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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Note 7. Income Taxes The components of Income (Loss) before Income Taxes follow:
(In millions) |  | 2022 |  |  | 2021 |  |  | 2020 |
U.S. |  | $ | 41 |  |  | $ | (102 | ) |  | $ | (993 | )
Foreign |  |  | 358 |  |  |  | 615 |  |  |  | (147 | )
|  | $ | 399 |  |  | $ | 513 |  |  | $ | (1,140 | )
A reconciliation of income taxes at the U.S. statutory rate to United States and Foreign Tax Expense (Benefit) follows:
(In millions) |  | 2022 |  |  | 2021 |  |  | 2020 |
U.S. federal income tax expense (benefit) at the statutory rate of 21% |  | $ | 84 |  |  | $ | 108 |  |  | $ | (239 | )
Net foreign losses (income) with no tax due to valuation allowances |  |  | 45 |  |  |  | 3 |  |  |  | 37 |
Adjustment for foreign income taxed at different rates |  |  | 33 |  |  |  | 24 |  |  |  | 7 |
Net establishment (release) of foreign valuation allowances and write off of deferred taxes |  |  | 24 |  |  |  | (1 | ) |  |  | — |
U.S. charges (benefits) related to foreign tax credits, R&D and foreign derived intangible deduction |  |  | (7 | ) |  |  | (4 | ) |  |  | (9 | )
State income taxes, net of U.S. federal benefit |  |  | 6 |  |  |  | 1 |  |  |  | (17 | )
Deferred tax impact of enacted rate and law changes |  |  | (6 | ) |  |  | (61 | ) |  |  | (18 | )
Net establishment (release) of uncertain tax positions |  |  | (4 | ) |  |  | (6 | ) |  |  | 6 |
Net establishment (release) of U.S. valuation allowances |  |  | — |  |  |  | (340 | ) |  |  | 310 |
Goodwill impairment |  |  | — |  |  |  | — |  |  |  | 34 |
Other |  |  | 15 |  |  |  | 9 |  |  |  | (1 | )
United States and Foreign Tax Expense (Benefit) |  | $ | 190 |  |  | $ | (267 | ) |  | $ | 110 |
The components of United States and Foreign Tax Expense (Benefit) by taxing jurisdiction, follow:
(In millions) |  | 2022 |  |  | 2021 |  |  | 2020 |
Current: |  |  |  |  |  |  |  |  |
Federal |  | $ | — |  |  | $ | 1 |  |  | $ | (5 | )
Foreign |  |  | 150 |  |  |  | 166 |  |  |  | 95 |
State |  |  | 12 |  |  |  | 37 |  |  |  | (3 | )
|  |  | 162 |  |  |  | 204 |  |  |  | 87 |
Deferred: |  |  |  |  |  |  |  |  |
Federal |  |  | (28 | ) |  |  | (362 | ) |  |  | 63 |
Foreign |  |  | 46 |  |  |  | (23 | ) |  |  | (31 | )
State |  |  | 10 |  |  |  | (86 | ) |  |  | (9 | )
|  |  | 28 |  |  |  | (471 | ) |  |  | 23 |
United States and Foreign Tax Expense (Benefit) |  | $ | 190 |  |  | $ | (267 | ) |  | $ | 110 |
Income tax expense in 2022 was $190 million on income before income taxes of $399 million. In 2022, income tax expense includes net discrete tax expense totaling $23 million, including a charge of $14 million to write off deferred tax assets related to tax loss carryforwards in the UK and a charge of $11 million to establish a full valuation allowance on our net deferred tax assets in Russia, partially offset by a net benefit of $2 million for various other items. In 2021, income tax benefit of $267 million includes net discrete tax benefits totaling $409 million, including a reduction in our valuation allowances of $340 million for certain U.S. deferred tax assets for foreign tax credits and state tax loss carryforwards, a $39 million benefit to adjust our deferred tax assets in England for a second quarter enacted change in the tax rate, a $21 million benefit to reflect an increase in our estimated state tax rate used in calculating our U.S. net deferred tax assets as a result of a change in the overall mix of our earnings by state after including the impact of the acquisition of Cooper Tire, an $8 million benefit related to a favorable court ruling in Brazil, and a net benefit of $1 million for various other items. In 2020, income tax expense of $110 million includes net discrete tax expense totaling $305 million, including the establishment of a $295 million valuation allowance in the U.S. on certain deferred tax assets for foreign tax credits. Discrete tax expense also includes a net charge of $10 million, including a $15 million charge related to a U.S. valuation allowance for state tax 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. On August 16, 2022, the Inflation Reduction Act (the "Act") was signed into law in the U.S. The Act includes a new 15% corporate alternative minimum tax ("CAMT"). This CAMT applies to tax years beginning after December 31, 2022 for companies with average annual adjusted financial statement income over the previous three years in excess of $1 billion. For 2023, we do not anticipate this CAMT will apply to us due to the significant pandemic-driven losses we incurred in 2020. As allowed, we elected to not consider the estimated impact of potential future CAMT obligations for purposes of assessing valuation allowances on our deferred tax assets. 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 also consider prudent tax planning strategies (including an assessment of their feasibility) to accelerate taxable income 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, 2022 and December 31, 2021, we had approximately $1.1 billion and $1.2 billion of U.S. federal, state and local net deferred tax assets, respectively, inclusive of valuation allowances totaling $26 million in each year primarily for state tax loss carryforwards with limited lives. Approximately $700 million of these U.S. net deferred tax assets have unlimited lives and approximately $400 million have limited lives and expire between 2023 and 2042. In the U.S., we have a cumulative loss for the three-year period ended December 31, 2022. However, as the three-year cumulative loss in the U.S. is driven by business disruptions created by the COVID-19 pandemic, primarily in 2020, and only includes the favorable impact of the Cooper Tire acquisition since the Closing Date, we also considered other objectively verifiable information in assessing our ability to utilize our net deferred tax assets, including continued favorable overall volume trends in the tire industry and our tire volume compared to 2020 levels. In addition, the Cooper Tire acquisition has generated significant incremental domestic earnings since the Closing Date and provides opportunities for cost and other operating synergies to further improve our U.S. profitability. At December 31, 2022 and December 31, 2021, our U.S. net deferred tax assets described above include approximately $230 million and $340 million, respectively, of foreign tax credits with limited lives. 