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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes For the years ended December 31, income (loss) before income taxes consisted of the following:
In millions | 2022 |  | 2021 |  | 2020
Income (loss) before income taxes |  |  |  |  |
United States | $ | 17 |  |  | $ | 67 |  |  | $ | (41) |
Foreign | 50 |  |  | 125 |  |  | 17 |
Total income (loss) before income taxes | $ | 67 |  |  | $ | 192 |  |  | $ | (24) |
For the years ended December 31, income tax expense (benefit) consisted of the following:
In millions | 2022 |  | 2021 |  | 2020
Income tax expense (benefit) |  |  |  |  |
Current |  |  |  |  |
Federal | $ | 29 |  |  | $ | (1) |  |  | $ | (45) |
State and local | 6 |  |  | 5 |  |  | 1 |
Foreign | 25 |  |  | 27 |  |  | 9 |
Deferred |  |  |  |  |
Federal | (21) |  |  | 3 |  |  | 34 |
State and local | (3) |  |  | 1 |  |  | 6 |
Foreign | (2) |  |  | 10 |  |  | (158) |
Total income tax expense (benefit) | $ | 34 |  |  | $ | 45 |  |  | $ | (153) |
Effective income tax rate | 50.7 | % |  | 23.4 | % |  | 637.5 | %
The following table presents the principal components of the difference between the effective tax rate and the United States federal statutory income tax rate for the years ended December 31:
| 2022 |  | 2021 |  | 2020
Income tax expense at the U.S. federal tax rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Foreign income tax differential | 13.0 | % |  | 2.8 | % |  | (20.8) | %
U.S. tax on foreign earnings | 2.8 | % |  | 0.3 | % |  | (16.7) | %
State and local income taxes | (4.2) | % |  | (1.3) | % |  | 25.0 | %
U.S. permanent book/tax differences | 4.8 | % |  | (2.3) | % |  | (4.2) | %
U.S. research and development tax credits | (10.4) | % |  | (2.6) | % |  | 25.0 | %
Change in valuation allowance | 18.7 | % |  | 3.2 | % |  | (25.0) | %
Tax impact of NOL carry-back under the CARES act. | — | % |  | — | % |  | 79.2 | %
Tax impact of stock compensation | 3.6 | % |  | 0.8 | % |  | (66.7) | %
Deferred tax impact from intra-entity IP transfer | — | % |  | — | % |  | 654.2 | %
Tax Impact of uncertain tax positions | 1.5 | % |  | 2.0 | % |  | (29.2) | %
Other, net | (0.1) | % |  | (0.5) | % |  | (4.3) | %
Effective income tax rate | 50.7 | % |  | 23.4 | % |  | 637.5 | %
The 2022 effective tax rate included a net $1 million of discrete tax benefit, of which $2 million of tax benefit related to the reversal of a capital FIN 48 tax reserve due to the expiration of statute of limitations and $4 million incremental tax benefit related to stock-based compensation. These tax benefits were partially offset by $5 million of discrete tax expenses related to valuation allowances recorded against deferred tax assets and current receivables in Russia that are not expected to be realized as a result of the discontinuation of the Company's business in Russia. The 2021 effective tax rate included a net $8 million of discrete tax benefit, of which $3 million of tax benefit was related to true-up adjustments to reconcile the Company’s 2020 U.S. tax return versus the preliminary estimate as booked in its tax provision for the year ended December 31, 2020 and $2 million of tax benefit related to a reduction in the Transition Tax based on the Company’s amended 2017 tax return. In addition, the Company recognized $4 million of incremental tax benefit related to stock-based compensation. These tax benefits were partially offset by $1 million of discrete tax expense related to adjustments to the Company’s accrual for unrecognized tax benefits in accordance with FIN 48. The 2020 effective tax rate included $157 million of net discrete tax benefit. A discrete tax benefit of $157 million related to the transfer of foreign intellectual property was recorded in 2020 as more fully described below. In addition, the Company recognized a net $13 million of tax benefit resulting from the CARES Act of 2020, which allows U.S. corporations a one-time opportunity to claim income tax refunds by allowing a 5-year net operating loss ("NOL") carry-back for taxable losses incurred in the tax year 2020. Teradata carried back its 2020 NOL to claim a refund for taxes it paid in 2015, which created a one-time income tax benefit for the difference between the 35% 2015 carry back tax rate and the current 21% federal statutory rate. These tax benefits were partially offset by $9 million tax expense related to stock-based compensation and $4 million of incremental GILTI tax. These discrete net tax benefits resulted in full-year total income tax benefit in 2020 of $153 million, on a pre-tax net loss of $24 million, causing a tax rate of 637.5%. On January 1, 2020, we transferred certain of our intellectual property among our wholly-owned subsidiaries, which resulted in the recognition of deferred tax assets of $157 million. The recognition of deferred tax assets from intra-entity transfers of intellectual property required the Company to make significant estimates and assumptions to determine the fair value of such intellectual property, using a discounted cash flow model. Significant assumptions in valuing the intellectual property include, but are not limited to, internal revenue and expense forecasts, and the discount rate. The sustainability of its future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities. Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:
