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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The components of income from continuing operations before income taxes were as follows:
For the year ended December 31, | 2019 |  | 2018 |  | 2017
United States | $ | 275 |  |  | $ | 518 |  |  | $ | 500 |
Foreign | 300 |  |  | 350 |  |  | (30 | )
| $ | 575 |  |  | $ | 868 |  |  | $ | 470 |
The provision for income taxes consisted of the following:
For the year ended December 31, | 2019 |  | 2018 |  | 2017
Current: |  |  |  |  |
Federal(1) | $ | 4 |  |  | $ | 45 |  |  | $ | — |
Foreign | 108 |  |  | 138 |  |  | 98 |
State and local | 5 |  |  | 4 |  |  | (2 | )
| 117 |  |  | 187 |  |  | 96 |
Deferred: |  |  |  |  |
Federal | 65 |  |  | 146 |  |  | 489 |
Foreign | (53 | ) |  | (94 | ) |  | 37 |
State and local | (24 | ) |  | (13 | ) |  | (78 | )
| (12 | ) |  | 39 |  |  | 448 |
Total | $ | 105 |  |  | $ | 226 |  |  | $ | 544 |
(1) | Includes U.S. taxes related to foreign income
A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate for all periods was a provision on income):
For the year ended December 31, | 2019 |  | 2018 |  | 2017
U.S. federal statutory rate | 21.0 | % |  | 21.0 | % |  | 35.0 | %
Foreign tax rate differential | 2.6 |  |  | 2.4 |  |  | (8.7 | )
U.S. and residual tax on foreign earnings | 6.0 |  |  | 1.6 |  |  | (0.1 | )
U.S. State and local taxes | 2.5 |  |  | 1.5 |  |  | 0.7 |
Federal benefit of state tax | 0.4 |  |  | (0.3 | ) |  | 3.7 |
Permanent differences related to asset disposals and items included in restructuring and other charges(1) | (22.9 | ) |  | (16.9 | ) |  | (167.4 | )
Non-deductible transaction costs | 1.6 |  |  | — |  |  | 0.3 |
Non-deductible officer compensation | 1.8 |  |  | 0.1 |  |  | — |
Statutory tax rate and law changes(2) | (0.2 | ) |  | 6.5 |  |  | 52.5 |
Tax holidays | (3.2 | ) |  | (1.6 | ) |  | (3.0 | )
Changes in valuation allowances(3) | (14.2 | ) |  | 0.9 |  |  | 137.9 |
Impairment of goodwill | — |  |  | — |  |  | 53.5 |
Changes in uncertain tax positions | 6.1 |  |  | 12.8 |  |  | 10.1 |
Prior year tax adjustments(4) | 15.2 |  |  | (2.6 | ) |  | (0.9 | )
Other | 1.6 |  |  | 0.6 |  |  | 2.1 |
Effective tax rate | 18.3 | % |  | 26.0 | % |  | 115.7 | %
(1) | In 2019, a net tax benefit was recognized related to a U.S. tax election which caused the deemed liquidation of a foreign subsidiary's assets into its U.S. tax parent. The benefit is partially offset by an increase in uncertain tax positions. Losses reported in Spain's 2017 tax return related to the Separation of Alcoa are offset by an increased valuation allowance.
(2) | In 2018, the Company finalized its accounting for the Tax Cuts and Jobs Act of 2017 ("the 2017 Act”) and recorded an additional $59 charge. In December 2017, an estimated $272 tax charge was recorded with respect to the enactment of the 2017 Act.
(3) | In 2019, the Company released a valuation allowance related to 2015 and 2016 foreign tax credits, subsequent to filing U.S. amended tax returns to deduct, rather than credit, foreign taxes.
(4) | In 2019, the Company filed U.S. amended tax returns to deduct, rather than credit, 2015 and 2016 foreign taxes resulting in a tax cost associated with the write-off of the deferred tax asset for the credit, partially offset by a tax benefit for the deduction.
