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INCOME TAXES | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Income (loss) before income taxes, consisted of the following for the years set forth below (amounts in thousands):
| 2022 |  | 2021 |  | 2020
Domestic | $ | 73,361 |  |  | $ | (5,862) |  |  | $ | (36,761) |
Foreign | 128,992 |  |  | 56,902 |  |  | (21,370) |
| $ | 202,353 |  |  | $ | 51,040 |  |  | $ | (58,131) |
The income tax provision was as follows for the years set forth below (amounts in thousands):
| 2022 |  | 2021 |  | 2020
Current |  |  |  |  |
Federal | $ | (55) |  |  | $ | (933) |  |  | $ | (4,050) |
State | 1,897 |  |  | (160) |  |  | 326 |
Foreign | 44,710 |  |  | 16,422 |  |  | 13,677 |
| 46,552 |  |  | 15,329 |  |  | 9,953 |
Deferred |  |  |  |  |
Federal | (14,953) |  |  | — |  |  | — |
State | (10,959) |  |  | — |  |  | — |
Foreign | 2,527 |  |  | (14,180) |  |  | (3,007) |
| (23,385) |  |  | (14,180) |  |  | (3,007) |
Income tax provision | $ | 23,167 |  |  | $ | 1,149 |  |  | $ | 6,946 |
The income tax provision differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) as a result of the following:
| 2022 |  | 2021 |  | 2020
Statutory U.S. federal tax rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Unrecognized tax positions | (0.3) |  |  | (1.1) |  |  | 5.9 |
Foreign tax rate differential | 11.7 |  |  | 13.0 |  |  | (7.2) |
Valuation allowance | (23.4) |  |  | (33.9) |  |  | (47.9) |
State taxes, net | 2.0 |  |  | 3.7 |  |  | 9.0 |
Nondeductible royalty | 0.5 |  |  | 1.9 |  |  | (1.2) |
Sale of investment | — |  |  | — |  |  | 8.7 |
Equity based compensation | (0.3) |  |  | (1.0) |  |  | (0.2) |
Nondeductible interest | — |  |  | 1.5 |  |  | (1.0) |
Other, net | 0.2 |  |  | (2.8) |  |  | 1.0 |
Effective tax rate | 11.4 | % |  | 2.3 | % |  | (11.9) | %
The effective tax rate for the year ended December 31, 2022, was 11.4% compared to 2.3% for the year ended December 31, 2021. The effective rate for 2022 was negatively affected by the impacts of foreign income and state income taxes, which resulted in a net $23.7 million and $4.0 million tax expense, respectively. For 2022, the rate was positively impacted by benefits from the federal and state valuation allowance release, which resulted in tax benefits of $53.3 million offset by $5.9 million foreign valuation allowance established. After giving consideration to these items, the effective tax rate for 2022 of 11.4% was lower than the 21% U.S. federal statutory rate. In December 2021, the U.S. Treasury Department released final regulations concerning the U.S foreign tax credit. In November 2022, the U.S. Treasury Department and IRS released proposed regulations which provided additional guidance relating to the credits for foreign taxes. As a result, the Company does not expect to receive a credit for Brazilian income taxes paid for U.S. tax purposes. This change is included in the $45.3 million global intangible low-taxed income (GILTI) inclusion amount for 2022, of which the $9.5 million tax expense is included within the foreign tax rate differential line item on the rate reconciliation. This income inclusion resulted in the utilization of interest expense carryforward, which had a full valuation allowance, and resulted in a benefit of approximately $2.9 million. In jurisdictions where the Company operates, management continues to monitor the realizability of the deferred tax assets arising from losses in its cyclical business, taking into account multiple factors. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. After evaluating all available evidence, including the fact that the U.S. achieved a three year cumulative income position in the fourth quarter of 2022, the Company released most of its U.S. valuation allowance and only retained a portion related to credits, some state net operating losses and interest expense carryforward that were not more likely than not to be utilized. The Company continues to record a valuation allowance in several major jurisdictions, including various U.S. states, Italy, and Luxembourg where it remains more likely than not that the deferred tax assets would not be utilized. The Company released a valuation allowance of $53.3 million and $16.1 million on the net deferred tax asset in 2022 and 2021, respectively. These amounts are primarily related to net operating losses generated from operations in these certain countries. The Company is involved in various tax matters, for some of which the outcome is uncertain. The Company believes that it has adequate tax reserves to address open tax matters acknowledging that the outcome and timing of these events are uncertain. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021, were as follows (amounts in thousands):
| 2022 |  | 2021
Deferred tax assets: |  |  |
Net operating loss carryforwards | $ | 117,646 |  |  | $ | 138,472 |
Pension | — |  |  | 447 |
Inventory | 7,001 |  |  | 7,602 |
Warranty | 5,587 |  |  | 4,391 |
Employee benefits and related costs | 8,394 |  |  | 8,585 |
Prepaid royalties | 2,145 |  |  | 2,922 |
Interest limitation | 16,361 |  |  | 21,868 |
Lease liability | 3,951 |  |  | 6,482 |
Intangible assets | 1,105 |  |  | — |
Other | 14,045 |  |  | 17,672 |
Deferred tax assets | 176,235 |  |  | 208,441 |
Deferred tax liabilities: |  |  |
Fixed assets | (11,978) |  |  | (11,455) |
Intangible assets | — |  |  | (710) |
Lease assets | (3,869) |  |  | (6,441) |
Pension | (1,169) |  |  | — |
Other | (2,851) |  |  | (3,810) |
Deferred tax liabilities | (19,867) |  |  | (22,416) |
Subtotal | 156,368 |  |  | 186,025 |
Valuation allowance | (121,057) |  |  | (173,172) |
Net deferred tax asset (liability) | $ | 35,311 |  |  | $ | 12,853 |
