INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES



Geographic Allocation of Income and Provision for Income Taxes
In millions	2019			2018			2017
Income (loss) before income taxes
Domestic	$	696		$	1,305		$	856
Foreign	(5		)	(3		)	(6		)
Income before income taxes	$	691		$	1,302		$	850
Current tax expense
Federal	$	70		$	166		$	226
State and local	4			6			2
Foreign	—			40			3
Total current tax expense	$	74		$	212		$	231
Deferred tax expense (benefit)
Federal ¹	$	(9	)	$	27		$	392
State and local	(1		)	8			22
Total deferred tax expense (benefit)	$	(10	)	$	35		$	414
Provision for income taxes	$	64		$	247		$	645
Net income	$	627		$	1,055		$	205


1.	2018 and 2017 include the impact of The Act.



Reconciliation to U.S. Statutory Rate	2019		2018		2017
Statutory U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
Unrecognized tax benefits	(1.0	)	(0.3	)	(0.4	)
Foreign Derived Intangible Income ("FDII") deduction	(1.3	)	(2.2	)	—
Federal tax accrual adjustments	1.7		(0.3	)	(1.1	)
Impact of U.S. tax reform	—		(0.2	)	29.4
Restoration of tax basis	(12.2	)	—		—
Deferred intercompany gain	—		—		11.4
State and local tax impact	0.9		1.0		2.2
Other - net	0.2		—		(0.6	)
Effective Tax Rate ¹	9.3	%	19.0	%	75.9	%


1.	The tax rate for 2019 was favorably impacted by the restoration of tax basis in assets, driven by a recent court judgment that did not involve the Corporation. The tax rate for 2018 was favorably impacted by The Act and the FDII deduction. The tax rate for 2017 was unfavorably impacted by The Act and the recognition of a deferred gain.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("The Act") was enacted. The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and moved to a hybrid territorial system. At December 31, 2017, the Corporation had not completed its accounting for the tax effects of The Act; however, the Corporation made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, income tax effects of The Act were refined upon obtaining, preparing and analyzing additional information during the measurement period. At December 31, 2018, the Corporation had completed its accounting for the tax effects of The Act.

•

As a result of The Act, the Corporation remeasured its U.S. federal deferred tax assets and liabilities based on the income tax rates at which they are expected to reverse in the future, which is generally 21 percent. The Corporation recorded a cumulative charge of $248 million ($2 million benefit in 2018 and $250 million charge in 2017) to "Provision for income taxes" in the consolidated statements of income with respect to the remeasurement of the Corporation's deferred tax balances.


•	The Act required a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits ("E&P"), which resulted in a one-time transition tax. As a result, the cumulative provisional amount recorded for the transition tax liability for the Corporation's foreign subsidiaries was insignificant at December 31, 2018.


•	The Corporation recorded an indirect impact of The Act related to prepaid tax on intercompany sales of inventory. The amount related to the inventory was $2 million, recorded as a charge to "Provision for income taxes" for the year ended December 31, 2018.


•	For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income ("GILTI"). The Corporation has made the policy election to record any liability associated with GILTI in the period in which it is incurred.

A transaction for the sale of stock between the Corporation and TDCC in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the intended separation of DowDuPont into three publicly traded companies. As a result, in the third quarter of 2017, the Corporation recorded a charge of $97 million to "Provision for income taxes" in the consolidated statements of income.



Deferred Tax Balances at Dec 31	2019					2018
In millions	Assets			Liabilities		Assets			Liabilities
Property	$	14		$	145	$	—		$	129
Tax loss and credit carryforwards	39			—		42			—
Postretirement benefit obligations	275			—		234			—
Other accruals and reserves	320			—		326			8
Inventory	5			—		8			—
Other - net	20			—		11			2
Subtotal	$	673		$	145	$	621		$	139
Valuation allowances ¹	(21		)	—		(19		)	—
Total	$	652		$	145	$	602		$	139


1.	Primarily related to the realization of recorded tax benefits on state tax loss carryforwards from operations in the United States.



Operating Loss and Tax Credit Carryforwards at Dec 31	2019		2018
In millions	Asset		Asset
Operating loss carryforwards
Expire within 5 years	$	26	$	31
Expire after 5 years or indefinite expiration	7		5
Total operating loss carryforwards	$	33	$	36
Tax credit carryforwards
Expire after 5 years or indefinite expiration	$	6	$	6
Total tax credit carryforwards	$	6	$	6

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $8 million at December 31, 2019 and $35 million at December 31, 2018. The unrecognized deferred tax liability on those earnings is not material.

The following table provides a reconciliation of the Corporation's unrecognized tax benefits:



Total Gross Unrecognized Tax Benefits
In millions	2019			2018			2017
Total unrecognized tax benefits at Jan 1	$	1		$	1		$	1
Total unrecognized tax benefits at Dec 31	$	1		$	1		$	1
Total unrecognized tax benefits that, if recognized, would impact the effective tax rate	$	1		$	1		$	1
Total amount of interest and penalties (benefit) recognized in "Provision for income taxes"	$	(7	)	$	(5	)	$	(6	)

In the first quarter of 2018, a settlement was reached for a tax matter regarding fees paid to the Corporation by a foreign nonconsolidated affiliate. As a result, the Corporation recorded an increase of $40 million to "Income taxes receivable" and "Income taxes payable" in the consolidated balance sheets. There was no impact to the consolidated statements of income. In the second quarter of 2018, a payment of $40 million was made for the settlement of the tax matter.

The Corporation is included in TDCC's consolidated federal income tax group and DowDuPont's consolidated tax return through March 31, 2019. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals, consistent with the TDCC-UCC Tax Sharing Agreement. The Corporation is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. It is reasonably possible that these examinations may be resolved in the next twelve months. The impact on the Corporation’s results of operations is not expected to be material.

Tax years that remain subject to examination for the Corporation's major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 2019	Earliest Open Year
Jurisdiction	Earliest Open Year
United States:
Federal income tax	2004
State and local income tax	2004

Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued will have a material impact on the Corporation's consolidated financial statements.