In 2020, NXP generated income before income taxes of $1 million (2019: income of $291 million; 2018: income of $2,375 million). The components of income (loss) before income taxes are as follows:


	2020	2019	2018
Current taxes:
Netherlands	(147)	(90)	(296)
Foreign	(119)	(105)	(91)
	(266)	(195)	(387)
Deferred taxes:
Netherlands	58	(28)	2
Foreign	291	203	209
	349	175	211
Total income tax benefit (expense)	83	(20)	(176)


	2020		2019		2018
	amount	%	amount	%	amount	%
Statutory income tax rate in the Netherlands	—	25.0	73	25.0	594	25.0

Rate differential between the local statutory rates and the statutory rate of the Netherlands	22	2,175.0	16	5.5	19	0.8
Net change in valuation allowance	35	3,500.0	59	20.2	10	0.4
Non-deductible expenses/losses	61	6,100.0	52	17.8	64	2.7
Netherlands tax incentives	(48)	(4,800.0)	(68)	(23.2)	(252)	(10.6)
Foreign tax incentives	(117)	(11,700.0)	(118)	(40.5)	(119)	(5.0)
Changes in estimates of prior years' income taxes	(13)	(1,300.0)	(3)	(1.2)	(83)	(3.5)
Sale of non-deductible goodwill	10	1,000.0	—	—	—	—
Withholding taxes	(31)	(3,100.0)	5	1.8	(12)	(0.6)
Other differences	(2)	(200.0)	4	1.5	(45)	(1.8)
Effective tax rate	(83)	(8,300.0)	20	6.9	176	7.4

We recorded an income tax benefit of $83 million in 2020, which reflects an effective tax rate of (8300.0)% compared to an expense of $20 million and an effective rate of 6.9% in 2019.The effective tax rate reflects the impact of tax incentives, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate, changes in estimates of prior years' income taxes, change in valuation allowance and non-deductible expenses, sale of non-deductible goodwill and withholding taxes. The impact of these items results in offsetting factors that attribute to the change in the effective tax rate between the two periods, with the significant drivers outlined below:

•The Company benefits from certain tax incentives, which reduce the effective tax rate. The dollar amount of the incentive in any given year is commensurate with the taxable income in that same period. For 2020, the Netherlands tax incentives was lower than 2019 by $20 million, mainly due to the fact that NXP has a lower qualifying income. Note that for 2019, the Netherlands tax incentives was lower than 2018, mainly due to the fact that NXP had received a break-up fee from Qualcomm of $2 billion in 2018 which drove a higher income before tax in 2018.

•The increase in the valuation allowance is mostly due to new Dutch corporate income tax law applicable as from 2019. A portion of the interest expenses is non-deductible in the year it is recorded but can be carried forward without expiration. The difference in valuation allowance in 2020 as compared with 2019 is mainly due to the fact that there was less Netherlands related interest expense impacted by the interest limitation rules as a result of higher qualifying income mainly linked to the divestiture of the VAS business and the lower Netherlands tax incentives.

•The difference of $36 million in the withholding tax benefit in 2020 as compared with 2019 is mainly due to changes in the applicable deferred tax liability rate regarding future remittances of the earnings of foreign subsidiaries and due to additional undistributed earnings being considered permanently reinvested.

•The change in estimates of prior years’ income taxes was higher in 2020 as compared to 2019, mostly relating to NXP USA ($20 million) primarily due to the early adoption of the U.S. regulations issued in Q3 2020. This was partly offset by other changes in estimates relating to multiple jurisdictions.

•The changes in estimates of prior years' income taxes was higher in 2018 comparing with 2019 as a result of the agreement NXP reached with the Dutch tax authorities relative to the application of the Dutch innovation box regime to the taxable income attributable to the Netherlands. This agreement is effective from January 1, 2017. As such, the Company was able to refine its estimate of the Dutch tax liability, recognizing an additional income tax benefit of $67 million in 2018.