On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, was issued by the SEC to address the application of U.S. GAAP for financial reporting. SAB 118 permitted the use of provisional amounts based on reasonable estimates in the financial statements. SAB 118 also provided that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. The Company calculated a reasonable estimate of the impact of the 2017 Act’s tax rate reduction and one-time transition tax in its 2017 year end income tax provision in accordance with its understanding of the 2017 Act and guidance available and, as a result, recorded a $272 tax charge in the fourth quarter of 2017, the period in which the legislation was enacted. In 2018, the Company included a $59 tax charge in income from continuing operations as a result of finalizing its accounting for the 2017 Tax Act in accordance with SAB 118. This charge primarily related to a $16 charge for the one-time transition tax and a $43 charge to update deferred tax balances. The components of net deferred tax assets and liabilities were as follows:
| 2019 |  | 2018
December 31, | Deferred tax assets |  | Deferred tax liabilities |  | Deferred tax assets |  | Deferred tax liabilities
Depreciation | $ | 25 |  |  | $ | 729 |  |  | $ | 38 |  |  | $ | 694 |
Employee benefits | 887 |  |  | 16 |  |  | 836 |  |  | 27 |
Loss provisions | 92 |  |  | — |  |  | 94 |  |  | — |
Deferred income/expense | 96 |  |  | 943 |  |  | 22 |  |  | 1,102 |
Interest | 56 |  |  | — |  |  | — |  |  | — |
Tax loss carryforwards | 2,932 |  |  | — |  |  | 3,159 |  |  | — |
Tax credit carryforwards | 379 |  |  | — |  |  | 579 |  |  | — |
Other | 52 |  |  | 16 |  |  | 94 |  |  | 20 |
| $ | 4,519 |  |  | $ | 1,704 |  |  | $ | 4,822 |  |  | $ | 1,843 |
Valuation allowance | (2,256 | ) |  | — |  |  | (2,486 | ) |  | — |
| $ | 2,263 |  |  | $ | 1,704 |  |  | $ | 2,336 |  |  | $ | 1,843 |
The following table details the expiration periods of the deferred tax assets presented above:
December 31, 2019 | Expires within 10 years |  | Expires within 11-20 years |  | No expiration(1) |  | Other(2) |  | Total
Tax loss carryforwards | $ | 452 |  |  | $ | 235 |  |  | $ | 2,245 |  |  | $ | — |  |  | $ | 2,932 |
Tax credit carryforwards | 300 |  |  | 69 |  |  | 10 |  |  | — |  |  | 379 |
Other | — |  |  | — |  |  | 120 |  |  | 1,088 |  |  | 1,208 |
Valuation allowance | (711 | ) |  | (176 | ) |  | (1,306 | ) |  | (63 | ) |  | (2,256 | )
| $ | 41 |  |  | $ | 128 |  |  | $ | 1,069 |  |  | $ | 1,025 |  |  | $ | 2,263 |
(1) | Deferred tax assets with no expiration may still have annual limitations on utilization.
(2) | Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (27%) and taxable temporary differences that reverse within the carryforward period (73%). Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays. In 2018, Arconic made a final accounting policy election to apply a tax law ordering approach when considering the need for a valuation allowance on net operating losses expected to offset GILTI income inclusions. Under this approach, reductions in cash tax savings are not considered as part of the valuation allowance assessment. Instead, future GILTI inclusions are considered a source of taxable income that support the realizability of deferred tax assets. Arconic’s foreign tax credits in the United States have a 10-year carryforward period with expirations ranging from 2020 to 2028 (as of December 31, 2019). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. After consideration of all available evidence including potential tax planning strategies, incremental valuation allowances of $46 and $9 were recognized in 2018 and 2017, respectively. No additional valuation allowance was recorded in 2019 as the Company intends to deduct, rather than credit, foreign taxes. Foreign tax credits of $88, $8, and $57 expired at the end of 2019, 2018, and 2017, respectively, resulting in a corresponding decrease to the valuation allowance. The valuation allowance was also reduced by $113 as a result of Arconic deducting foreign taxes that were previously claimed as a U.S. foreign tax credit. At December 31, 2019, the cumulative amount of the valuation allowance was $216. