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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes U.S. and foreign income before taxes are set forth below:
|  | 2020 |  | 2019 |  | 2018
U.S. |  | $ | 684 |  |  | $ | 466 |  |  | $ | 726 |
Foreign |  | 336 |  |  | 907 |  |  | 1,113 |
|  | $ | 1,020 |  |  | $ | 1,373 |  |  | $ | 1,839 |
The details of our income tax provision (benefit) are set forth below:
|  |  |  | 2020 |  | 2019 |  | 2018
Current: |  | Federal |  | $ | 37 |  |  | $ | 129 |  |  | $ | 102 |
|  | Foreign |  | 121 |  |  | 166 |  |  | 181 |
|  | State |  | 23 |  |  | 16 |  |  | 25 |
|  |  |  | $ | 181 |  |  | $ | 311 |  |  | $ | 308 |
Deferred: |  | Federal |  | $ | (21) |  |  | $ | (16) |  |  | $ | (24) |
|  | Foreign |  | (29) |  |  | (213) |  |  | 5 |
|  | State |  | (15) |  |  | (3) |  |  | 8 |
|  |  |  | $ | (65) |  |  | $ | (232) |  |  | $ | (11) |
|  |  |  | $ | 116 |  |  | $ | 79 |  |  | $ | 297 |
The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:
|  | 2020 |  | 2019 |  | 2018
U.S. federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
State income tax, net of federal tax |  | 1.0 |  |  | 0.9 |  |  | 0.8 |
Statutory rate differential attributable to foreign operations |  | (0.9) |  |  | 0.9 |  |  | (4.6) |
Adjustments to reserves and prior years |  | (1.7) |  |  | 2.3 |  |  | 2.8 |
Excess tax benefits from stock-based awards |  | (3.4) |  |  | (3.6) |  |  | (2.4) |
Change in valuation allowances |  | (2.5) |  |  | (0.6) |  |  | 0.7 |
Intercompany restructuring |  | (0.3) |  |  | (16.6) |  |  | — |
Impact of Tax Law Changes |  | (2.5) |  |  | — |  |  | (1.9) |
Other, net |  | 0.7 |  |  | 1.4 |  |  | (0.2) |
Effective income tax rate |  | 11.4 | % |  | 5.7 | % |  | 16.2 | %
Statutory rate differential attributable to foreign operations. This item includes local country taxes, withholding taxes, and shareholder-level taxes, net of foreign tax credits. In 2020, this item was favorably impacted by the ongoing effects of the fourth quarter 2019 intercompany restructuring that resulted in the transfer of certain intellectual property rights from wholly owned foreign subsidiaries to the United States (U.S.) and the United Kingdom (UK). In 2019, this item was unfavorably impacted by the full year impact of the global intangible low-taxed income (GILTI) and Foreign Derived Intangible Income (FDII) provisions of the Tax Cuts and Jobs Act of 2017. In 2018, this item was not significantly impacted by the GILTI or FDII provisions. Adjustments to reserves and prior years. This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. In 2020, this item was favorably impacted by $11 million of adjustments made to current and deferred tax accounts in various jurisdictions to align with balances supported by 2019 and prior tax filings. Additionally, in 2020 this item was favorably impacted by a $6 million tax benefit associated with a state settlement. In 2019, this item was unfavorably impacted by $34 million in reserves related to taxes recorded associated with a prior year divestiture and $18 million of tax expense related to the establishment of reserves associated with the inclusion of stock based compensation in cost sharing arrangements as well as other matters. This unfavorable impact was partially offset by the reversal of a $20 million reserve established in 2018 due to the favorable resolution of an income tax rate dispute in a foreign jurisdiction. In 2018, this item was unfavorably impacted by the aforementioned $20 million reserve and a $19 million charge for the correction of an error associated with the tax recorded on a prior year divestiture. Excess tax benefits from stock-based awards. 2020, 2019 and 2018 includes $35 million, $49 million and $44 million, respectively, of excess federal tax benefit related to share-based compensation. Change in valuation allowances. This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year. In 2020, this item was favorably impacted by $22 million of tax benefit associated with a valuation allowance release in a foreign jurisdiction resulting from a change in management’s judgement as to realizability of indefinite lived tax loss carryforward in that jurisdiction. Intercompany Restructuring. In December 2019, the Company completed an intercompany restructuring that resulted in the transfer of certain intellectual property rights held by wholly owned foreign subsidiaries primarily to the