The Company benefits from income tax holidays in certain jurisdictions which provide that we pay reduced income taxes in those jurisdictions for a fixed period of time that varies depending on the jurisdiction. The predominant income tax holiday is expected to expire at the end of 2026. The impact of this tax holiday decreased foreign income taxes by $11 million in 2020 (2019: $12 million; 2018: $21 million). The benefit of this tax holiday on net income per share (diluted) was $0.04 in 2020 (2019: $0.04; 2018: $0.06).


	2020	2019
Operating loss and tax credit carry forwards	480	499
Disallowed interest carry forwards	69	103
Other accrued liabilities	107	111
Pensions	121	95
Other non-current liabilities	58	53
Share-based compensation	13	15
Restructuring liabilities	15	5
Receivables	55	64
Inventories	8	4
Total Deferred Tax Assets	926	949
Valuation allowance	(227)	(190)
Total Deferred Tax Assets, net of valuation allowance	699	759

Identified intangible assets, net	(116)	(520)
Undistributed earnings of foreign subsidiaries	(54)	(99)
Property, plant and equipment, net	(15)	(34)
Goodwill	(66)	(43)
Other current and non-current assets	(56)	(52)
Total Deferred Tax Liabilities	(307)	(748)
Net Deferred Tax Position	392	11

The Company has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income or income taxes payable in future periods. Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The realization of our deferred tax assets depends on our ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The valuation allowance increased by $37 million during 2020 (2019: $45 million increase). Besides the net change in the valuation allowance of $35 million this mainly includes an increase of the valuation allowance due to a change in tax rates for $6 million and a decrease of the valuation allowance due to the expiration of tax attributes for $9 million.

We consider all available evidence in forming a judgment regarding the valuation allowance as of December 31, 2020, including events that occur subsequent to year end but prior to the issuance of the financial statements. The deferred tax assets are recognized to the extent that we consider it more likely than not that these assets will be realized. In making such a determination, we consider all available positive and negative evidence, including reversal of existing temporary differences, projected future taxable income and tax planning strategies.

The Company also has tax credit carryforwards of $468 million (excluding the effect of unrecognized tax benefits), which are available to offset future tax, if any, and which will expire as follows:

The net income tax payable (excluding the liability for unrecognized tax benefits) as of December 31, 2020 amounted to $117 million (2019: net income tax receivable of $2 million) and includes amounts directly receivable from or payable to tax authorities.

The Company does not indefinitely reinvest the majority of the undistributed earnings of its subsidiaries. Consequently, the Company has recognized a deferred tax liability of $54 million at December 31, 2020 (2019: $99 million) for the additional income taxes and withholding taxes payable upon the future remittances of these earnings of foreign subsidiaries. The Company considers $114 million of the undistributed earnings indefinitely reinvested although the timing of the reversal can be controlled. Upon repatriation of those earnings the Company would be subject to tax of $11 million which is not recognized as deferred tax liability at December 31, 2020.


	2020	2019	2018
Balance as of January 1,	159	165	177
Translation differences	—	(1)	(4)
Lapse of statute of limitations	(4)	(3)	—
Increases from tax positions taken during prior periods	5	4	7
Decreases from tax positions taken during prior periods	—	(4)	(17)
Increases from tax positions taken during current period	7	7	7
Decreases relating to settlements with the tax authorities	(6)	(9)	(5)
Balance as of December 31,	161	159	165

Of the total unrecognized tax benefits at December 31, 2020, $140 million, if recognized, would impact the effective tax rate. All other unrecognized tax benefits, if recognized, would not affect the effective tax rate as these would be offset by compensating adjustments in the Company’s deferred tax assets that would be subject to valuation allowance based on conditions existing at the reporting date.

The Company classifies interest related to an underpayment of income taxes as financial expense and penalties as income tax expense. The total related interest and penalties recorded during the year 2020 amounted to a $4 million expense (2019: $3 million benefit; 2018: $3 million benefit). As of December 31, 2020 the Company has recognized a liability for related interest and penalties of $13 million (2019: $11 million; 2018: $14 million). It is reasonably possible that the total amount of unrecognized tax benefits may significantly increase/decrease within the next 12 months of the reporting date due to, for example, completion of tax examinations. It is estimated that this reasonably possible change will not be significant.