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INCOME TAXES | 12 Months Ended
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Dec. 31, 2021
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES The income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 consists of the following (in millions):
| 2021 |  | 2020 |  | 2019
Current: |  |  |  |  |
U.S. Federal | $ | 1,388 |  |  | $ | 839 |  |  | $ | 570 |
U.S. State and Local | 194 |  |  | 100 |  |  | 183 |
Non-U.S. | 478 |  |  | 420 |  |  | 359 |
Total Current | 2,060 |  |  | 1,359 |  |  | 1,112 |
Deferred: |  |  |  |  |
U.S. Federal | 1,311 |  |  | (725) |  |  | 255 |
U.S. State and Local | 273 |  |  | (159) |  |  | (93) |
Non-U.S. | 61 |  |  | 26 |  |  | (62) |
Total Deferred | 1,645 |  |  | (858) |  |  | 100 |
Total Income Tax Expense | $ | 3,705 |  |  | $ | 501 |  |  | $ | 1,212 |
Income before income taxes includes the following components (in millions):
| 2021 |  | 2020 |  | 2019
United States | $ | 14,220 |  |  | $ | (39) |  |  | $ | 3,972 |
Non-U.S. | 2,375 |  |  | 1,883 |  |  | 1,680 |
Total Income Before Income Taxes: | $ | 16,595 |  |  | $ | 1,844 |  |  | $ | 5,652 |
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2021, 2020 and 2019 consists of the following:
| 2021 |  | 2020 |  | 2019
Statutory U.S. federal income tax rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
U.S. state and local income taxes (net of federal benefit) (1) | 2.2 |  |  | (2.6) |  |  | 1.4 |
Non-U.S. tax rate differential | — |  |  | 1.6 |  |  | 0.3 |
U.S. federal tax credits | (0.4) |  |  | (3.6) |  |  | (1.4) |
Goodwill and other asset impairments | — |  |  | 5.1 |  |  | — |
Net uncertain tax positions | 0.6 |  |  | 3.6 |  |  | 0.1 |
Non-U.S. valuation allowance release | — |  |  | — |  |  | (1.2) |
Other | (1.1) |  |  | 2.1 |  |  | 1.2 |
Effective income tax rate | 22.3 | % |  | 27.2 | % |  | 21.4 | %
(1)The 2020 state tax impact to the effective tax rate is negative due to the favorable proportion of state tax credits in comparison to pretax income. Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year. Our effective tax rate was 22.3% in 2021, compared with 27.2% in 2020 and 21.4% in 2019, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items. 2021 Discrete Items We recognized an income tax expense of $784 million related to a pre-tax mark-to-market gain of $3.3 billion on our pension and U.S. postretirement defined benefit plans. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes. We recorded pre-tax transformation strategy costs of $380 million during the year ended December 31, 2021. As a result, we recorded an additional income tax benefit of $95 million. This income tax benefit was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes. We recorded a pre-tax gain of $46 million during the year ended December 31, 2021 related to the divestiture of UPS Freight. As a result, we recorded an additional income tax expense of $11 million. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes. The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $105 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2021. 2020 Discrete Items In the fourth quarter of 2020, we recognized an income tax benefit of $1.6 billion related to pre-tax mark-to-market losses of $6.5 billion on our pension and U.S. postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes. We recorded pre-tax transformation strategy costs of $348 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $83 million. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes. We recorded pre-tax goodwill and other asset impairment charges of $686 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $57 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the costs related to goodwill impairment, which is not deductible for tax purposes. The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $28 million and reduced our effective tax rate by 1.5% during the year ended December 31, 2020. Our 2020 effective tax rate was also unfavorably impacted by new uncertain tax positions. 2019 Discrete Items In the fourth quarter of 2019, we recognized an income tax benefit of $571 million related to pre-tax mark-to-market losses of $2.4 billion on our pension and U.S. postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes. We recorded pre-tax transformation strategy costs of $255 million during the year ended December 31, 2019. As a result, we recorded an additional income tax benefit of $59 million. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes. Legal contingencies and expenses of $97 million were accrued during 2019 in respect of certain legal proceedings for which we recorded an additional income tax benefit of $6 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the accrual related to penalties, which are not deductible for tax purposes. As of December 31, 2018, we maintained a valuation allowance against certain deferred tax assets, primarily related to foreign net operating loss carryforwards. As of each reporting date, we consider new evidence, both positive and negative, that could affect the future realization of deferred tax assets. During 2019, we determined that there was sufficient positive evidence to conclude that it was more likely than not that the deferred tax assets related to certain foreign net operating loss carryforwards would be realized. This conclusion was primarily related to achieving cumulative