Income tax provisions (benefits) were:
2010 2009 2008
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
Federal $ 183 $ (358) $ (175) $ (224) $ 162 $ (62) $ 921 $ 192 $1,113
State and local 34 (30) 4 (75) 40 (35) 146 12 158
Foreign 2,937 (212) 2,725 1,484 870 2,354 2,206 (110) 2,096
Total $3,154 $ (600) $ 2,554 $1,185 $1,072 $2,257 $3,273 $ 94 $3,367
MARATHON OIL CORPORATION Notes to Consolidated Financial Statements
A reconciliation of the federal statutory income tax rate applied to income from continuing operations before income taxes to the provision for income taxes follows:
2010 2009 2008
Statutory rate applied to income from continuing operations before income taxes 35 % 35 % 35 %
Effects of foreign operations, including foreign tax credits 16 12 21
Foreign currency remeasurement (gain) loss - 10 (4)
Effects of nondeductible goodwill impairment - - 7
Adjustments to valuation allowances(a) (1) 8 (10)
State and local income taxes, net of federal income tax effects - (1) 2
Tax law change 1 -
-Other (1) 2 (1)
Effective income tax rate on continuing operations 50 % 66 % 50 %
(a) In 2009, it was determined that we may not be able to realize all recorded foreign tax credit benefits and therefore a valuation allowance was recorded against these benefits. In 2008, we released the valuation allowance on the Norwegian deferred tax asset associated with operating loss carryforwards upon completion of the operated Alvheim/Vilje development offshore Norway, with first production from Alvheim in June 2008 and from Vilje in July 2008.
The Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), (together, the “Acts”) were signed in to law in March 2010. The “Acts” effectively change the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D. The federal subsidy paid to employers was introduced as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
“MPDIMA”). Under the MPDIMA, the federal subsidy does not reduce our income tax deduction for the costs of providing such prescription drug plans nor is it subject to income tax individually. Beginning in 2013, under the Acts, our income tax deduction for the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees will be reduced by the amount of the federal subidy. Such a change in the tax law must be recognized in earnings in the period enacted regardless of the effective date. As a result, we recorded a charge of $45 million in the first quarter of 2010 for the write-off of deferred tax assets to reflect the change in the tax treatment of the federal subsidy.
Deferred tax assets and liabilities resulted from the following:
December 31,
Investments in subsidiaries and affiliates 1,116 1,330
Derivative instruments - 33
Other 42 75
Total deferred tax liabilities 7,418 7,915
Net deferred tax liabilities $ 3,893 $ 4,498
(a) Our expectation regarding our ability to realize the benefit of foreign tax credits is based on certain assumptions concerning future operating conditions (particularly as related to prevailing commodity prices) and income generated from foreign sources. Federal valuation allowances decreased $73 million in 2010, increased $280 million in 2009 and decreased $29 million in 2008 due to changes in the expected realizability of foreign tax credits.
(b) Foreign valuation allowances increased $39 million in 2010, primarily due to net operating loss carryforwards generated in Angola and Indonesia. Foreign valuation allowances decreased $55 million in 2009, mostly due to the reduction of net operating loss carryforwards as a result of the disposition of exploration and production businesses in Ireland. Foreign valuation allowances decreased $705 million in 2008 primarily due to the release of the Norwegian valuation allowance.
MARATHON OIL CORPORATION Notes to Consolidated Financial Statements
At December 31, 2010, our operating loss carryforwards include $851 million for Angola income tax which have no expiration dates. Canadian operating loss carryforwards of $602 million expire from 2026 through 2030. Indonesia operating loss carryforwards of $129 million do not have expiration dates. State operating loss carryforwards of $1,234 million expire in 2011 through 2028.
Net deferred tax liabilities were classified in the consolidated balance sheet as follows:
December 31,
(In millions) 2010 2009
Assets:
Other current assets $ - $ 3
Other noncurrent assets - 6
Liabilities:
Current deferred income taxes 324 403
Noncurrent deferred income taxes 3,569 4,104
Net deferred tax liabilities $ 3,893 $ 4,498
We are continuously undergoing examination of our U.S. federal income tax returns by the Internal Revenue Service.
Such audits have been completed through the 2007 tax year. We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled. Further, we are routinely involved in U.S.
state income tax audits and foreign jurisdiction tax audits. We believe all other audits will be resolved within the amounts paid and/or provided for these liabilities. As of December 31, 2010, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:
United States(a) 2004 - 2009
Canada 2006 - 2009
Equatorial Guinea 2006 - 2009
Libya 2006 - 2009
Norway 2008 - 2009
United Kingdom 2008 - 2009
(a) Includes federal and state jurisdictions.
The following table summarizes the activity in unrecognized tax benefits:
(In millions) 2010 2009 2008
Beginning balance $ 75 $ 39 $ 40
Additions based on tax positions related to the current year 28 30
-Reductions based on tax positions related to the current year (1) (2)
-Additions for tax positions of prior years 25 30 24
Reductions for tax positions of prior years (12) (15) (26)
Settlements (12) (7) 1
Ending balance $ 103 $ 75 $ 39
If the unrecognized tax benefits as of December 31, 2010 were recognized, $94 million would affect our effective income tax rate. There were $21 million of uncertain tax positions as of December 31, 2010 for which it is reasonably possible that the amount of unrecognized tax benefits would decrease during 2011.
Interest and penalties totaled $5 million expense in the year ended December 31, 2010. For the year ended December 31, 2009, interest and penalties were not significant and were a $14 million credit to income for the year ended December 31, 2008. As of December 31, 2010, 2009 and 2008, $15 million, $7 million and $8 million of interest and penalties were accrued related to income taxes.
Pretax income from continuing operations included amounts attributable to foreign sources of $4,563 million in 2010,
$2,947 million in 2009, and $4,029 million in 2008.
MARATHON OIL CORPORATION Notes to Consolidated Financial Statements
Undistributed income of certain consolidated foreign subsidiaries at December 31, 2010 amounted to $1,949 million for which no deferred U.S. income tax provision has been recorded because we intend to permanently reinvest such income in those foreign operations. If such income was not permanently reinvested, income tax expense of up to $682 million would be recorded.
11. Inventories
December 31,
(In millions) 2010 2009
Liquid hydrocarbons, natural gas and bitumen $ 1,275 $ 1,393
Refined products and merchandise 1,774 1,790
Supplies and sundry items 404 439
Inventories at cost $ 3,453 $ 3,622
The LIFO method accounted for 85 percent and 85 percent of total inventory value at December 31, 2010 and 2009.
Current acquisition costs were estimated to exceed the LIFO inventory value at December 31, 2010 and 2009 by $4,166 million and $3,115 million.