Income taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income taxes

6.    Income taxes

Reconciliation of the U.S. federal statutory rate to effective rate:

	Years ended December 31,
(Millions of dollars)	2021				2020				2019
Taxes at U.S. statutory rate	$	1,723	21.0	%	$	839	21.0	%	$	1,641	21.0	%
(Decreases) increases resulting from:
Non-U.S. subsidiaries taxed at other than the U.S. rate	211		2.6	%	285		7.1	%	365		4.7	%
State and local taxes, net of federal 1	28		0.3	%	32		0.8	%	59		0.8	%
Interest and penalties, net of tax	45		0.6	%	28		0.7	%	34		0.4	%
U.S. tax incentives	(123)		(1.5)	%	(52)		(1.3)	%	(149)		(1.9)	%
Net excess tax benefits from stock-based compensation	(63)		(0.8)	%	(49)		(1.2)	%	(41)		(0.5)	%
Prior year tax adjustments	(36)		(0.4)	%	(80)		(2.0)	%	(178)		(2.3)	%
Other—net	(43)		(0.6)	%	3		0.1	%	15		0.2	%
Provision (benefit) for income taxes	$	1,742	21.2	%	$	1,006	25.2	%	$	1,746	22.4	%
1 Excludes amounts included in net excess tax benefits from stock-based compensation.

Included in the line item above labeled “Non-U.S. subsidiaries taxed at other than the U.S. rate” are the effects of local and U.S. taxes related to earnings of non-U.S. subsidiaries, changes in the amount of unrecognized tax benefits associated with these earnings, losses at non-U.S. subsidiaries without local tax benefits due to valuation allowances and other permanent differences between tax and U.S. GAAP results.

The line item above labeled "Prior year tax adjustments" includes a $36 million benefit in 2021 to reflect changes in estimates and an $80 million benefit in 2020 including the impact of regulations received. During 2019, we recorded a $178 million tax benefit to adjust previously unrecognized tax benefits as a result of receipt of additional guidance related to the calculation of the one-time mandatory deemed repatriation of non-U.S. earnings required by U.S. tax legislation enacted on December 22, 2017.

Distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. Undistributed profits of non-U.S. subsidiaries of approximately $15 billion are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due to our legal entity structure and the complexity of U.S. and local tax laws.

The components of profit (loss) before taxes were:
	Years ended December 31,
(Millions of dollars)	2021		2020		2019
U.S.	$	2,740	$	590	$	2,888
Non-U.S.	5,464		3,405		4,924
	$	8,204	$	3,995	$	7,812

Profit before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located.  Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the provision (benefit) for income taxes were:
	Years ended December 31,
(Millions of dollars)	2021		2020		2019
Current tax provision (benefit):
U.S.1	$	766	$	18	$	405
Non-U.S.	1,283		1,031		1,261
State (U.S.)	76		31		52
	2,125		1,080		1,718
Deferred tax provision (benefit):
U.S.1	(387)		(44)		17
Non-U.S.	54		(34)		(7)
State (U.S.)	(50)		4		18
	(383)		(74)		28
Total provision (benefit) for income taxes	$	1,742	$	1,006	$	1,746
1 Includes U.S. taxes related to non-U.S. earnings. We account for U.S. taxes on global intangible low-taxed income as a period cost.

We paid net income tax and related interest of $1,759 million, $1,311 million and $1,847 million in 2021, 2020 and 2019, respectively.

