INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 4. INCOME TAXES

The following table summarizes income before income taxes:

	Years ended December 31,
In millions	2021		2020		2019
U.S. income	$	1,251	$	1,134	$	1,677
Foreign income	1,500		1,204		1,157
Income before income taxes	$	2,751	$	2,338	$	2,834

Income tax expense (benefit) consisted of the following:

	Years ended December 31,
In millions	2021		2020		2019
Current
U.S. federal and state	$	261	$	162	$	288
Foreign	319		358		282
Total current income tax expense	580		520		570
Deferred
U.S. federal and state	(12)		2		(32)
Foreign	19		22		28
Impact of India tax law changes	—		(17)		—
Total deferred income tax expense (benefit)	7		7		(4)
Income tax expense	$	587	$	527	$	566

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:

	Years ended December 31,
	2021		2020		2019
Statutory U.S. federal income tax rate	21.0	%	21.0	%	21.0	%
State income tax, net of federal effect	1.1		1.0		1.1
Differences in rates and taxability of foreign subsidiaries and joint ventures	0.1		3.6		1.5
Research tax credits	(0.6)		(1.3)		(1.5)
Foreign derived intangible income	(1.0)		(1.2)		(1.3)
Impact of India tax law changes	—		(0.7)		—
Other, net	0.7		0.1		(0.8)
Effective tax rate	21.3	%	22.5	%	20.0	%

Our effective tax rate for 2021 was 21.3 percent compared to 22.5 percent for 2020 and 20.0 percent for 2019. The year ended December 31, 2021, contained unfavorable net discrete tax items of $9 million, primarily due to $12 million of unfavorable provision to return adjustments related to the 2020 filed tax returns, partially offset by $3 million of favorable other discrete tax items.

The year ended December 31, 2020, contained $26 million of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million.

The India Tax Law Change resulted in the following adjustments to the Consolidated Statements of Net Income for the year ended December 31, 2020:

In millions	Favorable (Unfavorable)
Equity, royalty and interest income from investees	$	37
Income tax expense (1)	17
Less: Net income attributable to noncontrolling interests	(19)
Net income statement impact	$	35
(1) The adjustment to "Income tax expense" includes $15 million of favorable discrete items.

The year ended December 31, 2019, contained $34 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.

At December 31, 2021, $4.1 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes were not provided. Determination of the related deferred tax liability, if any, is not practicable because of the complexities associated with the hypothetical calculation.

Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax assets (liabilities) were as follows:

	December 31,
In millions	2021		2020
Deferred tax assets
U.S. and state carryforward benefits	$	218	$	223
Foreign carryforward benefits	177		159
Employee benefit plans	254		273
Warranty expenses	445		445
Lease liabilities	108		107
Accrued expenses	111		93
Other	78		52
Gross deferred tax assets	1,391		1,352
Valuation allowance	(360)		(346)
Total deferred tax assets	1,031		1,006
Deferred tax liabilities
Property, plant and equipment	(272)		(258)
Unremitted income of foreign subsidiaries and joint ventures	(197)		(185)
Employee benefit plans	(355)		(229)
Lease assets	(105)		(103)
Other	(77)		(77)
Total deferred tax liabilities	(1,006)		(852)
Net deferred tax assets	$	25	$	154

Our 2021 U.S. carryforward benefits include $218 million of state credit and net operating loss carryforward benefits that begin to expire in 2022. Our foreign carryforward benefits include $177 million of net operating loss carryforwards that begin to expire in 2022. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance is $360 million and increased in 2021 by a net $14 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.

Our Consolidated Balance Sheets contain the following tax related items:

	December 31,
In millions	2021		2020
Prepaid expenses and other current assets
Refundable income taxes	$	101	$	172
Other assets
Deferred income tax assets	428		479
Long-term refundable income taxes	—		23
Other accrued expenses
Income tax payable	107		82
Other liabilities
Long-term income tax	263		289
Deferred income tax liabilities	403		325

A reconciliation of unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019 was as follows:

	December 31,
In millions	2021		2020		2019
Balance at beginning of year	$	122	$	77	$	71
Additions to current year tax positions	11		9		23
Additions to prior years' tax positions	16		49		5
Reductions to prior years' tax positions	(28)		(13)		(11)
Reductions for tax positions due to settlements with taxing authorities	(32)		—		(11)
Balance at end of year	$	89	$	122	$	77

Included in the December 31, 2021, 2020 and 2019, balances are $85 million, $114 million and $69 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We also accrued interest expense related to the unrecognized tax benefits of $15 million, $17 million and $5 million as of December 31, 2021, 2020 and 2019, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.

As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2017.