As of December 31, 2022 and 2021, certain net tax loss carryforwards of $117.6 million and $138.5 million were available with $2.5 million expiring between 2022 and 2027 and $115.1 million expiring after 2027. At December 31, 2022, a valuation allowance of $121.1 million has been established. The net change in the valuation allowance was $(52.1) million and $(26.0) million for 2022 and 2021, respectively. The majority of the valuation allowance is related to deferred tax assets in the U.S., Italy, and Luxembourg. As of December 31, 2022, the Company has $75.2 million of gross Federal net operating loss carryforward, a portion of which expires starting in 2035 and a portion of which does not expire. Additionally, the Company has $303 million of state net operating losses and $351.4 million of foreign loss carryforwards. As a result of the Tax Cuts and Jobs Act, the Company can repatriate future foreign earnings back to the U.S. when needed with minimal additional taxes other than state income and foreign withholding tax. The Company has not changed its indefinite reinvestment assertion in light of the Tax Cuts and Jobs Act and has not accrued any potential incremental taxes which could be incurred if any foreign earnings are repatriated. The Company has not calculated the potential foreign withholding taxes as the Company does not expect to repatriate those earnings. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income", which is effective for tax years beginning after December 31, 2022 for applicable corporations with financial statement income greater than $1 billion, and a one percent excise tax on net repurchases of stock after December 31, 2022. Titan is continuing to evaluate the Inflation Reduction Act and its requirements, as well as the application to its business, but at this time does not expect the Inflation Reduction Act to have a material impact on its financial results. The Company or one of its subsidiaries files income tax returns in the U.S., Federal and State, and various foreign jurisdictions. The Company’s major locations are in the U.S., Italy and Brazil. Open tax years for the U.S. are from 2019-2022, for Italy open tax years are from 2016-2022, and Brazil has open tax years from 2016-2022. The Company has applied the provisions of ASC 740, “Income Taxes” related to unrecognized tax benefits. At December 31, 2022, 2021, and 2020, the unrecognized tax benefits were $0.0 million, $0.1 million, and $0.8 million, respectively. As of December 31, 2022, $0.0 million of unrecognized tax benefits would have affected income tax expense if the tax benefits were recognized. The majority of the accrual in unrecognized tax benefits relates to potential state tax exposures. Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is possible that the Company’s gross unrecognized tax benefits balance will decrease by approximately $0.0 million within the next twelve months. A reconciliation of the total amounts of unrecognized tax benefits at December 31 were as follows (amounts in thousands):
| 2022 |  | 2021 |  | 2020
Balance at January 1 | $ | 540 |  |  | $ | 1,012 |  |  | $ | 4,097 |
Increases to tax positions taken during the current year | — |  |  | — |  |  | — |
Increases to tax positions taken during the prior years | — |  |  | — |  |  | 13 |
Decreases to tax positions taken during prior years | — |  |  | — |  |  | — |
Decreases due to lapse of statutes of limitations | (506) |  |  | (473) |  |  | (3,099) |
Settlements | — |  |  | — |  |  | — |
Foreign exchange | (4) |  |  | 1 |  |  | 1 |
Balance at December 31 | $ | 30 |  |  | $ | 540 |  |  | $ | 1,012 |
The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest and penalties related to unrecognized tax benefits recorded in income tax expense was $0.0 million, $(0.2) million, and $(1.1) million at December 31, 2022, 2021 and 2020, respectively. The reconciliation of unrecognized tax benefits above does not include accrued interest and penalties of $0.3 million at December 31, 2020. There were no accrued interest and penalties excluded at December 31, 2022 and 2021. Brazilian Tax Credits In June 2021, the Company’s Brazilian subsidiaries received a notice that they had prevailed on an existing legal claim in regards to certain non-income (indirect) taxes that had been previously charged and paid. The matter specifically relates to companies’ rights to exclude the state tax on goods circulation (a value-added-tax or VAT equivalent, known in Brazil as “ICMS”) from the calculation of certain additional indirect taxes (specifically the program of social integration (“PIS”) and contribution for financing of social security (“COFINS”) levied by the Brazilian States on the sale of goods. During the second and third quarter of 2022, the Company submitted the related supporting documentation and received the approval from the Brazilian tax authorities for two of its Brazilian subsidiaries. For the year ended December 31, 2022, the Company recorded $32.0 million within other income in the consolidated statements of operations. The Company also recorded $16.1 million of income tax expense associated with the recognition of these indirect tax credits for the year end December 31, 2022. Of the $16.1 million income tax expense recorded, $9.4 million was recorded locally in Brazil, while the remaining $6.7 million was recorded to the US in accordance with the GILTI income tax requirements. The Company expects to be able to apply the tax credits received to settle the income tax liability that was incurred as a result of the credit. The Company also expects to utilize the majority of the credit against future PIS/COFINS and income tax obligations over the next twelve months. For the year ended December 31, 2022, the Company has utilized approximately $15.0 million of the tax credits in the settlement of income tax obligations. After the utilization of $15.0 million of tax credits, the Company paid in cash approximately $24.1 million of income taxes for the year ended December 31, 2022 which is on the supplemental information of the consolidated statement of cash flows.

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