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Income Taxes

12 Months Ended

Dec. 31, 2020

NOTE 9 – Income Taxes

The components of income before income taxes and the provision for income taxes are shown below:


	Year Ended December 31,
(in millions)	2020		2019		2018
Income (loss) before income taxes:
U.S.	$	(15)	$	74	$	121
Foreign		521		508		500
Total income before income taxes		506		582		621
Provision for income taxes:
Current tax expense:
U.S. federal		1		6		17
State and local		2		2		1
Foreign		156		147		172
Total current tax expense		159		155		190
Deferred tax expense (benefit):
U.S. federal		(18)		(8)		(14)
State and local		(1)		—		(2)
Foreign		12		11		(7)
Total deferred tax expense (benefit)		(7)		3		(23)
Total provision for income taxes	$	152	$	158	$	167

Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Significant temporary differences as of December 31, 2020 and 2019 are summarized as follows:


	As of December 31,
(in millions)	2020		2019
Deferred tax assets attributable to:
Employee benefit accruals	$	20	$	23
Pensions and postretirement plans		21		22
Lease liabilities		44		39
Derivative contracts		—		2
Other		60		46
Net operating loss carryforwards		32		24
Foreign tax credit carryforwards		5		1
Total deferred tax assets		182		157
Valuation allowances		(30)		(29)
Total deferred tax assets (net of valuation allowance)		152		128
Deferred tax liabilities attributable to:
Property, plant and equipment		173		175
Identified intangibles		46		41
Right-of-use lease assets		42		37
Foreign withholding and state taxes on unremitted earnings		31		32
Goodwill		20		17
Brazilian indirect tax credits		18		8
Derivative contracts		16		—
Total deferred tax liabilities		346		310
Net deferred tax liabilities	$	194	$	182

Of the $32 million of tax-effected net operating loss carryforwards as of December 31, 2020, approximately $12 million are for state loss carryforwards and approximately $20 million are for foreign loss carryforwards. Of the $24 million of tax-effected net operating loss carryforwards as of December 31, 2019, approximately $9 million are for state loss carryforwards and approximately $15 million are for foreign loss carryforwards. Income tax accounting requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making this assessment, management considers the level of historical taxable income, scheduled reversal of deferred tax liabilities, tax planning strategies, tax carryovers and projected future taxable income. As of December 31, 2020, the Company maintained valuation allowances of $12 million for state loss carryforwards, $4 million for state credits, $1 million for state Internal Revenue Code section 163(j) limitations, $5 million for foreign tax credits and $6 million for foreign loss carryforwards, all of which management has determined will more likely than not expire prior to realization. As of December 31, 2019, the Company maintained valuation allowances of $9 million for state loss carryforwards, $4 million for state credits, $1 million for state Internal Revenue Code section 163(j) limitations, $1 million for foreign tax credits and $13 million for foreign loss carryforwards all of which management has determined will more likely than not expire prior to realization. In addition, the Company maintains valuation allowances on foreign subsidiaries’ net deferred tax assets of $2 million and $1 million, for the years ended December 31, 2020 and 2019, respectively.

Net operating loss carryforwards disclosed in the financial statements differ from the as-filed tax returns due to an unrecognized tax benefit. Foreign net operating loss carryforwards would increase $19 million, absent the unrecognized tax benefit.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate follows:


	Year Ended December 31,
	2020		2019		2018
Provision for tax at U.S. statutory rate	21.0	%	21.0	%	21.0	%
Tax rate difference on foreign income	7.9		5.8		5.2
Net impact of tax benefit of intercompany financings	(0.8)		(1.2)		(0.8)
Net impact of global intangible low-taxed income (“GILTI”)	(1.0)		1.2		1.0
Net impact of U.S. foreign tax credits	1.6		1.0		0.5
Net impact of valuation allowance in Argentina	(0.6)		0.3		1.0
Other items, net	1.9		(1.0)		(1.0)
Provision at effective tax rate	30.0	%	27.1	%	26.9	%

The Company has significant operations in Mexico, Pakistan and Colombia where the 2020 statutory tax rates are 30 percent, 29 percent and 33 percent (including local trade taxes), respectively. In addition, the Company's subsidiary in Brazil has a statutory tax rate of 34 percent before the application of local incentives that vary each year.

The Company made an accounting election to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) During the year ended December 31, 2020, the Company made a GILTI high-tax exclusion election with respect to the years ended December 31, 2020 and 2019. As a result, the company recorded a tax benefit in the amount of $5 million, or 1.0 percentage points on the effective tax rate.

During the year ended December 31, 2020, the Company utilized previously unbenefited net operating losses in Argentina and recorded a benefit of $3 million, or 0.6 percentage points on the effective rate. The Company recorded valuation allowances in the amount of $2 million, or 0.3 percentage points on the effective tax rate, and $6 million, or 1.0 percentage points on the effective tax rate for the years ended December 31, 2019 and 2018, respectively.

As of December 31, 2017, for U.S. tax purposes, all of the undistributed earnings and profits of the Company’s foreign subsidiaries were deemed to be repatriated and subjected to a transition tax. As of December 31, 2020, the remaining balance was a $31 million liability for foreign withholding and state income taxes on certain unremitted earnings from foreign subsidiaries. No foreign withholding taxes, federal and state taxes on foreign currency gains/losses have been provided on distributions of approximately $2.2 billion of unremitted earnings of the Company’s foreign subsidiaries, as such amounts are considered permanently reinvested. It is not practicable to estimate the additional income taxes, including applicable foreign withholding taxes that would be due upon the repatriation of these earnings.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for 2020 and 2019 is as follows:


	Year Ended December 31,
(in millions)	2020		2019
Balance at January 1	$	22	$	30
Additions for tax positions related to prior years		33		—
Reductions related to a lapse in the statute of limitations		(9)		(8)
Balance at December 31	$	46	$	22

Of the $46 million of unrecognized tax benefits as of December 31, 2020, $36 million represents the amount that, if recognized, could affect the effective tax rate in future periods. The remaining $10 million includes an offset of $9 million for an income tax receivable and $1 million of federal benefit created as part of a U.S.-Canada tax settlement.

The Company accounts for interest and penalties related to income tax matters within the provision for income taxes. The Company has accrued $4 million of interest expense and penalties related to the unrecognized tax benefits as of December 31, 2020. The accrued interest expense was $2 million as of December 31, 2019.

The Company is subject to U.S. federal income tax as well as income tax in multiple states and non-U.S. jurisdictions. The U.S. federal tax returns are subject to audit for the years 2016 through 2019. In general, the Company’s foreign subsidiaries remain subject to audit for years 2010 and later.

It is reasonably possible that the total amount of unrecognized tax benefits including interest and penalties will increase or decrease within 12 months of December 31, 2020. The Company believes it is reasonably possible that approximately $12 million of unrecognized tax benefits may be recognized within 12 months of December 31, 2020 as a result of a lapse of the statute of limitations, of which $3 million, could affect the effective tax rate. The Company has classified none of the unrecognized tax benefits as current because they are not expected to be resolved within the next 12 months.

- 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.

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