Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income tax expense (benefit) —



	2019			2018			2017
Current
U.S. federal and state	$	13		$	14		$	6
Non-U.S.	92			128			98
Total current	105			142			104

Deferred
U.S. federal and state	(104		)	(47		)	164
Non-U.S.	(33		)	(17		)	15
Total deferred	(137		)	(64		)	179
Total expense (benefit)	$	(32	)	$	78		$	283

We record interest and penalties related to uncertain tax positions as a component of income tax expense or benefit. Net interest expense for the periods presented herein is not significant.

Income before income taxes —



	2019			2018		2017
U.S. operations	$	(166	)	$	26	$	60
Non-U.S. operations	337			468		320
Earnings before income taxes	$	171		$	494	$	380

Income tax audits — We conduct business globally and, as a result, file income tax returns in multiple jurisdictions that are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state and local or foreign income tax examinations for years before 2009.

We are currently under audit by U.S. and foreign authorities for certain taxation years. When the issues related to these periods are settled, the total amounts of unrecognized tax benefits for all open tax years may be modified. Audit outcomes and the timing of the audit settlements are subject to uncertainty and we cannot make an estimate of the impact on our financial position at this time.

U.S. tax reform legislation — On December 22, 2017, the Tax Cuts and Jobs Act ("Act") was signed into law in the U.S. The Act includes a broad range of tax reforms, certain of which were required by GAAP to be recognized upon enactment. Based on our historical financial performance in the U.S., at December 31, 2017, we had a significant net deferred tax asset position. As such, with the Act's reduction of the corporate tax rate from 35% to 21%, we remeasured our net deferred tax assets at the lower corporate rate of 21% and recognized tax expense to adjust net deferred tax assets to the reduced value. The Act introduced provisions that fundamentally change the U.S. approach to taxation of foreign earnings. Under the Act, qualified dividends of foreign subsidiaries are no longer subject to U.S. tax. Under the previously-existing tax rules, dividends from foreign operations were subjected to U.S. tax, and if not considered permanently reinvested, we had recognized expense and recorded a liability for the tax expected to be incurred upon receipt of the dividend of these foreign earnings. Although the Act excludes dividends of foreign subsidiaries from taxation, it included a provision for a mandatory deemed dividend of undistributed foreign earnings at tax rates of 15.5% or 8% ("transition tax") depending on the nature of the foreign operations' assets. Companies may utilize tax attributes (including net operating losses and tax credits) to offset the transition tax. The net effect of applying the provisions of the Act on our 2017 results of operations was a non-cash charge to tax expense of $186.

Beginning in 2018, the Act may also trigger a taxable deemed dividend to the extent that the annual earnings of our foreign subsidiaries exceed a specified threshold, based on the value of tangible foreign operating assets. The deemed dividend, if any, from this global intangible low-taxed income (GILTI) may be offset by the use of other tax attributes in that year, and specifically, the GILTI rules may impact the amount of cash tax savings that net operating losses provide. The SEC staff has indicated that a company should make and disclose certain policy elections related to accounting for GILTI. As to whether we will recognize deferred taxes for basis differences expected to reverse as GILTI or account for the effect of GILTI as a period cost when incurred, we intend to account for the tax effect of GILTI as a period cost. As to the realizability of the tax benefit provided by net operating losses, we are electing to utilize the tax law ordering approach.

Effective tax rate reconciliation —



	2019		2018		2017
U.S. federal income tax rate	21	%	21	%	35	%
Adjustments resulting from:
State and local income taxes, net of federal benefit	(1	)	1		1
Non-U.S. income (expense)	15		5		(11	)
Credits and tax incentives	(37	)	(18	)	(16	)
Foreign derived intangible income	(2	)
U.S. tax on non-U.S. earnings	12		3		12
Intercompany sale of certain operating assets			1		(6	)
Settlement and return adjustments	(11	)	6		(2	)
Enacted change in tax laws	2		1		49
Pension settlement	43
Miscellaneous items	(1	)			1
Valuation allowance adjustments	(60	)	(4	)	11
Effective income tax rate	(19	)%	16	%	74	%