Accounting for income taxes under U.S. GAAP requires that individual tax-paying entities of the company offset all deferred tax liabilities and assets within each particular tax jurisdiction and present them as a noncurrent deferred tax liability or asset in the Consolidated Financial Position. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes at December 31, included on the following lines in Statement 3, were as follows:

	December 31,
(Millions of dollars)	2021		2020
Assets:
Noncurrent deferred and refundable income taxes	$	1,669	$	1,358
Liabilities:
Other liabilities	412		418
Deferred income taxes—net	$	1,257	$	940

The components of deferred tax assets and liabilities were:
	December 31,
(Millions of dollars)	2021		2020
Deferred income tax assets:
Tax carryforwards	$	1,380	$	1,346
Postemployment benefits other than pensions	848		919
Employee compensation and benefits	464		267
Research expenditures	415		193
Intercompany prepayments	280		—
Warranty reserves	266		247
Lease obligations	159		154
Post sale discounts	143		153
Pension	111		396
Allowance for credit losses	106		126
Other—net	235		317
	4,407		4,118
Deferred income tax liabilities:
Capital and intangible assets, including lease basis differences	(1,457)		(1,526)
Other outside basis differences	(264)		(284)
Translation	(188)		(147)
Bond discount	(112)		(117)
Undistributed profits of non-U.S. subsidiaries	(101)		(95)
	(2,122)		(2,169)
Valuation allowance for deferred tax assets	(1,028)		(1,009)
Deferred income taxes—net	$	1,257	$	940

At December 31, 2021, approximately $890 million of U.S. state tax net operating losses (NOLs) and $130 million of U.S. state tax credit carryforwards were available. The state NOLs primarily expire over the next twenty years.  The state tax credit carryforwards primarily expire over the next fifteen years, with some credits having an unlimited carryforward period. In total, we have established a valuation allowance of $150 million related to certain of these carryforwards.

At December 31, 2021, approximately $790 million of capital losses are available to carryforward on the U.S. federal tax return. These losses have a five-year carryforward period and will expire in 2027.

At December 31, 2021, approximately $90 million of U.S. foreign tax credits were available to carryforward on the U.S. federal tax return. These credits have a ten-year carryforward period and begin to expire in 2028.

At December 31, 2021, amounts and expiration dates of net operating loss and interest carryforwards in various non-U.S. taxing jurisdictions were:

(Millions of dollars)
2022		2023		2024		2025-2027		2028-2042		Unlimited		Total
$	4	$	3	$	14	$	32	$	844	$	3,876	$	4,773

At December 31, 2021, non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the realization of net deferred tax assets have recorded valuation allowances of $770 million, including certain entities in Luxembourg.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, follows.

 

Reconciliation of unrecognized tax benefits: 1
	Years ended December 31,
(Millions of dollars)	2021		2020		2019
Beginning balance	$	1,759	$	1,778	$	1,796
Additions for tax positions related to current year	141		44		72
Additions for tax positions related to prior years	43		46		112
Reductions for tax positions related to prior years	(30)		(12)		(201)
Reductions for settlements 2	(24)		(94)		—
Reductions for expiration of statute of limitations	(3)		(3)		(1)
Ending balance	$	1,886	$	1,759	$	1,778
Amount that, if recognized, would impact the effective tax rate	$	1,688	$	1,657	$	1,616

1Foreign currency impacts are included within each line as applicable.

2Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as a component of the provision for income taxes. We recognized a net provision for interest and penalties of $54 million, $38 million and $43 million during the years ended December 31, 2021, 2020 and 2019, respectively. The total amount of interest and penalties accrued was $297 million and $264 million as of December 31, 2021 and 2020, respectively.

In Revenue Agent’s Reports issued at the end of the field examinations of our U.S. income tax returns for 2007 to 2012 including the impact of a loss carryback to 2005, the Internal Revenue Service has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL (CSARL) based on the examination team’s application of the “substance-over-form” or “assignment-of-income” judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant change to our unrecognized tax benefits for this position within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

With the exception of a loss carryback to 2005, tax years prior to 2007 are generally no longer subject to U.S. tax assessment. In our major non-U.S. jurisdictions including Australia, Brazil, China, Germany, India, Japan, Mexico, Switzerland, Singapore and the U.K., tax years are typically subject to examination for three to ten years. Due to the uncertainty related to

the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.