Income Taxes

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Income Taxes

Our effective tax rate was 1.0% and 0.5% in the quarters ended June 30, 2020 and 2019, respectively. The increase in the effective tax rate for the quarter ended June 30, 2020 is primarily due to the absence of the tax benefit related to the 2019 audit settlements, which decreased the prior year rate by 22.5%, partially offset by a 17.4% increase in the rate associated with the non-deductible goodwill impairment, a 1.6% increase to the rate related to the debt exchange, and a 1.2% increase in the rate associated with a revaluation of certain international tax incentives, with the remaining 1.8% decrease composed of various unrelated items, which individually and collectively are not significant.

Our effective tax rate was (22.0)% and 7.4% in the six months ended June 30, 2020 and 2019, respectively. The decrease in the effective tax rate for the six months ended June 30, 2020 is primarily due to the absence of the tax benefit related to the 2019 audit settlements, which decreased the prior year rate by 12.7%, partially offset by a 24.6% increase in the rate associated with the non-deductible goodwill impairment, a 14.3% increase in the rate for the impairment of deferred tax assets as a result of the Separation Transactions or the Raytheon Merger, a 2.2% increase to the rate related to the debt exchange, and a 1.7% increase in the rate associated with a revaluation of certain international tax incentives. The remaining decrease of 0.7% is composed of various unrelated items, which individually and collectively are not significant.

We conduct business globally and, as a result, Raytheon Technologies or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Germany, India, Philippines, Poland, Singapore, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2009.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

As a result of the Separation Transactions and the Distributions in April of 2020, we transferred unrecognized tax benefits to Carrier and Otis of approximately $440 million in the second quarter. Pursuant to the terms of the separation agreements, certain other unrecognized tax benefits retained by Raytheon Technologies will be subject to indemnification. As a result of the Raytheon Merger, unrecognized tax benefits increased during the second quarter by approximately $240 million due to inclusion of items related to pre-merger Raytheon Company tax periods. Additionally, it is reasonably possible that a net reduction within the range of $140 million to $275 million of unrecognized tax benefits may occur within the next 12 months as a result of the revaluation of uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts, or the closure of tax statutes. Interest on unrecognized tax benefits during the quarter ended June 30, 2020 and 2019 were $11 million and $13 million, respectively. The amount of interest accrued at June 30, 2020 was $126 million.

Management has determined that the distributions of Carrier and Otis on April 3, 2020, and certain related internal business separation transactions, qualified as tax-free under applicable law. In making these determinations, we applied the tax law in the relevant jurisdictions to our facts and circumstances and either obtained tax rulings from the relevant taxing authorities, tax opinions, and/or other external tax advice related to the concluded tax treatment. If the completed distributions of Carrier or Otis, in each case, or certain internal business separation transactions, were to fail to qualify for tax-free treatment, the Company could be subject to significant liabilities, and there could be material adverse impacts on the Company’s business, financial condition, results of operations and cash flows in future reporting periods.

The Examination Division of the Internal Revenue Service (IRS) commenced an audit of Raytheon Technologies tax years 2017 and 2018 in the second quarter of 2020. The Examination Division of the IRS is auditing pre-merger Raytheon Company tax periods 2017, 2018 and 2019 under the IRS Compliance Assurance Program, as well as certain refund claims of Raytheon Company for tax years 2014, 2015 and 2016 filed prior to the Raytheon Merger. The Examination Division of the IRS is also auditing pre-acquisition Rockwell Collins fiscal tax years 2016 and 2017, which is projected to close prior to the end of 2020.

As a result of the projected closure of the audit of Rockwell Collins fiscal tax years 2016 and 2017 as well as other potential settlements and statute of limitations expirations, it is reasonably possible that the Company may recognize non-cash gains in the range of $75 million to $125 million, primarily tax, prior to the end of 2020.