During 2019, we recognized a benefit of $22 for the release of valuation allowance in a subsidiary in Brazil based on recent history of profitability and increased income projections. A pre-tax pension settlement charge of $259 was recorded, resulting in income tax expense of $11 and a valuation allowance release of $18. For the year, we also recognized benefits for the release of valuation allowance in the US of $34 based on increased income projections and $30 based on the development of a tax planning strategy related to federal tax credits. Partially offsetting this benefit in the US was $6 of expense related to a US state law change. During the second quarter of 2019, we also recorded tax benefits of $48 related to tax actions that adjusted federal tax credits.

During 2018, we recognized a benefit of $44 related to U.S. state law changes and the development and implementation of a tax planning strategy which adjusted federal tax credits, along with federal and state net operating losses and the associated valuation allowances. We also recognized benefits of $11 relating to the reversal of a provision for an uncertain tax position, $5 relating to the release of valuation allowances in the US based on improved income projections and $7 due to permanent reinvestment assertions. Partially offsetting these benefits was $5 of expense to settle outstanding tax matters in a foreign jurisdiction.

The net effect in 2017 of applying the U.S. tax reform provisions of the Act was tax expense of $186. This impact, which increased the effective rate for 2017 by 49%, was principally attributable to the reduction of net deferred tax assets to reflect the reduced corporate tax rate. Foreign tax credits of $49 which were generated in 2017 but not utilized to offset the transition tax are included as a benefit in the credits and incentives component of the effective rate reconciliation, with an offsetting expense of $49 in the valuation allowance component to recognize that such credits were not likely to be realized.

Foreign income repatriation — Prior to the U.S. tax reform provisions enacted with passage of the Act, we provided for U.S. federal income and non-U.S. withholding taxes on the earnings of our non-U.S. operations that are not considered to be permanently reinvested. As indicated above, with passage of the Act, dividends of earnings from non-U.S. operations are generally no longer subjected to U.S. income tax. Accordingly, in the fourth quarter of 2017, we reduced the previously recorded liability for U.S. income tax on expected repatriations of non-U.S. earnings. We continue to analyze and adjust the estimated impact of the non-U.S. income and withholding tax liabilities based on the amount and source of these earnings, as well as the expected means through which those earnings may be taxed. We recognized a net expense of $3 in 2019, net benefit of $7 in 2018, and net expense of $2 in 2017 related to future income taxes and non-U.S. withholding taxes on repatriations from operations that are not permanently reinvested. We also paid withholding taxes of $10, $11 and $7 during 2019, 2018 and 2017 related to the actual transfer of funds to the U.S. The unrecognized tax liability associated with the operations in which we are permanently reinvested is $9 at December 31, 2019.

The earnings of our certain non-U.S. subsidiaries may be repatriated to the U.S. in the form of repayments of intercompany borrowings. Certain of our international operations had intercompany loan obligations to the U.S. totaling $1,015 at the end of 2019. Included in this amount are intercompany loans and related interest accruals with an equivalent value of $19 which are denominated in a foreign currency and considered to be permanently invested.

Valuation allowance adjustments — We have recorded valuation allowances in several entities where the recent history of operating losses does not allow us to satisfy the “more likely than not” criterion for the recognition of deferred tax assets. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit.

When evaluating the need for a valuation allowance we consider all components of comprehensive income, and we weigh the positive and negative evidence, putting greater reliance on objectively verifiable evidence than on projections of future profitability that are dependent on actions that have not occurred as of the assessment date. We also consider changes to the historical financial results due to activities that were either new to the business or not expected to recur in the future, in order to identify the core earnings of the business. A sustained period of profitability, after considering changes to the historical results due to implemented actions and nonrecurring events, along with positive expectations for future profitability are necessary to reach a determination that a valuation allowance should be released. During the third quarter of 2019, we recognized a benefit of $22 for the release of a valuation allowance in a subsidiary in Brazil based on recent history of profitability and increased income projections.

