Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Income tax expense was $354 million, $138 million, and $550 million in 2019, 2018 and 2017, respectively. The increase in tax expense in 2019 compared to 2018 is primarily due to higher earnings before tax, reduced foreign tax credits and the sale of Embraco, offset by net reductions in valuation allowances, and impacts from a legal entity merger. As part of ongoing efforts to reduce costs and simplify the Company's legal entity structure, the Company has completed a statutory legal entity merger within our EMEA business. The completion of the merger created a tax-deductible loss which was recognized in the fourth quarter of 2019, and resulted in a $147 million tax benefit.

The decrease in tax expense in 2018 compared to 2017 is primarily due to lower level of earnings, the reduction in statutory U.S. tax rate from 35% to 21%, impact of non-deductible goodwill impairments and government payment accruals, valuation allowances and tax planning actions.

The following table summarizes the difference between an income tax benefit at the United States statutory rate of 21% in 2019 and 2018, respectively, and 35% in 2017, and the income tax expense at effective worldwide tax rates for the respective periods:



Millions of dollars	2019			2018			2017
Earnings (loss) before income taxes
United States	$	674		$	729		$	671
Foreign	878			(750		)	216
Earnings (loss) before income taxes	$	1,552		$	(21	)	$	887

Income tax (benefit) expense computed at United States statutory rate	$	326		$	(4	)	$	310
U.S. government tax incentives	(21		)	(11		)	(13		)
Foreign government tax incentives, including BEFIEX	(13		)	(21		)	(29		)
Foreign tax rate differential	70			(24		)	(14		)
U.S. foreign tax credits	(86		)	(260		)	17
Valuation allowances	(150		)	75			(68		)
State and local taxes, net of federal tax benefit	42			23			29
Foreign withholding taxes	54			24			41
U.S. tax on foreign dividends and subpart F income	67			72			12
Settlements and changes in unrecognized tax benefits	113			72			48
U.S. Transition Tax	26			40			190
Changes in enacted tax rates	42			(54		)	49
Nondeductible goodwill	—			139			—
Nondeductible fines & penalties	—			30			—
Sale of Embraco	58			—			—
Legal entity merger tax impact	(147		)	—			—
Other items, net	(27		)	37			(22		)
Income tax computed at effective worldwide tax rates	$	354		$	138		$	550

Current and Deferred Tax Provision

The following table summarizes our income tax (benefit) provision for 2019, 2018 and 2017:



	2019					2018						2017
Millions of dollars	Current		Deferred			Current			Deferred			Current		Deferred
United States	$	203	$	74		$	(70	)	$	120		$	138	$	386
Foreign	432		(406		)	182			(119		)	213		(233		)
State and local	42		9			12			13			12		34
	$	677	$	(323	)	$	124		$	14		$	363	$	187
Total income tax expense			$	354					$	138				$	550

United States Government Tax Legislation

On December 22, 2017, H.R.1 (the “Tax Cuts and Jobs Act”) was signed into law. Significant provisions impacting Whirlpool's 2017 and 2018 effective tax rate include the reduction in corporate tax rate from 35% to 21% effective in

2018, a one-time deemed repatriation (“Transition Tax”) on earnings of certain foreign subsidiaries that were previously tax deferred, and the creation of new taxes on certain foreign sourced earnings.

At December 31, 2017, pursuant to the SEC guidance under SAB118, the Company made a reasonable estimate of the provisional effects of the rate reduction on its existing deferred tax balances and the impact of the one-time Transition Tax. For the items for which the Company was able to determine a reasonable estimate, it recognized the following provisional impacts. The reduction in corporate tax rate resulted in a one-time tax expense in the amount of $49 million related to the revaluation of our U.S. net deferred tax asset. Transition Tax resulted in a one-time tax expense in the amount of $190 million. These amounts represented the Company's best estimate of the impact of the Tax Cuts and Jobs act, at that time.

At December 31, 2018, the Company has revised these estimated amounts and recognized an additional tax benefit in the amount of $54 million on the difference between the 2017 U.S. enacted tax rate of 35%, and the 2018 enacted tax rate of 21%, primarily related to a $350 million tax deductible pension plan contribution included on the Company's 2017 U.S. Corporation income tax return. The Company recognized additional tax expense of $95 million related to the Transition Tax, including $55 million of unrecognized tax benefits during the fourth quarter.

For the full year 2019, we recognized $26 million related to prior years resulting from the one time transition tax deemed repatriation on earnings of certain foreign subsidiaries that were previously tax deferred and related impacts. At December 31, 2019, we have recognized $299 million tax expense related to the Transition Tax, net of unrecognized tax benefits and other correlative adjustments. During 2019, the government issued additional clarifying regulations related to tax reform. As a result, the Company recorded an additional income tax liability related to an uncertain tax position in the amount of $117 million.

