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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income taxes The components of net income before income tax expense in consolidated entities for the years ended December 31, 2022, 2021 and 2020 are as follows:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In millions)
United States | $ | (207) |  |  | $ | (214) |  |  | $ | (54) |
Brazil | 259 |  |  | 189 |  |  | 79 |
Argentina | 699 |  |  | 389 |  |  | 185 |
Mexico | 74 |  |  | (130) |  |  | (134) |
Other Countries | (45) |  |  | 7 |  |  | 5 |
| $ | 780 |  |  | $ | 241 |  |  | $ | 81 |
Income tax is composed of the following:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In millions)
Income Tax: |  |  |  |  |
Current: |  |  |  |  |
U.S. | $ | 12 |  |  | $ | — |  |  | $ | — |
Non-U.S. | 383 |  |  | 178 |  |  | 152 |
| 395 |  |  | 178 |  |  | 152 |
Deferred: |  |  |  |  |
U.S. | 55 |  |  | (3) |  |  | (5) |
Non-U.S. | (152) |  |  | (26) |  |  | (65) |
| (97) |  |  | (29) |  |  | (70) |
Income tax expense | $ | 298 |  |  | $ | 149 |  |  | $ | 82 |
The following is a reconciliation of the difference between the actual charge for income taxes and the expected income tax expense computed by applying the statutory income tax rate for the years ended December 31, 2022, 2021 and 2020 to income before taxes:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In millions)
Net income before income tax | $ | 780 |  |  | $ | 241 |  |  | $ | 81 |
Income tax rate | 21 | % |  | 21 | % |  | 21 | %
Expected income tax expense | $ | 164 |  |  | $ | 51 |  |  | $ | 17 |
Permanent differences: |  |  |  |  |
Transfer pricing adjustments | 3 |  |  | 2 |  |  | 1 |
Non-deductible tax | 1 |  |  | 4 |  |  | 3 |
Non-deductible expenses | 54 |  |  | 29 |  |  | 18 |
Dividend distributions | 12 |  |  | 36 |  |  | 9 |
Non-taxable income | (62) |  |  | (32) |  |  | (4) |
Effect of rates different than statutory | 37 |  |  | 8 |  |  | (4) |
Currency translation | 48 |  |  | 16 |  |  | 12 |
Change in valuation allowance | 92 |  |  | 56 |  |  | 41 |
Tax Inflation Adjustments | (35) |  |  | (19) |  |  | (7) |
Inventory Adjustments | — |  |  | (1) |  |  | — |
True up | (16) |  |  | (1) |  |  | (4) |
Income tax expense | $ | 298 |  |  | $ | 149 |  |  | $ | 82 |
Income taxes are determined by each subsidiary on a stand alone basis according to income tax law of each jurisdiction The Company’s consolidated effective tax rate for year ended December 31, 2022 as compared to 2021 decreased from 61.8% to 38.2% largely as a result of (i) the one-time loss on debt extinguishment related to 2028 Notes repurchase recognized during the first quarter of 2021, which was considered as non-deductible expense; and (ii) the deferred tax assets in Mexico that were recognized during 2022 regarding the partial reversal of certain tax valuation allowances in one of the subsidiaries according to projected taxable gains for upcoming years. This decrease in our effective tax rate was partially offset by (i) pre-tax losses in another Mexican subsidiary which were included in the valuation allowance; (ii) higher deferred tax liabilities in the U.S. due to temporary differences related to retained earnings from certain Brazilian VIEs; and (iii) a higher foreign exchange loss due to the purchase of our own shares in the Argentine market that is considered a non-deductible expense, see Note 25 “Share repurchase program” of these audited consolidated financial statements for further detail. Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The following table summarizes the composition of deferred tax assets and liabilities for the years ended December 31, 2022 and 2021:
| December 31,
| 2022 |  | 2021
| (In millions)
Deferred tax assets |  |  |
Allowance for doubtful accounts | $ | 110 |  |  | $ | 65 |
Unrealized net gains | 8 |  |  | 2 |
Property and equipment, net | 43 |  |  | 27 |
Accounts payable and accrued expenses | 17 |  |  | 11 |
Payroll and social security payable | 32 |  |  | 28 |
Foreign exchange effect | — |  |  | 7 |
Provisions | 131 |  |  | 89 |
U.S. foreign tax credit | 156 |  |  | 50 |
Tax loss carryforwards | 255 |  |  | 194 |
Inventories | 3 |  |  | 2 |
Tax inflation adjustments | 3 |  |  | 7 |
Total deferred tax assets | 758 |  |  | 482 |
Valuation allowance | (360) |  |  | (262) |
Total deferred tax assets, net | 398 |  |  | 220 |
Deferred tax liabilities |  |  |
Property and equipment, net | (29) |  |  | (18) |
Customer lists | (1) |  |  | (1) |
Unrealized net losses | (3) |  |  | (2) |
Goodwill | (4) |  |  | (3) |
Convertible notes and Capped Call | — |  |  | (26) |
Accounts payable and accrued expenses | (3) |  |  | (3) |
Payroll and social security payable | (7) |  |  | (7) |
Outside Basis Dividends | (103) |  |  | (36) |
Provisions | (8) |  |  | (5) |
Total deferred tax liabilities | $ | (158) |  |  | $ | (101) |
| $ | 240 |  |  | $ | 119 |
Valuation allowance on deferred tax assets The following table summarizes the tax valuation allowance activity during the years ended December 31, 2022, 2021 and 2020:
Tax valuation allowance | Balance at beginning of year |  | Charged/(credited) to Net income |  | Charges Utilized/ Currency translation adjustments and other adjustments |  | Balance at end of year
| (In millions)
Year ended December 31, 2020 | $ | 139 |  |  | $ | 41 |  |  | $ | (1) |  |  | $ | 179 |
Year ended December 31, 2021 | 179 |  |  | 56 |  |  | 27 |  |  | 262 |
Year ended December 31, 2022 | 262 |  |  | 92 |  |  | 6 |  |  | 360 |
As of December 31, 2022, consolidated deferred tax asset on tax loss carryforwards for income tax purposes were $255 million. If not utilized, tax loss carryforwards will begin to expire as follows:
2026 | $ | 2 |
2027 | 13 |
2028 | 29 |
Thereafter | 131 |
Without due dates | 80 |
Total | $ | 255 |