U.S. and the UK. The intellectual property rights transferred to the UK resulted in a step up in the tax basis for UK tax purposes resulting in a deferred tax asset of $586 million. The deferred tax asset was analyzed for realizability and a valuation allowance of $366 million was established representing the portion of the deferred tax asset not likely to be realized. The recognized tax benefit of $220 million is amortizable for UK tax purposes over a twenty-year period. The transfer of certain intellectual property rights to other non-UK jurisdictions in 2019 resulted in the recording of deferred tax assets of $13 million and related valuation allowances of $7 million for deferred tax assets that are not likely to be realized, for a net tax benefit of $6 million. Impact of Significant Tax Law Changes. UK Tax Rate Change – On July 22, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%. As such, the Company recognized a $25 million tax benefit in 2020 associated with remeasuring its deferred tax assets in the UK from 17% to 19%. These deferred tax assets were primarily related to the step-up in tax basis associated with the Intercompany Restructuring. U.S. Tax Reform - On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act significantly modified the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from 35% to 21%, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, imposed a mandatory one-time deemed repatriation tax on accumulated foreign earnings and changed the manner in which foreign earnings are subject to U.S. tax. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 which allowed us to record provisional amounts related to the impacts of the Tax Act during a measurement period not to extend beyond one year of the enactment date. As a result, we recorded a $434 million provisional estimate of the effect of the Tax Act in 2017. This expense was comprised of an estimate of our deemed repatriation tax, the remeasurement of net deferred tax assets resulting from the permanent reduction in the U.S. tax rate to 21%, and establishment of a valuation allowance on foreign tax credit carryforwards which were unlikely to be realized under revised U.S tax law. In 2018, we completed the accounting for the tax effects of the enactment of the Tax Act. As a result of the Tax Act, we recorded cumulative net tax expense of $399 million ($35 million benefit in 2018 and $434 million expense in 2017). This net expense was comprised of $241 million for our deemed repatriation tax liability, $47 million related to the remeasurement of our net deferred tax assets to the 21% U.S. tax rate and $111 million to establish a valuation allowance on foreign tax credits that are unlikely to be realized under revised U.S. tax law. Other. This item primarily includes the net impact of permanent differences related to current year earnings, U.S. tax credits, and other individually insignificant items impacting income tax expense. Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost. The details of 2020 and 2019 deferred tax assets (liabilities) are set forth below:
|  | 2020 |  | 2019
Operating losses and interest deduction carryforwards |  | $ | 181 |  |  | $ | 176 |
Capital losses |  | 3 |  |  | 3 |
Tax credit carryforwards |  | 226 |  |  | 230 |
Employee benefits |  | 82 |  |  | 85 |
Share-based compensation |  | 58 |  |  | 55 |
Lease-related liabilities |  | 199 |  |  | 199 |
Accrued liabilities and other |  | 47 |  |  | 49 |
Derivative instruments |  | 50 |  |  | 30 |
Intangible assets |  | 678 |  |  | 602 |
Property, plant and equipment |  | 31 |  |  | 21 |
Deferred income |  | 81 |  |  | 55 |
Gross deferred tax assets |  | 1,636 |  |  | 1,505 |
Deferred tax asset valuation allowances |  | (789) |  |  | (787) |
Net deferred tax assets |  | $ | 847 |  |  | $ | 718 |
Intangible assets, including goodwill |  | $ | (1) |  |  | $ | (40) |
Property, plant and equipment |  | (75) |  |  | (44) |
Operating lease right-of-use assets |  | (161) |  |  | (156) |
Other |  | (57) |  |  | (31) |
Gross deferred tax liabilities |  | $ | (294) |  |  | $ | (271) |
Net deferred tax assets (liabilities) |  | $ | 553 |  |  | $ | 447 |
The details of the 2020 valuation allowance activity are set forth below:
|  | 2020 |  | 2019
Beginning of Year |  | $ | (787) |  |  | $ | (454) |
Increases |  | (64) |  |  | (384) |
Decreases |  | 45 |  |  | 57 |
Other Adjustments |  | 17 |  |  | (6) |