United States Tax on Foreign Dividends

We have historically reinvested all unremitted earnings of the majority of our foreign subsidiaries and affiliates, and therefore have not recognized any U.S. deferred tax liability on those earnings. However, upon the enactment of the Tax Cuts and Jobs Act, the unremitted earnings and profits of our foreign subsidiaries and affiliates, subsequent to 1986, are subject to U.S. tax under the Transition Tax provision. Under the Transition Tax provision, the Company recognized a deemed remittance of $3.5 billion. The Company had cash and cash equivalents of approximately $2.0 billion at December 31, 2019, of which a significant majority substantially all was held by subsidiaries in foreign countries. Our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate the cash to fund our U.S. operations. However, if these funds were repatriated, they would likely not be subject to United States federal income tax under the previously taxed income or the dividend exemption rules. We would likely be required to accrue and pay United States state and local taxes and withholding taxes payable to various countries. It is not practicable to estimate the tax impact of the reversal of the outside basis difference, or the repatriation of cash due to the complexity of its hypothetical calculation.

Valuation Allowances

At December 31, 2019, we had net operating loss carryforwards of $5.6 billion, $695 million of which were U.S. state net operating loss carryforwards. Of the total net operating loss carryforwards, $3.3 billion do not expire, with substantially all of the remaining carryforwards expiring in various years through 2038. At December 31, 2019, we had $787 million of United States general business credit carryforwards available to offset future payments of federal income taxes, expiring between 2029 and 2038.

We routinely review the future realization of deferred tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. We have recorded a valuation allowance to reflect the net estimated amount of certain deferred tax assets associated with net operating loss and other deferred tax assets we believe will be realized. Our recorded valuation allowance of $192 million at December 31, 2019 consists of $111 million of net operating loss carryforward deferred tax assets and $81 million of other deferred tax assets. Our recorded valuation allowance was $348 million at December 31, 2018 and consisted of $286 million of net operating loss carryforward deferred tax assets and $62 million of other deferred tax assets. The decrease in our valuation allowance includes $150 million recognized in net earnings, with the remaining change related to reclassification within our net deferred tax asset. During 2019, the Company used proceeds from a bond offering to recapitalize various entities in EMEA which resulted in a reduction in the valuation allowance. In addition, the Company has established tax planning strategies and transfer pricing policies to provide sufficient future taxable income to realize these deferred tax assets. We believe that it is more likely than not that we will realize the benefit of existing deferred tax assets, net of valuation allowances mentioned above.

Deferred Tax Liabilities and Assets

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The following table summarizes the significant components of our deferred tax liabilities and assets at December 31, 2019 and 2018:



Millions of dollars	2019			2018
Deferred tax liabilities
Intangibles	$	439		$	450
Property, net	175			195
Right of use assets	238			—
LIFO inventory	89			37
Other	215			262
Total deferred tax liabilities	$	1,156		$	944
Deferred tax assets
U.S. general business credit carryforwards, including Energy Tax Credits	$	787		$	875
Lease liabilities	242			—
Pensions	66			144
Loss carryforwards	1,226			1,051
Postretirement obligations	145			99
Foreign tax credit carryforwards	39			—
Research and development capitalization	133			135
Employee payroll and benefits	96			98
Accrued expenses	93			154
Product warranty accrual	78			55
Receivable and inventory allowances	72			85
Other	574			536
Total deferred tax assets	3,551			3,232
Valuation allowances for deferred tax assets	(192		)	(348		)
Deferred tax assets, net of valuation allowances	3,359			2,884
Net deferred tax assets	$	2,203		$	1,940

Unrecognized Tax Benefits

The following table represents a reconciliation of the beginning and ending amount of unrecognized tax benefits that if recognized would impact the effective tax rate, excluding federal benefits of state and local tax positions, and interest and penalties:



Millions of dollars	2019			2018			2017
Balance, January 1	$	278		$	219		$	102
Additions for tax positions of the current year	20			21			25
Additions for tax positions of prior years	138			60			110
Reductions for tax positions of prior years	(26		)	(5		)	(1		)
Settlements during the period	(4		)	(8		)	(10		)
Lapses of applicable statute of limitation	(12		)	(9		)	(7		)
Balance, December 31	$	394		$	278		$	219

Interest and penalties associated with unrecognized tax benefits resulted in a net benefit of $4 million at December 31, 2019, a net expense of $2 million and $8 million in 2018 and 2017, respectively. We have accrued a total of $42 million, $46 million and $45 million at December 31, 2019, 2018 and 2017, respectively.

It is reasonably possible that certain unrecognized tax benefits of $4 million could be settled with various related jurisdictions during the next 12 months.

We are in various stages of audits by certain governmental tax authorities. We establish liabilities for the difference between tax return provisions and the benefits recognized in our financial statements. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known. We are no longer subject to any significant United States federal tax examinations for the years before 2009, or any state, local or foreign income tax examinations by tax authorities for years before 2003.