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 these net foreign tax credits which expire through 2032. 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 accelerating income on cross border transactions, including sales of inventory or raw materials to our subsidiaries, reducing U.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, and other financing transactions, 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. These forecasts include the impact of recent trends, including various macroeconomic factors such as the impact of higher raw material, transportation, labor and energy costs, on our profitability, as well as the impact of tax planning strategies. These macroeconomic factors 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 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, 2022, our U.S. net deferred tax assets, including our foreign tax credits, will be fully utilized. At December 31, 2022 and December 31, 2021, we also had approximately $1.2 billion and $1.3 billion of foreign net deferred tax assets, respectively, and related valuation allowances of approximately $1.0 billion in each year. 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 $873 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) |  | 2022 |  |  | 2021 |
Tax loss carryforwards and credits |  | $ | 1,160 |  |  | $ | 1,274 |
Capitalized research and development expenditures |  |  | 481 |  |  |  | 453 |
Prepaid royalty income |  |  | 457 |  |  |  | 534 |
Partnership basis differences |  |  | 341 |  |  |  | 364 |
Accrued expenses deductible as paid |  |  | 320 |  |  |  | 331 |
Lease liabilities |  |  | 70 |  |  |  | 101 |
Postretirement benefits and pensions |  |  | 63 |  |  |  | 126 |
Rationalizations and other provisions |  |  | 52 |  |  |  | 26 |
Vacation and sick pay |  |  | 26 |  |  |  | 25 |
Other |  |  | 100 |  |  |  | 98 |
|  |  | 3,070 |  |  |  | 3,332 |
Valuation allowance |  |  | (1,072 | ) |  |  | (1,044 | )
Total deferred tax assets |  |  | 1,998 |  |  |  | 2,288 |
Property basis differences |  |  | (407 | ) |  |  | (503 | )
Intangible property basis differences related to Cooper Tire acquisition |  |  | (214 | ) |  |  | (227 | )
Right-of-use assets |  |  | (68 | ) |  |  | (96 | )
Tax on undistributed earnings of subsidiaries |  |  | — |  |  |  | (1 | )
Total net deferred tax assets |  | $ | 1,309 |  |  | $ | 1,461 |
At December 31, 2022, we had $746 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 $72 million of tax credit carryforwards in various European countries that are subject to expiration from 2023 to 2032. A valuation allowance totaling $1,046 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $348 million of federal and $66 million of state tax assets for net operating loss and tax credit carryforwards. The federal carryforwards include $227 million of foreign tax credits that are subject to expiration from 2023 to 2032 and $121 million of tax assets related to research and development credits and other federal credits that are subject to expiration from 2030 to 2042. The state carryforwards include $57 million that are subject to expiration from 2023 to 2042. A valuation allowance of $26 million has been recorded against federal and state deferred tax assets where recovery is uncertain. At December 31, 2022, we had unrecognized tax benefits of $87 million that, if recognized, would have a favorable impact on our tax expense of $56 million. We had accrued interest of $1 million as of December 31, 2022. If not favorably settled, $14 million of the unrecognized tax benefits and all the accrued interest would require the use of our cash. We do not expect changes during 2023 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) |  | 2022 |  |  | 2021 |  |  | 2020 |
Balance at January 1 |  | $ | 90 |  |  | $ | 85 |  |  | $ | 82 |
Increases related to prior year tax positions |  |  | 10 |  |  |  | 28 |  |  |  | 26 |
Decreases related to prior year tax positions |  |  | — |  |  |  | (12 | ) |  |  | (1 | )
Settlements |  |  | (12 | ) |  |  | (5 | ) |  |  | (15 | )
Foreign currency impact |  |  | (1 | ) |  |  | (7 | ) |  |  | (7 | )
Increases related to current year tax positions |  |  | 2 |  |  |  | 3 |  |  |  | — |
Lapse of statute of limitations |  |  | (2 | ) |  |  | (2 | ) |  |  | — |
Balance at December 31 |  | $ | 87 |  |  | $ | 90 |  |  | $ | 85 |
We are open to examination in the U.S. for 2021 and in Germany from 2018 onward. Generally, for our remaining tax jurisdictions, years from 2017 onward are still open to examination. We have undistributed earnings and profits of our foreign subsidiaries totaling approximately $2.7 billion at December 31, 2022. 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 $100 million (net of foreign tax credits) would be required if these earnings and profits were to be distributed to the U.S. Net cash payments for income taxes were $174 million, $201 million and $45 million in 2022, 2021 and 2020, respectively.

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