Income Taxes

12 Months Ended

Dec. 31, 2019


(Dollars in millions)	Year Ended December 31
Loss before income taxes	2019		2018		2017
U.S.	$	(230)	$	(54)	$	(200)
Non-U.S.	(291)		(199)		(114)
Total	$	(521)	$	(253)	$	(314)


(Dollars in millions)	Year Ended December 31
Provision for income taxes	2019		2018		2017
Current
Non-U.S.	$	7	$	22	$	40
Deferred
U.S. federal	(9)		(4)		(1)
State	2		—		—
Non-U.S.	1		24		(9)
Total income tax expense	$	1	$	42	$	30


(Dollars in millions)	Year Ended December 31
Effective income tax rate	2019		2018		2017
U.S. federal income tax rate	$	(109)	$	(53)	$	(110)
Foreign tax rate variances	(8)		1		9
State taxes, net of federal benefit	(6)		—		(2)
Tax credits	(7)		(9)		(10)
Change in Valuation Allowances	120		79		62
Non-Controlling Interest	2		3		21
Earnings of equity investments	15		13		7
Withholding taxes	4		5		4
Goodwill impairment	—		—		13
Change in U.S. tax rate	—		—		35
Convertible debt	(10)		—		—
Other, net	—		3		2
Provision for income taxes	$	1	$	42	$	30

The 2019 income tax expense of $1 million includes a $10 million income tax benefit related to domestic losses incurred during the year ended December 31, 2019. The deferred tax liability is a result of the issuance of the Convertible Senior Notes and recorded as a component of APIC is treated as a source of income in fiscal 2019 and a resulting benefit recorded in continuing operations.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate income tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. The Company has completed the Company’s accounting for the effects on the Company’s existing deferred tax balances. Due to the full valuation allowance related to the Company’s U.S. operations, the impact to deferred taxes had a net zero impact to the Company except as it relates to a deferred tax liability related to tax deductible goodwill which resulted in a benefit of $4 million recorded for the year ended December 31, 2018 which is reflected as a change in valuation allowances. Pursuant to the Tax Matters Agreement entered into with Autoliv in connection with the Spin-Off, Autoliv is the primarily obligor on all taxes which relate to any period prior to April 1, 2018. Consequently, the Company is not liable for any transition taxes under the Tax Act.

The law generally referred to as the Tax Cuts and Jobs Act (the “Tax Act”) created a new requirement that certain Global Intangible Low Taxed Income (“GILTI”) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of deferred taxes. The Company has determined that it will treat the impact of GILTI as a period cost. The Tax Act also included other provisions effective in 2018, designated as (1) foreign derived intangible income (“FDII”), (2) interest disallowance and (3) base erosion anti-abuse tax (“BEAT”), that were considered in the income tax provision for the year ended December 31, 2019.

The tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities were as follows:


(Dollars in millions)	As of December 31
Deferred taxes	2019		2018
Assets
Provisions	$	42	$	39
Costs capitalized for tax	1		1
Acquired intangibles	12		20
Tax receivables, principally net operating loss carryforward	130		74
Credits	8		2
Right of Use Assets	29		—
Other	4		3
Deferred tax assets before allowances	$	226	$	139
Valuation allowances	(179)		(125)
Total	$	47	$	14
Liabilities
Property, plant and equipment	(9)		(9)
Distribution taxes	(4)		(7)
Convertible Senior Notes	(10)		—
Lease Liabilities	(30)		—
Total	$	(53)	$	(16)
Net deferred tax asset (liability)	$	(6)	$	(2)

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. On December 31, 2019, the Company had net operating loss carryforwards (NOL’s) of approximately $582 million, of which approximately $539 million have no expiration date. The remaining losses expire on various dates through 2029. The Company also has $8 million of U.S. Research and Development Credit carry forwards, which expire on various dates through 2039.

