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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | Note 6. Income Taxes The components of Income (Loss) before Income Taxes follow:
(In millions) |  | 2020 |  |  | 2019 |  |  | 2018 |
U.S. |  | $ | (993 | ) |  | $ | (39 | ) |  | $ | 439 |
Foreign |  |  | (147 | ) |  |  | 216 |  |  |  | 572 |
|  | $ | (1,140 | ) |  | $ | 177 |  |  | $ | 1,011 |
A reconciliation of income taxes at the U.S. statutory rate to United States and Foreign Tax Expense follows:
(In millions) |  | 2020 |  |  | 2019 |  |  | 2018 |
U.S. federal income tax expense (benefit) at the statutory rate of 21% |  | $ | (239 | ) |  | $ | 37 |  |  | $ | 212 |
Net establishment (release) of U.S. valuation allowances |  |  | 310 |  |  |  | (98 | ) |  |  | 25 |
Net foreign losses (income) with no tax due to valuation allowances |  |  | 37 |  |  |  | 48 |  |  |  | 7 |
Goodwill impairment |  |  | 34 |  |  |  | — |  |  |  | — |
Deferred tax impact of enacted tax rate and law changes |  |  | (18 | ) |  |  | 3 |  |  |  | — |
State income taxes, net of U.S. federal benefit |  |  | (17 | ) |  |  | (1 | ) |  |  | (1 | )
U.S. charges (benefits) related to foreign tax credits, R&D and foreign derived intangible deduction |  |  | (9 | ) |  |  | (17 | ) |  |  | 20 |
Adjustment for foreign income taxed at different rates |  |  | 7 |  |  |  | 16 |  |  |  | 30 |
Net establishment of uncertain tax positions |  |  | 6 |  |  |  | 7 |  |  |  | 18 |
Federal and state tax on accelerated royalty income transaction |  |  | — |  |  |  | 334 |  |  |  | — |
Net establishment (release) of foreign valuation allowances |  |  | — |  |  |  | 140 |  |  |  | (5 | )
Other |  |  | (1 | ) |  |  | 5 |  |  |  | (3 | )
United States and Foreign Tax Expense |  | $ | 110 |  |  | $ | 474 |  |  | $ | 303 |
The components of United States and Foreign Tax Expense by taxing jurisdiction, follow:
(In millions) |  | 2020 |  |  | 2019 |  |  | 2018 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (5 | ) |  | $ | — |  |  | $ | (15 | )
Foreign |  |  | 95 |  |  |  | 134 |  |  |  | 188 |
State |  |  | (3 | ) |  |  | 17 |  |  |  | (1 | )
|  |  | 87 |  |  |  | 151 |  |  |  | 172 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 63 |  |  |  | 133 |  |  |  | 120 |
Foreign |  |  | (31 | ) |  |  | 153 |  |  |  | 6 |
State |  |  | (9 | ) |  |  | 37 |  |  |  | 5 |
|  |  | 23 |  |  |  | 323 |  |  |  | 131 |
United States and Foreign Tax Expense |  | $ | 110 |  |  | $ | 474 |  |  | $ | 303 |
Income tax expense in 2020 was $110 million on a loss before income taxes of $1,140 million. In 2020, income tax expense was unfavorably impacted by net discrete adjustments totaling $305 million, including the establishment of a $295 million valuation allowance on certain deferred tax assets for foreign tax credits during the first quarter of 2020 as discussed below. Discrete adjustments also reflect a net charge of $10 million, including a $15 million charge related to a U.S. valuation allowance for state loss carryforwards, a $13 million benefit to adjust our deferred tax assets in England for a third quarter enacted change in the tax rate, and various other net charges totaling $8 million. In 2019, income tax expense of $474 million was unfavorably impacted by net discrete adjustments totaling $386 million. Discrete adjustments were due to non-cash charges of $334 million related to an acceleration of royalty income in the U.S. from the sale of certain European royalty payments to Luxembourg and $150 million related to an increase in our valuation allowance on tax losses in Luxembourg, which were partially offset by a non-cash tax benefit of $98 million related to a reduction of our U.S. valuation allowance for foreign tax credits. In 2018, income tax expense of $303 million was unfavorably impacted by net discrete adjustments of $65 million. Discrete adjustments were primarily due to charges totaling $135 million related to deferred tax assets for foreign tax credits, including the establishment of a valuation allowance on foreign tax credits of $98 million, partially offset by a tax benefit of $88 million related to a worthless stock deduction created by permanently ceasing operations of our Venezuelan subsidiary during the fourth quarter of 2018. Income tax expense in 2018 also included net charges of $18 million for various other discrete tax adjustments, including those related to finalizing our accounting for certain provisional items related to the Tax Cuts and Jobs Act. We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives (such as tax loss carryforwards and tax credits) prior to their expiration. We consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized. At December 31, 2020, we had approximately $1.2 billion of U.S. federal, state and local deferred tax assets, net of valuation allowances totaling $368 million primarily for foreign tax credits with limited lives. Approximately $900 million of these U.S. net deferred tax assets have unlimited lives and approximately $300 million have limited lives