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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Note 11. Income Taxes A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:
(in millions) |  | Unrecognised Tax Benefits |  |  | Interest and Penalties |  |  | Total |
Opening balance at January 1, 2020 |  | $ | 14.4 |  |  | $ | 2.0 |  |  | $ | 16.4 |
Reductions for tax positions of prior periods |  |  | (1.2 | ) |  |  | (0.2 | ) |  |  | (1.4 | )
Additions for tax positions of prior periods |  |  | 0.4 |  |  |  | 0.6 |  |  |  | 1.0 |
Closing balance at 31 December, 2020 |  |  | 13.6 |  |  |  | 2.4 |  |  |  | 16.0 |
Current |  |  | — |  |  |  | — |  |  |  | — |
Non-current |  | $ | 13.6 |  |  | $ | 2.4 |  |  | $ | 16.0 |
Opening balance at January 1, 2021 |  | $ | 13.6 |  |  | $ | 2.4 |  |  | $ | 16.0 |
Reductions for tax positions of prior periods |  |  | (1.3 | ) |  |  | 0.0 |  |  |  | (1.3 | )
Additions for tax positions of prior periods |  |  | 0.9 |  |  |  | 0.7 |  |  |  | 1.6 |
Closing balance at 31 December, 2021 |  |  | 13.2 |  |  |  | 3.1 |  |  |  | 16.3 |
Current |  |  | — |  |  |  | — |  |  |  | — |
Non-current |  | $ | 13.2 |  |  | $ | 3.1 |  |  | $ | 16.3 |
Opening balance at January 1, 2022 |  | $ | 13.2 |  |  | $ | 3.1 |  |  | $ | 16.3 |
Reductions for tax positions of prior periods |  |  | (3.1 | ) |  |  | — |  |  |  | (3.1 | )
Additions for tax positions of prior periods |  |  | 0.1 |  |  |  | 0.1 |  |  |  | 0.2 |
Closing balance at 31 December, 2022 |  |  | 10.2 |  |  |  | 3.2 |  |  |  | 13.4 |
Current |  |  | — |  |  |  | — |  |  |  | — |
Non-current |  | $ | 10.2 |  |  | $ | 3.2 |  |  | $ | 13.4 |
All of the $13.4 million of unrecognized tax benefits would impact our effective tax rate if recognized. In 2021 a non-U.S. subsidiary, Innospec Limited, entered into a review by the U.K. tax authorities under the U.K.’s Profit Diversion Compliance Facility (“PDCF”) in relation to the period 2017 to 2020 inclusive. The Company determined that additional tax and interest totaling $1.0 million may arise as a result of the ongoing review. During 2022 the Company recorded an additional $0.1 million of tax which was offset by a $0.1 million reduction for foreign exchange movements. A non-U.S. subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $3.2 million may arise as a consequence of the tax audit. This includes additional interest accrued of $0.1 million which was offset by $0.2 million foreign exchange movements recorded during 2022. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement. In 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has determined that additional tax, interest and penalties totaling $9.2 million may arise in relation to this item. This includes a reduction in the unrecognized tax benefit of $2.8 million related to tax adjustments recognized during 2022 that would offset adjustments arising as a consequence of the Tax Act. The Company and its U.S. subsidiaries remain open to examination by the IRS for certain elements of 2017 year and for years 2019 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including Brazil (2018 onwards), Germany (2018 onwards), and the U.K. (2017 onwards). The sources of income before income taxes were as follows:
(in millions) |  | 2022 |  |  | 2021 |  |  | 2020 |
Domestic |  | $ | 106.3 |  |  | $ | 53.2 |  |  | $ | (0.7 | )
Foreign |  |  | 78.3 |  |  |  | 81.2 |  |  |  | 40.4 |
|  | $ | 184.6 |  |  | $ | 134.4 |  |  | $ | 39.7 |
The components of income tax expense are summarized as follows:
(in millions) |  | 2022 |  |  | 2021 |  |  | 2020 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 27.0 |  |  | $ | 12.4 |  |  | $ | 6.1 |
State and local |  |  | 6.5 |  |  |  | 2.6 |  |  |  | 0.5 |
Foreign |  |  | 23.1 |  |  |  | 19.4 |  |  |  | 6.8 |
|  |  | 56.6 |  |  |  | 34.4 |  |  |  | 13.4 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (3.7 | ) |  |  | (1.9 | ) |  |  | (2.8 | )
State and local |  |  | (0.7 | ) |  |  | (0.3 | ) |  |  | (0.4 | )
Foreign |  |  | (0.6 | ) |  |  | 9.1 |  |  |  | 0.8 |
|  |  | (5.0 | ) |  |  | 6.9 |  |  |  | (2.4 | )
|  | $ | 51.6 |  |  | $ | 41.3 |  |  | $ | 11.0 |
Cash payments for income taxes were $50.0 million, $36.8 million and $23.4 million during 2022, 2021 and 2020, respectively. The effective tax rate varies from the U.S. federal statutory rate because of the factors indicated below:
(in percent) |  | 2022 |  |  | 2021 |  |  | 2020 |
Statutory rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
Foreign income inclusions |  |  | 3.3 |  |  |  | 1.7 |  |  |  | 7.1 |
Foreign tax rate differential |  |  | 0.9 |  |  |  | 1.0 |  |  |  | 4.2 |
Tax charge/(credit) from previous years |  |  | 0.2 |  |  |  | 0.6 |  |  |  | 3.7 |
Net charge/(credit) from unrecognized tax benefits |  |  | (1.4 | ) |  |  | 0.4 |  |  |  | (1.7 | )
Foreign currency transactions |  |  | 3.5 |  |  |  | 0.1 |  |  |  | (4.5 | )
Tax on unremitted earnings |  |  | 0.3 |  |  |  | 0.1 |  |  |  | 0.3 |
Non-deductible foreign interest |  |  | — |  |  |  | — |  |  |  | 0.7 |
Change in U.K. statutory tax rate |  |  | — |  |  |  | 5.4 |  |  |  | 6.9 |
State and local taxes |  |  | 2.2 |  |  |  | 1.3 |  |  |  | 1.5 |
U.S. incentive for foreign derived intangible income |  |  | (2.7 | ) |  |  | (1.5 | ) |  |  | (1.5 | )