Based on Management’s assessment of available objective evidence, the Company maintained a valuation allowance on deferred tax assets of $360 million and $262 million as of December 31, 2022 and 2021, respectively. This valuation allowance includes $156 million and $50 million to fully reserve the outstanding U.S. foreign tax credits as of December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company increased its valuation allowance mainly on U.S foreign tax credits by $106 million offset by the partial recovery of the valuation allowance on its Mexican operation by $35 million. Knowledge-based economy promotional regime in Argentina On June 10, 2019, the Argentine government enacted Law No. 27,506 (knowledge-based economy promotional regime), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from certain specified activities related to the knowledge-based economy. The regime was suspended on January 20, 2020, until new rules for the application of the knowledge-based economy promotional regime were issued. On October 7, 2020, changes to the knowledge-based economy promotional regime were finally approved by the Congress. The approved regime has effect from January 1, 2020 through December 31, 2029. Based on the amended promotional regime, companies that meet new specified criteria shall be entitled to: i) a reduction of the income tax burden (60% for micro and small enterprises, 40% for medium-sized enterprises and 20% for large enterprises) over the promoted activities for each fiscal year, applicable to both Argentine source income and foreign source income, ii) stability of the benefits established by the knowledge-based economy promotional regime (as long as the beneficiary is registered and in good standing), and iii) a non-transferable tax credit bond amounting to 70% (which can be up to 80% in certain specific cases) of the Company’s contribution to the social security regime of every employee whose job is related to the promoted activities (caps on the number of employees are applicable). Such bonds can be used within 24 months from their issue date (which period can be extended for an additional 12 months in certain cases) to offset certain federal taxes, such as value-added tax, but they cannot be used to offset income tax. On December 20, 2020, Argentina’s Executive Power issued Decree No. 1034/2020, which set the rules to implement the provisions of the knowledge-based economy promotional regime. Eligible companies must enroll in a registry according to the terms and conditions to be established by the Application Authority, which will verify compliance with the requirements. The Decree also set the mechanism for calculating the level of investment in research and development, the level of employee retention, exports, among others. It also establishes that exports of services from companies participating in this regime will not be subject to export duties. On January 13, 2021, Argentina’s Ministry of Productive Development –current Application Authority of the knowledge-based economy promotional regime– issued Resolution No. 4/2021, which was followed by Disposition N° 11/2021 issued by the Under Secretariat of Knowledge Economy on February 12, 2021. Both rules establish further details on the requirements, terms, conditions, application, and compliance procedures to be eligible under the promotional regime. In August 2021, the Under Secretariat of Knowledge Economy issued the Disposition 316/2021 approving MercadoLibre S.R.L.’s application for eligibility under the knowledge-based economy promotional regime. Tax benefits granted pursuant to the promotional regime to MercadoLibre S.R.L. were retroactive to January 1, 2020. As a result, the Company accounted for an income tax benefit of $14 million for the year ended December 31, 2021, which $8 million corresponded to the year ended December 31, 2020. The aggregate per share effect of the income tax benefit amounted to $0.29 for the year ended December 31, 2021. Furthermore, the Company recorded a social security benefit of $45 million for the year ended December 31, 2021, which $15 million corresponded to the year ended December 31, 2020. Given that the promotional regime establishes that exports of services by eligible companies are not subject to export duties, the Company recognized a gain of $24 million related to export duties accrued from January 2020 to August 2021 that are no longer required to be paid. Additionally, for the year ended December 31, 2021, the Company accrued a charge of $4 million to pay knowledge-based economy promotional law audit fees and FONPEC (“Fondo Fiduciario para la Promoción de la Economía del Conocimiento”) contribution. During the year end ed December 31, 2022, the Company accounted for an income tax benefit of $27 million. The aggregate per share effect of the income tax benefit amounted to $0.54 for the year ended December 31, 2022. Furthermore, the Company recorded a social security benefit of $54 million for the year ended December 31, 2022. Additionally, during the year ended December 31, 2022, the Company accrued a charge of $5 million, to pay knowledge-based economy promotional law audit fees and FONPEC contribution. Corporate income tax reform in Argentina In June 2021, Argentine Congress enacted Law 27,630, which increases corporate income tax rate for tax years beginning January 1, 2021, and onwards. The law replaced the 30% fixed tax rate with a progressive tax scale that applies as follows: a) for accumulated net taxable income up to $5 million Argentine Pesos (roughly $28 thousand): 25% tax rate on net taxable income, b) for accumulated net taxable income from $5 million Argentine Pesos to $50 million Argentine Pesos (roughly $282 thousand): a tax payment of $1 million Argentine Pesos (roughly $6 thousand) plus a 30% tax rate on accumulated net taxable income on any amount exceeding $5 million Argentine Pesos, c) for accumulated net taxable income exceeding $50 million Argentine Pesos: a tax payment of $15 million Argentine Pesos (roughly $85 thousand) plus a 35% tax rate on accumulated net taxable income on any amount exceeding $50 million Argentine Pesos. In addition, the new law permanently extended the 7% withholding tax currently in force to dividend distributions. The mentioned thresholds are subject to inflation adjustment from 2022 onwards.

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