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances. Arconic also recorded a valuation allowance of $10 related to capital losses and capital investments in 2019. Capital losses can only offset capital gain income. Arconic does not have sufficient sources of capital gain income to support the utilization of these losses and investments. The need for valuation allowances against capital losses and investments will be reassessed on a continuing basis. Arconic released $13 and $10 of certain U.S. state valuation allowances in 2019 and 2018, respectively. After weighing all available positive and negative evidence, the Company determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates. Valuation allowances of $672 remain against other net state deferred tax assets expected to expire before utilization. The need for valuation allowances against net state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances. In 2018, Arconic reduced a valuation allowance by $92 as a result of increasing a tax reserve for unrecognized tax benefits in Spain. The valuation allowance reduction was partially offset by a $20 charge with respect to losses no longer supported by reversing temporary differences. Arconic also recorded an additional valuation allowance of $61 and $675 in 2018 and 2017, respectively, which offsets a deferred tax asset recorded for additional losses reported on the Spanish tax return related to the Separation of Alcoa that are not more likely than not to be realized. The following table details the changes in the valuation allowance:
December 31, | 2019 |  | 2018 |  | 2017
Balance at beginning of year | $ | 2,486 |  |  | $ | 2,584 |  |  | $ | 1,940 |
Increase to allowance | 37 |  |  | 136 |  |  | 831 |
Release of allowance | (222 | ) |  | (154 | ) |  | (246 | )
Acquisitions and divestitures | (2 | ) |  | — |  |  | (1 | )
Tax apportionment, tax rate and tax law changes | (13 | ) |  | (14 | ) |  | (24 | )
Foreign currency translation | (30 | ) |  | (66 | ) |  | 84 |
Balance at end of year | $ | 2,256 |  |  | $ | 2,486 |  |  | $ | 2,584 |
As a result of the 2017 Act, the non-previously taxed post-1986 foreign earnings and profits (calculated based on U.S. tax principles) of certain U.S.-owned foreign corporations has been subject to U.S. tax under the one-time transition tax provisions. The 2017 Act also created a new requirement that certain income earned by foreign subsidiaries, GILTI, must be included in the gross income of the U.S. shareholder. The 2017 Act also established the Base Erosion and Anti-Abuse Tax (BEAT). In the first quarter of 2018, Arconic made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred. Arconic has estimated a GILTI inclusion for 2019 and 2018 and recorded tax expense accordingly. Arconic does not anticipate being subject to BEAT for 2019 and 2018. Foreign U.S. GAAP earnings that have not otherwise been subject to U.S. tax, will generally be exempt from future U.S. tax under the 2017 Act when distributed. Such distributions, as well as distributions of previously taxed foreign earnings, could potentially be subject to U.S. state tax in certain states, and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. At this time, Arconic has no plans to distribute such earnings in the foreseeable future. If such earnings were to be distributed, Arconic would expect the potential U.S. state tax and withholding tax impacts to be immaterial and the potential deferred tax liability associated with future foreign currency gains to be impracticable to determine. Arconic and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Arconic is no longer subject to income tax examinations by tax authorities for years prior to 2006. All U.S. tax years prior to 2019 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Arconic’s income tax returns for various tax years through 2018. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
December 31, | 2019 |  | 2018 |  | 2017
Balance at beginning of year | $ | 166 |  |  | $ | 73 |  |  | $ | 28 |
Additions for tax positions of the current year | 34 |  |  | — |  |  | 23 |
Additions for tax positions of prior years | 3 |  |  | 143 |  |  | 27 |
Reductions for tax positions of prior years | — |  |  | (42 | ) |  | — |
Settlements with tax authorities | — |  |  | — |  |  | — |
Expiration of the statute of limitations | (2 | ) |  | (6 | ) |  | (5 | )
Foreign currency translation | (4 | ) |  | (2 | ) |  | — |
Balance at end of year | $ | 197 |  |  | $ | 166 |  |  | $ | 73 |
For all periods presented, a portion of the balance pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2019, 2018, and 2017 would be approximately 13%, 5%, and 15%, respectively, of pre-tax book income. Arconic does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2020. It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. Arconic recognized interest of $6, $22 and $1 for 2019, 2018, and 2017, respectively. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Arconic recognized interest income of $0, $1, and $2 in 2019, 2018, and 2017, respectively. As of December 31, 2019, 2018, and 2017, the amount accrued for the payment of interest and penalties was $23, $21, and $2, respectively.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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