In millions | 2022 |  | 2021
Deferred income tax assets |  |  |
Employee pensions and other liabilities | $ | 47 |  |  | $ | 65 |
Other balance sheet reserves and allowances | 19 |  |  | 8 |
Operating lease liabilities | 5 |  |  | 7 |
Tax loss and credit carryforwards | 99 |  |  | 86 |
Deferred revenue | 6 |  |  | 6 |
Intangibles and capitalized software | 172 |  |  | 159 |
Total deferred income tax assets | 348 |  |  | 331 |
Valuation allowance | (69) |  |  | (58) |
Net deferred income tax assets | 279 |  |  | 273 |
Deferred income tax liabilities |  |  |
Right of use assets - operating lease | 3 |  |  | 6 |
Property and equipment | 35 |  |  | 41 |
Other | 35 |  |  | 31 |
Total deferred income tax liabilities | 73 |  |  | 78 |
Total net deferred income tax assets | $ | 206 |  |  | $ | 195 |
As of December 31, 2022, Teradata has NOL and tax credit carryforwards totaling $99 million (tax effected and before any valuation allowance offset and application of recognition criteria for uncertain tax positions). Of the total tax carryforwards, $14 million are NOLs in the United States and certain foreign jurisdictions, a small portion of which will begin to expire in 2023; $8 million are United States foreign tax credit carryforwards which expire in 2029, which have an $8 million valuation allowance offset; and $77 million are California R&D tax credits that have an indefinite carryforward period, which have a $57 million valuation allowance offset and $20 million of FIN 48 reserve recorded. The Company considers a majority of its foreign earnings to not be indefinitely reinvested outside of the United States, and any distributions of profits from non-U.S. subsidiaries are not expected to cause a significant United States tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. The Company has recorded $5 million of deferred foreign withholding tax expense with respect to certain earnings which are not considered permanently reinvested as they would be taxable upon remittance. Deferred taxes have not been provided on earnings considered indefinitely reinvested. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company reflects any interest and penalties recorded in connection with its uncertain tax positions as a component of income tax expense. As of December 31, 2022, the Company’s uncertain tax positions totaled approximately $41 million, of which $22 million is reflected in the other liabilities section of the Company’s balance sheet as a non-current liability and $19 million of uncertain tax positions relates to certain tax attributes generated by the Company, which are netted against the underlying deferred tax assets recorded on the balance sheet. The entire balance of $41 million in uncertain tax positions would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded $3 million of interest accruals related to its uncertain tax liabilities as of December 31, 2022. Below is a roll-forward of the Company’s liability related to uncertain tax positions at December 31:
In millions | 2022 |  | 2021
Balance at January 1 | $ | 43 |  |  | $ | 39 |
Gross increases for prior period tax positions | 1 |  |  | 5 |
Gross increases for current period tax positions | 3 |  |  | 3 |
Decreases due to the lapse of applicable statute of limitations | (3) |  |  | (4) |
Decreases relating to settlements with taxing authorities | (3) |  |  | — |
Balance at December 31 | $ | 41 |  |  | $ | 43 |
The Company and its subsidiaries file income tax returns in the United States and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2022, the Company has ongoing tax audits related to its 2020 U.S. Federal income tax return, as well as in a limited number of state and foreign jurisdictions. However, no material adjustments have been proposed or made in any of these examinations to date, which would result in any incremental income tax expense in future periods to the Company. The Company's tax returns for years 2019-2022 are still open for assessment by tax authorities in its major jurisdictions

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