Innovation incentives – current year |  |  | (0.8 | ) |  |  | (1.1 | ) |  |  | (4.9 | )
Innovation incentives – prior years |  |  | — |  |  |  | — |  |  |  | (5.3 | )
Non-deductible officer compensation |  |  | 1.4 |  |  |  | 0.2 |  |  |  | 1.8 |
Tax on closure of legacy operations |  |  | — |  |  |  | 1.6 |  |  |  | — |
Other items and adjustments, net |  |  | 0.1 |  |  |  | (0.1 | ) |  |  | (1.6 | )
|  |  | 28.0 | % |  |  | 30.7 | % |  |  | 27.7 | %
Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. tax regulations. Foreign tax credits can fully or partially offset these incremental U.S. taxes from foreign income inclusions. The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may prevent offset. The effective tax rate is negatively impacted by the net impact of foreign inclusions post foreign tax credit usage in 2022. As a consequence of the Company having operations outside of the U.S., it is exposed to foreign currency fluctuations. These have had a negative impact on the effective tax rate in 2022. In 2022 there was an increase in the level of profits arising in the U.S. compared to prior periods. This has increased the amount of state and local taxes falling due, which has had a negative impact on the effective tax rate, but has also increased the level of foreign-derived intangible income benefit that the Company is entitled to, which has had a positive impact on the effective tax rate in the year. Other items do not have a significant impact on the effective tax rate. Details of deferred tax assets and liabilities are analyzed as follows:
(in millions) |  | 2022 |  |  | 2021 |
Deferred tax assets: |  |  |  |  |  |  |  |
Stock compensation |  | $ | 3.7 |  |  | $ | 5.2 |
Net operating loss carry forwards |  |  | 10.9 |  |  |  | 12.0 |
Other intangible assets |  |  | 10.5 |  |  |  | 11.1 |
Accretion expense |  |  | 3.2 |  |  |  | 3.2 |
Restructuring provision |  |  | 1.7 |  |  |  | 2.0 |
Employee related liabilities |  |  | 8.1 |  |  |  | 4.1 |
Foreign tax credits |  |  | 0.8 |  |  |  | 1.9 |
Operating lease liabilities |  |  | 11.8 |  |  |  | 10.6 |
Inventory provisions |  |  | 6.6 |  |  |  | 3.6 |
Research and experimental expenditure |  |  | 2.7 |  |  |  | — |
Other |  |  | 4.8 |  |  |  | 3.8 |
Subtotal |  |  | 64.8 |  |  |  | 57.5 |
Less valuation allowance |  |  | (0.7 | ) |  |  | (0.8 | )
Total net deferred tax assets |  | $ | 64.1 |  |  | $ | 56.7 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Property, plant and equipment |  | $ | (22.5 | ) |  | $ | (23.6 | )
Intangible assets including goodwill |  |  | (30.3 | ) |  |  | (29.8 | )
Pension asset |  |  | (10.9 | ) |  |  | (38.2 | )
Customer relationships |  |  | (3.4 | ) |  |  | (4.5 | )
Unremitted overseas earnings |  |  | (1.9 | ) |  |  | (1.9 | )
Right-of-use assets |  |  | (11.8 | ) |  |  | (10.6 | )
Other |  |  | (3.6 | ) |  |  | (2.5 | )
Total deferred tax liabilities |  | $ | (84.4 | ) |  | $ | (111.1 | )
Net deferred tax liability |  | $ | (20.3 | ) |  | $ | (54.4 | )
Deferred tax assets |  | $ | 5.9 |  |  | $ | 6.4 |
Deferred tax liabilities |  |  | (26.2 | ) |  |  | (60.8 | )
|  | $ | (20.3 | ) |  | $ | (54.4 | )
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Available evidence considered in determining the use of deferred tax assets includes, but is not limited to, cumulative losses arising in recent accounting periods, the Company’s estimate of future taxable income and any applicable tax-planning strategies. Based on such evidence, if it is more likely than not that some portion or all of such deferred tax assets will not be realized, a valuation allowance is recorded to reduce the Company’s deferred tax assets. On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $0.7 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carry forward period are reduced or increased or if other evidence becomes available. As of December 31, 2022, the Company has approximately $5.1 million of tax-effected U.S. federal net operating loss carryforwards. These loss carryforwards can be carried forward indefinitely without expiration, and the Company expects to utilize the losses in their entirety. The Company has approximately $0.4 million of tax-effected state net operating loss carryforwards, net of federal benefit. Some of these loss carryforwards will begin to expire in 2036 if not utilized, while other s can be carried forward indefinitely. The Company also has approximately $4.8 million of tax-effected foreign net operating loss carryforwards, net of valuation allowance, across four of the Company’s foreign subsidiaries, which can also be carried forward indefinitely.

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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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://asc.fasb.org/extlink&oid=122134291&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 https://asc.fasb.org/extlink&oid=121826272&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 https://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 https://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 https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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