and expire between 2025 and 2040. At December 31, 2019, we had approximately $1.2 billion of U.S. federal, state and local deferred tax assets, net of valuation allowances totaling $13 million. In the U.S., we have a cumulative loss for the three-year period ending December 31, 2020. However, as the three-year cumulative loss in the U.S. is driven by the business disruption created by the COVID-19 pandemic, in assessing our ability to utilize our deferred tax assets, we also considered objectively verifiable information including recent favorable recovery trends in the tire industry and our tire volume as well as the return to profitability of our U.S. business by the end of the fourth quarter and its expected continued improvement. While the COVID-19 related disruptions to our business are ultimately expected to be temporary, there is still considerable uncertainty around the extent and duration of these disruptions, as well as what additional actions federal, state or local governments may take to contain the pandemic. As such, an additional valuation allowance may be required against all, or a portion of, our U.S. net deferred tax assets in a future period. At December 31, 2020 and 2019, our U.S. deferred tax assets included $133 million and $403 million of foreign tax credits with limited lives, net of valuation allowances of $328 million and $3 million, respectively, generated primarily from the receipt of foreign dividends. During the first quarter of 2020, we established a valuation allowance of $295 million against all of these foreign tax credits with expiration dates through 2024 and a portion of those expiring in 2025. In addition, during the fourth quarter of 2020, we increased our valuation allowance by $30 million with a corresponding increase to our deferred tax assets to reflect the impact of a decrease in foreign tax credits utilized on our 2019 income tax return. Due to the sudden and sharp decline in industry demand and the temporary suspension of production at our U.S. manufacturing facilities as a result of the COVID-19 pandemic, we have a significant U.S. tax loss for 2020. As loss carryforwards must be utilized prior to foreign tax credits in offsetting future income for tax purposes, we concluded that it is not more likely than not that we will be able to utilize these foreign tax credits prior to their expiration. Our earnings and forecasts of future profitability, taking into consideration recent trends, along with three significant sources of foreign income provide us sufficient positive evidence that we will be able to utilize our remaining foreign tax credits that expire between 2025 and 2030. Our sources of foreign income are (1) 100% of our domestic profitability can be re-characterized as foreign source income under current U.S. tax law to the extent domestic losses have offset foreign source income in prior years, (2) annual net foreign source income, exclusive of dividends, primarily from royalties, and (3) tax planning strategies, including capitalizing research and development costs, accelerating income on cross border transactions, including sales of inventory or raw materials to our subsidiaries, and reducing U.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, all of which would increase our domestic profitability. We consider our current forecasts of future profitability in assessing our ability to realize our deferred tax assets, including our foreign tax credits. As noted above, these forecasts include the impact of recent trends, including various macroeconomic factors such as the impact of the COVID-19 pandemic, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including the impact of the COVID-19 pandemic, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future earnings will not be sufficient to fully utilize our U.S. net deferred tax assets, including our remaining foreign tax credits. However, we believe our forecasts of future profitability along with the three significant sources of foreign income described above provide us sufficient positive, objectively verifiable evidence to conclude that it is more likely than not that, at December 31, 2020, our U.S. net deferred tax assets, including our foreign tax credits, net of valuation allowances, will be fully utilized. At December 31, 2020 and 2019, we had approximately $1.3 billion and $1.2 billion of foreign deferred tax assets, respectively, and valuation allowances of $1.1 billion and $1.0 billion, respectively. Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of these net foreign deferred tax assets. Most notably, in Luxembourg, we maintain a valuation allowance of $978 million on all of our net deferred tax assets. Each reporting period, we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. We do not believe that sufficient positive evidence required to release valuation allowances having a significant impact on our financial position or results of operations will exist within the next twelve months. Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31 follow:
(In millions) |  | 2020 |  |  | 2019 |
Tax loss carryforwards and credits |  | $ | 1,570 |  |  | $ | 1,159 |
Prepaid royalty income |  |  | 629 |  |  |  | 576 |
Capitalized research and development expenditures |  |  | 421 |  |  |  | 416 |
Accrued expenses deductible as paid |  |  | 255 |  |  |  | 347 |
Postretirement benefits and pensions |  |  | 209 |  |  |  | 221 |
Lease liabilities |  |  | 76 |  |  |  | 75 |
Rationalizations and other provisions |  |  | 34 |  |  |  | 38 |
Vacation and sick pay |  |  | 21 |  |  |  | 23 |
Other |  |  | 133 |  |  |  | 106 |
|  |  | 3,348 |  |  |  | 2,961 |
Valuation allowance |  |  | (1,469 | ) |  |  | (982 | )
Total deferred tax assets |  |  | 1,879 |  |  |  | 1,979 |
Property basis differences |  |  | (420 | ) |  |  | (467 | )
Right-of-use assets |  |  | (75 | ) |  |  | (74 | )
Tax on undistributed earnings of subsidiaries |  |  | (1 | ) |  |  | (1 | )
Total net deferred tax assets |  | $ | 1,383 |  |  | $ | 1,437 |
At December 31, 2020, we had $704 million of tax assets for net operating loss, capital loss and tax credit carryforwards related to certain foreign subsidiaries. These carryforwards are primarily from countries with unlimited carryforward periods, but include $69 million of tax credit carryforwards in various European countries that are subject to expiration from 2021 to 2030. A valuation allowance totaling $1,101 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $767 million of federal and $99 million of state tax assets for net operating loss and tax credit carryforwards. The federal carryforwards include $461 million of foreign tax credits that are subject to expiration from 2022 to 2030 and $92 million of tax assets related to research and development credits and other federal credits that are subject to expiration from 2030 to 2040. The state carryforwards include $87 million that are subject to expiration from 2021 to 2040. A valuation allowance of $368 million has been recorded against federal and state deferred tax assets where recovery is uncertain. At December 31, 2020, we had unrecognized tax benefits of $85 million that if recognized, would have a favorable impact on our tax expense of $58 million. We had accrued interest of $2 million as of December 31, 2020. If not favorably settled, $9 million of the unrecognized tax benefits and all the accrued interest would require the use of our cash. We do not expect changes during 2021 to our unrecognized tax benefits to have a significant impact on our financial position or results of operations. A summary of our unrecognized tax benefits and changes during the year follows:
(In millions) |  | 2020 |  |  | 2019 |  |  | 2018 |
Balance at January 1 |  | $ | 82 |  |  | $ | 71 |  |  | $ | 52 |
Increases related to prior year tax positions |  |  | 26 |  |  |  | 24 |  |  |  | 9 |
Decreases related to prior year tax positions |  |  | (1 | ) |  |  | — |  |  |  | (1 | )
Settlements |  |  | (15 | ) |  |  | (11 | ) |  |  | (2 | )
Foreign currency impact |  |  | (7 | ) |  |  | (2 | ) |  |  | (5 | )
Increases related to current year tax positions |  |  | — |  |  |  | — |  |  |  | 21 |
Lapse of statute of limitations |  |  | — |  |  |  | — |  |  |  | (3 | )
Balance at December 31 |  | $ | 85 |  |  | $ | 82 |  |  | $ | 71 |
We are open to examination in the U.S. for 2020 and in Germany from 2018 onward. Generally, for our remaining tax jurisdictions, years from 2015 onward are still open to examination. We have undistributed earnings and profits of our foreign subsidiaries totaling approximately $2.3 billion at December 31, 2020. We have concluded that no provision for tax in the U.S. is required because substantially all of the remaining undistributed earnings and profits have been or will be reinvested in property, plant and equipment and working capital outside of the U.S. A foreign withholding tax charge of approximately $85 million (net of foreign tax credits) would be required if these earnings and profits were to be distributed to the U.S. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a substantial tax and spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act allows corporations with net operating losses generated in 2018, 2019 and 2020 to elect to carryback those losses for a period of five years and relaxes the limitation for business interest deductions for 2019 and 2020. These provisions did not have a material impact on our operating results. We did, however, benefit from a CARES Act provision that accelerates the ability of corporations to claim a refund of alternative minimum tax credit carryforwards. Under this provision, we received a refund of $5 million during the third quarter of 2020 that would otherwise have been received in two equal annual installments in 2021 and 2022. Net cash payments for income taxes were $45 million, $142 million and $178 million in 2020, 2019 and 2018, 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://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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