Income Taxes

Year ended December 31
  2007 2006 2005
Taxes on income
U.S. Federal
Current $1,446 $2,828 $1,459
Deferred 225 200 567
State and local 338 581 409
Total United States 2,009 3,609 2,435
International
Current 11,416 11,030 7,837
Deferred 54 199 826
Total International 11,470 11,229 8,663
Total taxes on income $13,479 $14,838 $11,098

In 2007, before-tax income for U.S. operations, including related corporate and other charges, was $7,794, compared with before-tax income of $9,131 and $6,733 in 2006 and 2005, respectively. For international operations, before-tax income was $24,373, $22,845 and $18,464 in 2007, 2006 and 2005, respectively. U.S. federal income tax expense was reduced by $132, $116 and $289 in 2007, 2006 and 2005, 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 explained in the table below:

  Year ended December 31
2007 2006 2005
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 8.3 10.3 9.2
State and local taxes on income, net of U.S. federal income tax benefit 0.8 1.0 1.0
Prior-year tax adjustments 0.3 0.9 0.1
Tax credits (0.4) (0.4) (1.1)
Effects of enacted changes in tax laws (0.3) 0.3 –
Other (1.8) (0.7) (0.1)
Effective tax rate 41.9% 46.4% 44.1%

The company's effective tax rate decreased by 4.5 percent in 2007 from the prior year. The 2 percent decrease pertaining to the "Effect of income taxes from international operations ..." was primarily due to the impact of asset sales and to lower effective tax rates in certain non-U.S. operations. The 1 percent decrease in "Other" primarily relates to the effects of asset sales in 2007.

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
2007 2006
Deferred tax liabilities    
Properties, plant and equipment $17,310 $16,054
Investments and other 1,837 2,137
Total deferred tax liabilities 19,147 18,191
Deferred tax assets    
Abandonment/environmental reserves (3,587) (2,925)
Employee benefits (2,148) (2,707)
Tax loss carryforwards (1,603) (1,509)
Capital losses – (246)
Deferred credits (1,689) (1,670)
Foreign tax credits (3,138) (1,916)
Inventory (608) (378)
Other accrued liabilities (477) (375)
Miscellaneous (1,528) (1,144)
Total deferred tax assets (14,778) (12,870)
Deferred tax assets valuation allowance 5,949 4,391
Total deferred taxes, net $10,318 $9,712

In 2007, deferred tax liabilities increased by approximately $1,000 from the amount reported in 2006. The increase was primarily related to increased temporary differences for properties, plant and equipment.

Deferred tax assets increased by approximately $1,900 in 2007. The increase related primarily to additional foreign tax credits arising from earnings in high-tax-rate international jurisdictions. This increase was substantially offset by valuation allowances.

The overall valuation allowance relates to foreign tax credit carryforwards, tax loss carryforwards and temporary differences for which no benefit is expected to be realized. Tax loss carryforwards exist in many international jurisdictions. Whereas some of these tax loss carryforwards do not have an expiration date, others expire at various times from 2008 through 2029. Foreign tax credit carryforwards of $3,138 will expire between 2008 and 2017.

At December 31, 2007 and 2006, deferred taxes were classified in the Consolidated Balance Sheet as follows:

  At December 31
2007 2006
Prepaid expenses and other current assets $(1,234) $(1,167)
Deferred charges and other assets (812) (844)
Federal and other taxes on income 194 76
Noncurrent deferred income taxes 12,170 11,647
Total deferred income taxes, net $10,318 $9,712

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 $20,557 at December 31, 2007. 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 eventual remittance of earnings that are intended to be reinvested indefinitely. At the end of 2007, deferred income taxes were recorded for the undistributed earnings of certain international operations for which the company no longer intends to indefinitely reinvest the earnings. The company does not anticipate incurring significant additional taxes on remittances of earnings that are not indefinitely reinvested.

Uncertain Income Tax Positions

Effective January 1, 2007, the company implemented Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for income tax benefits that are uncertain in nature. This interpretation was intended by the standard-setters to address the diversity in practice that existed in this area of accounting for income taxes.

Under FIN 48, 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 FIN 48 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 accounting interpretation also provides guidance on measurement methodology, derecognition thresholds, financial statement classification and disclosures, recognition of interest and penalties, and accounting for the cumulative-effect adjustment at the date of adoption. Upon adoption of FIN 48 on January 1, 2007, the company recorded a cumulative-effect adjustment that reduced retained earnings by $35.

The following table indicates the changes to the company's unrecognized tax benefits for the year ended December 31, 2007. The term "unrecognized tax benefits" in FIN 48 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 in accordance with the guidelines of FIN 48. Interest and penalties are not included.

Balance at January 1, 2007 (date of FIN 48 adoption) $2,296
Foreign currency effects 19
Additions based on tax positions taken in 2007 418
Additions for tax positions taken in prior years 120
Reductions for tax positions taken in prior years (225)
Settlements with taxing authorities in 2007 (255)
Reductions due to tax positions previously expected to be taken but subsequently not taken on 2006 tax returns (174)
Balance at December 31, 2007 $2,199

The only individually significant change for 2007 was a reduction in an unrecognized tax benefit for a position previously expected to be taken but subsequently not taken on a 2006 tax return. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2008, the company believes that no change will be individually significant during 2008. Approximately 80 percent of the $2,199 of unrecognized tax benefits at December 31, 2007, would have an impact on the overall tax rate if subsequently recognized.

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, 2007. In this regard, the company received a final U.S. federal income tax audit report for years 2002 and 2003 in March 2007. In early 2008, the company's 2004 and 2005 tax returns were under examination by the Internal Revenue Service. For other major tax jurisdictions, the latest years for which income tax examinations had been finalized were as follows: Nigeria — 1994, Angola — 2001 and Saudi Arabia — 2003.

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, 2007, accruals of $198 for anticipated interest and penalty obligations were included on the Consolidated Balance Sheet. For the year 2007, income tax expense associated with interest and penalties was not material.

Taxes Other Than on Income Year ended December 31
2007 2006 2005
United States
Excise and similar taxes on products and merchandise $4,992 $4,831 $4,521
Import duties and other levies 12 32 8
Property and other miscellaneous taxes 491 475 392
Payroll taxes 185 155 149
Taxes on production 288 360 323
Total United States 5,968 5,853 5,393
International
Excise and similar taxes on products and merchandise 5,129 4,720 4,198
Import duties and other levies 10,404 9,618 10,466
Property and other miscellaneous taxes 528 491 535
Payroll taxes 89 75 52
Taxes on production 148 126 138
Total International 16,298 15,030 15,389
Total taxes other than on income $22,266 $20,883 $20,782