Deferred tax assets and liabilities — Temporary differences and carryforwards give rise to the following deferred tax assets and liabilities.



	2019			2018
Net operating loss carryforwards	$	258		$	255
Postretirement benefits, including pensions	87			98
Research and development costs	124			94
Expense accruals	81			75
Other tax credits recoverable	244			232
Capital loss carryforwards	42			40
Inventory reserves	19			13
Postemployment and other benefits	6			6
Leasing activities	46
Total	907			813
Valuation allowances	(190		)	(281		)
Deferred tax assets	717			532

Unremitted earnings	(4		)	(1		)
Intangibles	(34		)	(11		)
Depreciation	(104		)	(44		)
Other	(33		)	(59		)
Deferred tax liabilities	(175		)	(115		)
Net deferred tax assets	$	542		$	417

Carryforwards — Our deferred tax assets include benefits expected from the utilization of net operating loss (NOL), capital loss and credit carryforwards in the future. The following table identifies the net operating loss deferred tax asset components and the related allowances that existed at December 31, 2019. Due to time limitations on the ability to realize the benefit of the carryforwards, additional portions of these deferred tax assets may become unrealizable in the future.



	Deferred Tax Asset		Valuation Allowance			Carryforward Period	Earliest Year of Expiration
Net operating losses
U.S. federal	$	59	$	—		20	2030
U.S. state	75		(37		)	Various	2020
Brazil	17		(6		)	Unlimited
France	8					Unlimited
Australia	24		(24		)	Unlimited
Italy	32		(6		)	Unlimited
Germany	6		(6		)	Unlimited
U.K.	3		(3		)	Unlimited
Canada	21		(20		)	20	2022
Argentina	1		(1		)	5	2024
China	12		(11		)	5	2020
Total	$	258	$	(114	)

In addition to the NOL carryforwards listed in the table above, we have deferred tax assets related to capital loss carryforwards of $42 which are fully offset with valuation allowances at December 31, 2019. We also have deferred tax assets of $244 related to other credit carryforwards which are partially offset with $18 of valuation allowances at December 31, 2019. The capital losses can be carried forward indefinitely while the other credits are generally available for 10 to 20 years.

The use of our $281 U.S. federal NOL as of December 31, 2019 is subject to limitation due to the change in ownership of our stock in January 2008. Generally, the application of the relevant Internal Revenue Code (IRC) provisions will release the limitation on $84 of pre-change NOLs each year, allowing pre-change losses to offset post-change taxable income. However, there can be no assurance that trading in our shares will not affect another change in ownership under the IRC which could further limit our ability to utilize our available NOLs.

Unrecognized tax benefits — Unrecognized tax benefits are the difference between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes. Interest income or expense, as well as penalties relating to income tax audit adjustments and settlements, are recognized as components of income tax expense or benefit. Interest of $12 and $11 was accrued on the uncertain tax positions at December 31, 2019 and 2018.

Reconciliation of gross unrecognized tax benefits —



	2019			2018			2017
Balance, beginning of period	$	107		$	119		$	117
Decrease related to expiration of statute of limitations	(10		)	(4		)	(3		)
Decrease related to prior years tax positions				(15		)	(25		)
Increase related to prior years tax positions	13			8			15
Increase related to current year tax positions	9			10			15
Decrease related to settlements				(11		)
Balance, end of period	$	119		$	107		$	119

The 2017 decrease related to prior years tax positions includes $23 that resulted from the reduction of the U.S. income tax rate from 35% to 21% since these positions represent a reduction of U.S. net operating losses. We anticipate that our gross unrecognized tax benefits will decrease by $17 in the next twelve months upon the expected completion of examinations in various jurisdictions. The settlement of these matters will not impact the effective tax rate. Gross unrecognized tax benefits of $90 would impact the effective tax rate if recognized. If other open matters are settled with the IRS or other taxing jurisdictions, the total amounts of unrecognized tax benefits for open tax years may be modified.