106		3,511		6,183
Property and other miscellaneous taxes	2,501		2,354		2,000
Payroll taxes	160		148		133
Taxes on production	248		256		227
Total International	6,360		10,155		12,650
Total taxes other than on income	$	12,376	$	15,628	$	18,191