three-year income and anticipated future earnings within the relevant jurisdiction. Accordingly, we reversed the related valuation allowance and recognized a discrete tax benefit of approximately $68 million. Other factors that impacted our 2019 effective tax rate include favorable tax provisions enacted in the Taxpayer Certainty and Disaster Tax Relief Act of 2019. Other Items Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which was effective through December 31, 2021. The tax incentive was conditioned upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $61, $35 and $27 million (increased diluted earnings per share by $0.07, $0.04 and $0.03) for 2021, 2020 and 2019, respectively. Deferred income tax assets and liabilities are comprised of the following as of December 31, 2021 and 2020 (in millions):
| 2021 |  | 2020
Fixed assets and capitalized software | $ | (5,808) |  |  | $ | (5,355) |
Operating lease right-of-use assets | (839) |  |  | (730) |
Other | (593) |  |  | (501) |
Deferred tax liabilities | (7,240) |  |  | (6,586) |
Pension and postretirement benefits | 1,620 |  |  | 3,994 |
Loss and credit carryforwards | 342 |  |  | 325 |
Insurance reserves | 587 |  |  | 535 |
Stock compensation | 219 |  |  | 183 |
Accrued employee compensation | 453 |  |  | 583 |
Operating lease liabilities | 874 |  |  | 736 |
Other | 318 |  |  | 357 |
Deferred tax assets | 4,413 |  |  | 6,713 |
Deferred tax assets valuation allowance | (122) |  |  | (88) |
Deferred tax asset (net of valuation allowance) | 4,291 |  |  | 6,625 |
Net deferred tax asset (liability) | $ | (2,949) |  |  | $ | 39 |
Amounts recognized in the consolidated balance sheets: |  |  |
Deferred tax assets | $ | 176 |  |  | $ | 527 |
Deferred tax liabilities | (3,125) |  |  | (488) |
Net deferred tax asset (liability) | $ | (2,949) |  |  | $ | 39 |
The valuation allowance changed by $34, $34 and $(58) million during the years ended December 31, 2021, 2020 and 2019, respectively. We have a U.S. federal capital loss carryforward of $185 million as of December 31, 2021, $18 million of which expires on December 31, 2025 and the remainder of which expires on December 31, 2026. Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
| 2021 |  | 2020
U.S. state and local operating loss carryforwards | $ | 924 |  |  | $ | 1,253 |
U.S. state and local credit carryforwards | $ | 90 |  |  | $ | 108 |
The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $674 million as of December 31, 2021, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. federal, state and non-U.S. carryforwards and outside basis differences due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions and other limitations. Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $5.4 billion as of December 31, 2021. Currently, $834 million of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation. In December 2017, the United States enacted into law the Tax Act, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. We elected to pay the tax over eight years based on an installment schedule outlined in the Tax Act. The remaining liability of $123 million, to be paid between 2023 and 2025, is reflected as a non-current liability on the balance sheet. The following table summarizes the activity related to our uncertain tax positions (in millions):
| Tax |  | Interest |  | Penalties
Balance as of January 1, 2019 | $ | 167 |  |  | $ | 44 |  |  | $ | 5 |
Additions for tax positions of the current year | 6 |  |  | — |  |  | — |
Additions for tax positions of prior years | 51 |  |  | 13 |  |  | — |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (45) |  |  | (4) |  |  | (1) |
Settlements during the period | (3) |  |  | (1) |  |  | — |
Lapses of applicable statute of limitations | (4) |  |  | — |  |  | — |
Balance as of December 31, 2019 | 172 |  |  | 52 |  |  | 4 |
Additions for tax positions of the current year | 61 |  |  | — |  |  | — |
Additions for tax positions of prior years | 154 |  |  | 34 |  |  | 2 |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (54) |  |  | (24) |  |  | (2) |
Settlements during the period | — |  |  | (1) |  |  | — |
Lapses of applicable statute of limitations | — |  |  | — |  |  | — |
Balance as of December 31, 2020 | 333 |  |  | 61 |  |  | 4 |
Additions for tax positions of the current year | 85 |  |  | — |  |  | — |
Additions for tax positions of prior years | 107 |  |  | 23 |  |  | — |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (42) |  |  | (4) |  |  | (2) |
Settlements during the period | (3) |  |  | (2) |  |  | — |
Lapses of applicable statute of limitations | — |  |  | — |  |  | — |
Balance as of December 31, 2021 | $ | 480 |  |  | $ | 78 |  |  | $ | 2 |
The total amount of gross uncertain tax positions as of December 31, 2021, 2020 and 2019 that, if recognized, would affect the effective tax rate was $479, $332 and $171 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense. We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2016. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the liability for uncertain tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to uncertain tax positions include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations, or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.

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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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