The Company assesses all available evidence, both positive and negative, to determine the amount of any required valuation allowance. In the fourth quarter of 2018, one of the Company’s Asian subsidiaries entered into a long-term development contract which will result in projected losses in that jurisdiction. While this entity has historically been profitable, the Company has determined that, given the projected losses along with indications that there may be a slowdown in this jurisdiction, it is no longer more likely than not that its deferred tax assets in the jurisdiction will be realizable and therefore has recorded a full valuation allowance against this entity’s deferred tax assets. Valuation allowances have been established for the Company’s US, Sweden, China, France and Japan operations. Such allowances are provided against each entity’s net deferred tax assets, primarily NOL’s, due to a history of cumulative losses or changes to projected future earnings which would support the recognition of the net deferred tax assets.

The Company has recorded a deferred tax asset of $7 million and $11 million as of December 31, 2019 and 2018, respectively, and deferred tax liabilities of $13 million as of December 31, 2019 and 2018, in the Consolidated Balance Sheets.

The following table summarizes the activity related to the Company’s valuation allowances:


(Dollars in millions)	As of December 31
Valuation Allowances Against Deferred Tax Assets	2019		2018
Allowances at beginning of year	$	125	$	150
Benefits reserved current year	102		83

Settlement of tax matters with Former Parent¹	—		(101)
Change in Tax rate /impact of U.S. tax reform	—		(4)
Translation difference	(1)		(3)
Held for sale	(47)		—
Allowances at end of year	$	179	$	125

¹Impact is reflected in equity in conjunction with the Spin-Off

The Company has reserves for income taxes that represent the Company’s best estimate of the potential liability for tax exposures. Inherent uncertainties exist in estimates of tax exposures due to changes in tax law, both legislated and concluded through the various jurisdictions’ court systems. Any income tax liabilities resulting from operations prior to the legal date of separation, were settled with Former Parent on the last day Veoneer was part of the Autoliv group and were relieved through the Former Parent company investment.

The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. Taxing jurisdictions significant to Veoneer include Canada, China, France, Germany, India, Japan, South Korea, Sweden and the U.S. Open tax years related to these taxing jurisdictions remain subject to examination and could result in additional tax liabilities. In general, the Company’s affiliates are no longer subject to income tax examinations by foreign tax authorities for years before 2014.

Since the Company’s operations were generally part of an existing Autoliv legal entity through April 1, 2018 or June 30, 2018 (depending on the jurisdiction), the existing Autoliv legal entity was the primary obligor and is responsible for handling any income tax audit and settling any audits with the taxing authority. For historic stand-alone Autoliv entities that were transferred to Veoneer, Autoliv had agreed to indemnify Veoneer for any taxes incurred for periods prior to April 1, 2018 subject to the terms of the Tax Matters Agreement. To the extent that the Company has accrued a liability for an uncertain tax position related to a period prior to the separation, such liabilities were settled with Former Parent on the last day the Company was part of the Former Parent’s group and were relieved through the Parent company investment.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in tax expense. As of December 31, 2019, the Company had recorded $4 million for unrecognized tax benefits. The total unrecognized tax benefits as of December 31, 2019 is classified as non-current tax payable included in Other Non-Current Liabilities in the Consolidated Balance Sheets.

Approximately $2 million of these reserves would impact income tax expense if released into income. The Company does not expect a change to its unrecognized tax benefits in the next twelve months.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:


(Dollars in millions)	As of December 31
Unrecognized Tax Benefits	2019		2018
Unrecognized tax benefits at beginning of year	$	2	$	2
Increases as a result of tax positions taken during the current period	2		2
Settlement with net former parent	—		(2)
Total unrecognized tax benefits at end of year	$	4	$	2

The Company's deferred tax liability for unremitted foreign earnings was $4 million as of December 31, 2019. The $4 million deferred tax liability represented our estimate of the foreign tax cost associated with our preliminary estimate of $47 million of foreign earnings that are not considered to be permanently reinvested. The Company has not provided for foreign withholding or income taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of December 31, 2019. Accordingly, no provision has been made for foreign withholding or

income taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were paid to us as dividends.