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INCOME TAXES | 12 Months Ended
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Dec. 31, 2021
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable.
| Income (loss) before income taxes
(In millions) | 2021 |  | 2020 |  | 2019
Ireland | $ | 153 |  |  | $ | (132) |  |  | $ | (201) |
Foreign | 2,743 |  |  | 1,878 |  |  | 2,792 |
Total income before income taxes | $ | 2,896 |  |  | $ | 1,746 |  |  | $ | 2,591 |
| Income tax expense (benefit)
(In millions) | 2021 |  | 2020 |  | 2019
Current |  |  |  |  |
Ireland | $ | 50 |  |  | $ | 15 |  |  | $ | 26 |
Foreign | 730 |  |  | 441 |  |  | 410 |
Total current income tax expense | 780 |  |  | 456 |  |  | 436 |
Deferred |  |  |  |  |
Ireland | (2) |  |  | — |  |  | 3 |
Foreign | (28) |  |  | (125) |  |  | (61) |
Total deferred income tax expense (benefit) | (30) |  |  | (125) |  |  | (58) |
Total income tax expense | $ | 750 |  |  | $ | 331 |  |  | $ | 378 |
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate are as follows:
| 2021 |  | 2020 |  | 2019
Income taxes at the applicable statutory rate | 25.0 | % |  | 25.0 | % |  | 25.0 | %
Ireland operations |  |  |  |  |
Ireland tax on trading income | (0.7) | % |  | (0.2) | % |  | (1.0) | %
Nondeductible interest expense | 0.6 | % |  | 2.7 | % |  | 3.9 | %
Ireland Other - net | (0.2) | % |  | 0.4 | % |  | 0.1 | %
Foreign operations |  |  |  |  |
Tax impact on sale of businesses | 9.1 | % |  | 3.9 | % |  | — | %
Earnings taxed at other than the applicable statutory tax rate | (8.0) | % |  | (14.0) | % |  | (14.8) | %
Other items | (0.1) | % |  | 1.6 | % |  | 3.3 | %
Worldwide operations |  |  |  |  |
Adjustments to tax liabilities | 0.2 | % |  | (0.6) | % |  | (0.5) | %
Adjustments to valuation allowances | — | % |  | 0.2 | % |  | (1.4) | %
Effective income tax expense rate | 25.9 | % |  | 19.0 | % |  | 14.6 | %
During 2021, income tax expense of $750 million was recognized (an effective tax rate of 25.9%) compared to income tax expense of $331 million in 2020 (an effective tax rate of 19.0%) and income tax expense of $378 million in 2019 (an effective tax rate of 14.6%). The increase in the effective tax rate from 19% in 2020 to 25.9% in 2021 was primarily due to the tax expense on the gain from the sale of the Hydraulics business in 2021 discussed in Note 2. The increase in the effective tax rate from 14.6% in 2019 to 19.0% in 2020 was primarily due to the tax expense on the gain from the sale of the Lighting business in 2020 discussed in Note 2, partially offset by a tax benefit on the restructuring charges discussed in Note 16. No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $29.9 billion at December 31, 2021, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. The cash that is permanently reinvested is typically used to expand operations either organically or through acquisitions. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings. Worldwide income tax payments, net of tax refunds, are as follows:
(In millions) |
2021 | $ | 753 |
2020 | 391 |
2019 | 425 |
Deferred Income Tax Assets and Liabilities Components of noncurrent deferred income taxes are as follows:
| December 31
| 2021 |  | 2020
(In millions) | Noncurrent assets and liabilities |  | Noncurrent assets and liabilities
Accruals and other adjustments |  |  |
Employee benefits | $ | 348 |  |  | $ | 553 |
Depreciation and amortization | (1,087) |  |  | (1,101) |
Other accruals and adjustments | 385 |  |  | 505 |
Ireland income tax loss carryforwards | 1 |  |  | 1 |
Foreign income tax loss carryforwards | 3,127 |  |  | 1,815 |
Foreign income tax credit carryforwards | 263 |  |  | 309 |
Valuation allowance for income tax loss and income tax credit carryforwards | (3,139) |  |  | (1,863) |
Other valuation allowances | (65) |  |  | (67) |
Total deferred income taxes | (167) |  |  | 152 |
Deferred income taxes reported as held for sale | — |  |  | 3 |
Deferred income taxes | $ | (167) |  |  | $ | 149 |
In 2021, the Company recorded an increase of $1.5 billion in its deferred tax assets for foreign income tax loss carryforwards related to a tax deductible statutory adjustment in Luxembourg. The Company also recorded a corresponding increase in its valuation allowance for income tax loss carryforwards, since it does not believe that it is more likely than not that the net operating loss is realizable, resulting in no impact to the Consolidated Statements of Income. At December 31, 2021, Eaton Corporation plc and its foreign subsidiaries had income tax loss carryforwards and income tax credit carryforwards that are available to reduce future taxable income or tax liabilities. These carryforwards and their respective expiration dates are summarized below:
(In millions) | 2022 through 2026 |  | 2027 through 2031 |  | 2032 through 2036 |  | 2037 through 2046 |  |  |  | Not subject to expiration |  | Valuation allowance
Ireland income tax loss carryforwards | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | 8 |  |  | $ | — |
Ireland deferred income tax assets for income tax loss carryforwards | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 1 |  |  | (1) |
Foreign income tax loss carryforwards | 363 |  |  | 7,335 |  |  | 7,061 |  |  | 299 |  |  |  |  | 2,301 |  |  | — |
Foreign deferred income tax assets for income tax loss carryforwards | 60 |  |  | 670 |  |  | 1,768 |  |  | 84 |  |  |  |  | 560 |  |  | (2,982) |
Foreign deferred income tax assets for income tax loss carryforwards after ASU 2013-11 | 47 |  |  | 668 |  |  | 1,768 |  |  | 84 |  |  |  |  | 560 |  |  | (2,982) |