End of Year |  | $ | (789) |  |  | $ | (787) |
Net deferred tax assets (liabilities) for 2020 and 2019 are reported in our Consolidated Balance Sheets as Deferred income taxes. As of December 31, 2020, we had approximately $3.9 billion of unremitted foreign retained earnings. The Tax Act imposed U.S. federal tax on all post-1986 foreign Earnings and Profits accumulated through December 31, 2017. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. tax. Undistributed foreign earnings may still be subject to certain foreign income and withholding taxes upon repatriation. Subject to limited exceptions, our intent is to indefinitely reinvest our unremitted earnings outside the U.S., and our current plans do not demonstrate a need to repatriate these amounts to fund our U.S. operations. Thus, we have not provided taxes, including U.S. federal and state income, foreign income, or foreign withholding taxes, for the unremitted earnings that we believe are permanently invested. However, if these funds were repatriated in taxable transactions, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes. A determination of the deferred tax liability on this amount is not practicable due to the complexities, variables and assumptions inherent in the hypothetical calculations. Details of tax loss, credit carryforwards, and expiration dates along with valuation allowances as of December 31, 2020, are as follows:
|  | Gross Amount |  | Deferred Tax Asset |  | Valuation Allowance |  | Expiration
Federal net operating losses |  | $ | 25 |  |  | $ | 5 |  |  | $ | — |  |  | 2035-2036
Federal net operating losses - Indefinite |  | 61 |  |  | 13 |  |  | — |  |  | None
Foreign net operating losses |  | 32 |  |  | 10 |  |  | (10) |  |  | 2021-2030
Foreign net operating losses - Indefinite |  | 253 |  |  | 75 |  |  | (51) |  |  | None
State net operating losses |  | 1,268 |  |  | 63 |  |  | (48) |  |  | 2021-2039
Foreign capital loss carryforward - Indefinite |  | 14 |  |  | 3 |  |  | (3) |  |  | None
Foreign tax credits |  | 220 |  |  | 220 |  |  | (220) |  |  | 2023-2030
State tax credits |  | 8 |  |  | 6 |  |  | (5) |  |  | 2023
State interest deduction carryforward - Indefinite |  | 361 |  |  | 15 |  |  | (15) |  |  | None
|  | $ | 2,242 |  |  | $ | 410 |  |  | $ | (352) |  |  |
We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2020, the Company had $175 million of gross unrecognized tax benefits, $132 million of which would impact the effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:
|  | 2020 |  | 2019
Beginning of Year |  | $ | 188 |  |  | $ | 113 |
Additions on tax positions - current year |  | 5 |  |  | 84 |
Additions for tax positions - prior years |  | 34 |  |  | 54 |
Reductions for tax positions - prior years |  | (22) |  |  | (30) |
Reductions for settlements |  | (30) |  |  | (31) |
Reductions due to statute expiration |  | — |  |  | (2) |
Foreign currency translation adjustment |  | — |  |  | — |
End of Year |  | $ | 175 |  |  | $ | 188 |
The Company believes it is reasonably possible that its unrecognized tax benefits as of December 31, 2020, may decrease by approximately $30 million in the next 12 months due to settlements or statute of limitations expirations. During 2020, 2019, and 2018 the Company recognized $2 million of net expense, $13 million of net expense, and $2 million of net benefit, respectively, for interest and penalties in our Consolidated Statements of Income as components of its Income tax provision. At December 31, 2020 and December 31, 2019, the Company has recorded $1 million of net tax receivables and $26 million of net tax payables, respectively, associated with interest and penalties. The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions. The Company has settled audits with the IRS through fiscal year 2012 and is currently under IRS examination for 2013-2015. Our operations in certain foreign jurisdictions remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities.

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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=84230637&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=116825942&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=84230637&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=116825942&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=84230637&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 + Details
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