Foreign income tax credit carryforwards | 50 |  |  | 183 |  |  | 55 |  |  | 4 |  |  |  |  | 30 |  |  | (156) |
Foreign income tax credit carryforwards after ASU 2013-11 | 28 |  |  | 146 |  |  | 55 |  |  | 4 |  |  |  |  | 30 |  |  | (156) |
Recoverability of Deferred Income Tax Assets Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards. Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pre-tax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pre-tax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance. Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period. Unrecognized Income Tax Benefits A summary of gross unrecognized income tax benefits is as follows:
(In millions) | 2021 |  | 2020 |  | 2019
Balance at January 1 | $ | 1,036 |  |  | $ | 1,001 |  |  | $ | 913 |
Increases and decreases as a result of positions taken during prior years |  |  |  |  |
Transfers from valuation allowances | 6 |  |  | — |  |  | 15 |
Other increases, including currency translation | 22 |  |  | 10 |  |  | 22 |
Other decreases, including currency translation | (10) |  |  | (10) |  |  | (10) |
Increases related to acquired businesses | 12 |  |  | 7 |  |  | — |
Increases as a result of positions taken during the current year | 75 |  |  | 58 |  |  | 80 |
Decreases relating to settlements with tax authorities | (11) |  |  | (26) |  |  | (16) |
Decreases as a result of a lapse of the applicable statute of limitations | (10) |  |  | (4) |  |  | (3) |
Balance at December 31 | $ | 1,120 |  |  | $ | 1,036 |  |  | $ | 1,001 |
Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company evaluates and adjusts the amount of unrecognized income tax benefits based on changes in facts and circumstances. The Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4. If all unrecognized income tax benefits were recognized, the net impact on the provision for income tax expense would be $755 million. As of December 31, 2021 and 2020, Eaton had accrued approximately $128 million and $110 million, respectively, for the payment of worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as the timing of finalizing resolutions of audit disputes through reaching settlement agreements or concluding litigation, or changes in law. Therefore, for the majority of Eaton’s unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change. The Company believes that the final resolution of all the assessments discussed below will not have a material impact on its consolidated financial statements. The ultimate outcome of these matters cannot be predicted with certainty given the complex nature of tax controversies. Should the ultimate outcome of any one of these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct, and that its accrual of unrecognized income tax benefits is appropriate with respect to these matters. Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. With only a few exceptions, including the tax years in Brazil and the United States discussed below, Eaton and its subsidiaries are no longer subject to examinations for years before 2014. Brazil Tax Years 2005-2012 During 2010, the Company received a tax assessment, which included interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. In 2018, the Company received an unfavorable result at the final tax administrative appeals level. In August 2021, the Company was notified of a recalculation from an original alleged tax deficiency of $23 million plus $65 million of interest and penalties to a revised alleged tax deficiency of $30 million plus $97 million of interest and penalties (translated at the December 31, 2021 exchange rate). During 2014, the Company received a tax assessment, which included interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues concerning the 2005 through 2008 tax years). In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $25 million plus $90 million of interest and penalties (translated at the December 31, 2021 exchange rate). The Company is challenging both of the assessments in the judicial system. Challenges in the judicial system are expected to take several years to resolve and require provision of certain assets as security for the alleged deficiencies. As of December 31, 2021, the Company pledged Brazilian real estate assets with net book value of $18 million and provided additional security in the form of three separate bonds totaling $96 million and a cash deposit of $17 million (translated at the December 31, 2021 exchange rate). United States Tax Disputes The United States Internal Revenue Service (IRS) typically audits large corporate taxpayers on a continuous basis, generally resulting in many open tax years if there are disputed tax positions upon completion of the audits. The IRS has completed its examination of the consolidated income tax returns of the Company’s United States subsidiaries (Eaton US) for 2005 through 2016 and the statuses of the various tax years are discussed below. The IRS has challenged certain tax positions of Eaton US, and the Company is attempting to resolve those issues in litigation and the IRS administrative process, as described in more detail below. The IRS is currently examining tax years 2017 through 2019, and the statute of limitations for those years is open until December 31, 2024. Tax years 2020 and later are subject to future examination by the IRS. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. The Eaton US tax positions challenged by the IRS are items that recur beyond the tax years for which the IRS has proposed adjustments. Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct. However, if there is a final unfavorable resolution of any of the issues discussed below, it may have a material adverse impact on the Company’s consolidated financial statements. U.S. Tax Years 2005-2006 In 2011, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2005 and 2006 tax years (the 2005-06 Notice), which Eaton US contested in United States Tax Court. The 2005-06 Notice proposed assessments of $75 million in additional taxes plus $52 million in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed the 2005-2010 tax years. Eaton US has continued to apply the APA pricing methodology for 2011 through the current reporting period. Immediately prior to the 2005-06 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. The case in Tax Court involved whether the IRS improperly cancelled the APAs. On July 26, 2017, the Tax Court issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements. On May 24, 2021, the IRS filed a notice to appeal the Tax Court’s ruling to the United States Sixth Circuit Court of Appeals, and the appellate process is anticipated to be ongoing in 2022. Tax years 2005 and 2006 remain open until this matter is resolved. U.S. Tax Years 2007-2010 In 2014, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2007 through 2010 tax years (the 2007-10 Notice), which Eaton US contested in Tax Court. The 2007-10 Notice proposed assessments of $190 million in additional taxes plus $72 million in penalties, net of agreed credits and deductions. The proposed assessments pertain to: (i) the same transfer pricing issues and APA for which the Tax Court has issued its ruling during 2017 as noted above; and (ii) the separate proposed assessment noted below. The Company believes that the Tax Court’s ruling for tax years 2005-2006 will also be applicable to the 2007-2010 years. Following the issuance of the Tax Court’s ruling, Eaton and the IRS recognized that the ruling on the enforceability of the APA did not address a secondary issue regarding the transfer pricing for a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has agreed to the royalty rate as reported by Eaton US in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to apply the same royalty rate in the 2007-2010 years. The 2007-10 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton US’s controlled foreign corporations. The Company believes that the proposed assessment is without merit and contested the matter in Tax Court. In October 2017, Eaton and the IRS both moved for partial summary judgment on this issue. On February 25, 2019, the Tax Court granted the IRS’s motion for partial summary judgment and denied Eaton’s. The Company intends to appeal the Tax Court’s partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The total potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition issue is not estimable until all matters in the open tax years have been resolved. U.S. Tax Years 2011-2013 In 2018, the IRS completed its examination of Eaton US for tax years 2011 through 2013 and has proposed adjustments, including: (i) transfer pricing adjustments similar to those proposed in the 2005-06 and 2007-10 Notices for products manufactured in the Company’s facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S.; (ii) adjustments involving the recognition of income for several of Eaton US’s controlled foreign corporations, which is the same issue included in the 2007-10 Notice described above and subject to litigation in Tax Court; (iii) transfer pricing adjustments for products manufactured in one of the Company’s facilities in Mexico and sold to affiliated companies located in the U.S.; and (iv) adjustments challenging the appropriate interest rate on intercompany debt and amount of intercompany fees charged for financial guarantees on external debt. The Company is attempting to resolve certain of these issues in administrative appeals. However, if acceptable resolutions are not achieved, the Company will vigorously defend its positions through litigation, which if undertaken will likely take several years for final resolution. The statute of limitations on these tax years currently remains open until December 31, 2022. U.S. Tax Years 2014-2016 In 2021, the IRS completed its examination of Eaton US for tax years 2014 through 2016 and has proposed adjustments, including: (i) transfer pricing adjustments similar to those proposed in the 2005-06 Notice, 2007-10 Notice, and in tax years 2011-2013 for products manufactured in the Company’s facilities in Puerto Rico, and the Dominican Republic and sold to affiliated companies located in the U.S.; (ii) transfer pricing adjustments similar to those proposed in tax years 2011-2013 for products manufactured in one of the Company’s facilities in Mexico and sold to affiliated companies located in the U.S.; and (iii) adjustments similar to those proposed in tax years 2011-2013 challenging the appropriate interest rate on intercompany debt and amount of intercompany fees charged for financial guarantees on external debt. On November 29, 2021, the case was formally assigned to administrative appeals, and the Company will attempt to resolve certain of the issues in this administrative forum. However, if acceptable resolutions are not achieved, the Company will vigorously defend its positions through litigation, which if undertaken will likely take several years for final resolution. The statute of limitations on these tax years currently remains open until December 31, 2022.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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