Income Taxes

12 Months Ended

Nov. 01, 2020

Income Taxes

Income Taxes

Note 15. Income Taxes

The provision (credit) for income taxes by taxing jurisdiction and by significant component consisted of the following (in millions of dollars):

	2020		2019		2018
Current:
U.S.:
Federal	$	273.2	$	351.1	$	(244.5)
State		9.0		1.9		6.0
Foreign		27.5		29.0		17.6
Total current		309.7		382.0		(220.9)
Deferred:
U.S.:
Federal		(179.1)		(279.9)		(3.4)
State		(4.1)		(.6)		4.2
Foreign		7.6		(6.0)		2.9
Total deferred		(175.6)		(286.5)		3.7
Provision (credit) for income taxes	$	134.1	$	95.5	$	(217.2)

On December 22, 2017, the U.S. government enacted tax reform. The primary provisions of tax reform affecting the Company in 2018 were a reduction to the corporate income tax rate from 35 percent to 21 percent and a transition from a worldwide corporate tax system to a primarily territorial tax system. The reduction in the corporate income tax rate required the Company to remeasure its U.S. net deferred tax liabilities to the new corporate tax rate and the transition to a territorial tax system required payment of a one-time tax on the deemed repatriation of undistributed and previously untaxed non-U.S. earnings (repatriation tax). The repatriation tax was paid in 2019. The Company’s U.S. statutory corporate income tax rate was 21 percent for 2020 and 2019, and approximately 23.3 percent for 2018.

Beginning in 2019, the Company was subject to additional provisions of the U.S. tax reform legislation. The main provisions of tax reform affecting the Company beginning in 2019 include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion and anti-abuse tax benefits (BEAT) for certain payments between a U.S. corporation and foreign subsidiaries, a limitation on the deductibility of certain executive compensation, and interest expense limitations. The combined effect of these provisions did not have a significant effect on the 2020 or 2019 provision for income taxes.

In 2019 and 2018, the Company recorded discrete tax adjustments related to the remeasurement of the Company’s net deferred tax liabilities to the new corporate income tax rate and for the repatriation tax. The income tax expense (benefit) for the net deferred tax liability remeasurement and the repatriation tax adjustments were as follows (in millions of dollars):

	2019		2018
Net deferred tax liability remeasurement	$	4.8	$	(362.9)
Deemed earnings repatriation tax		(13.9)		20.6
Total discrete tax expense (benefit)	$	(9.1)	$	(342.3)

The repatriation tax expense is based on interpretations of existing laws, regulations, and certain assumptions. The Company continues to analyze the repatriation tax provisions, and monitor legislative and regulatory developments.

The taxable income of the Company is included in the consolidated U.S. income tax return of Deere & Company. Under a tax sharing agreement with Deere & Company, the Company’s provision (credit) for income taxes is generally recorded as if Capital Corporation and each of its subsidiaries filed separate income tax returns, with a modification for realizability of certain tax benefits. The difference between the provision (credit) for income taxes recorded by the Company and the provision (credit) for income taxes calculated on an unmodified, separate return basis was not significant in 2020 or 2019.

In 2018, the Company recorded a tax benefit under the tax sharing agreement that was $19.0 million higher than an unmodified, separate return basis. The additional tax benefit was related to deductions that were included in the 2018 consolidated U.S. income tax return of Deere & Company at Deere & Company’s 2018 U.S. statutory income tax rate of 23.3 percent. On an unmodified, separate return basis, a net operating loss would have been generated and a deferred tax asset recorded in 2018 at a U.S. statutory income tax rate of 21 percent. The pro forma provision (credit) for income taxes and net income on this basis would have been as follows (in millions of dollars):

	2018
Provision (credit) for income taxes assuming computation on an unmodified, separate return basis	$	(198.2)
Pro forma net income attributable to the Company		780.2

The amounts payable to Deere & Company under the tax sharing agreement at November 1, 2020 and November 3, 2019 were $42.9 million and $2.5 million, respectively. The tax sharing payable is included in accounts payable and accrued expenses on the consolidated balance sheet.

A comparison of the statutory and effective income tax provision and reasons for related differences follows (in millions of dollars):

	2020		2019		2018
U.S. federal income tax provision at a statutory rate (2020 - 21 percent, 2019 - 21 percent, 2018 - 23.3 percent)	$	116.9	$	107.7	$	135.3
Increase (decrease) resulting from:
Net deferred tax liability remeasurement				4.8		(362.9)
Deemed earnings repatriation tax				(13.9)		20.6
Other effects of tax reform						(8.5)
Tax rates on foreign earnings		5.8		4.4		2.1
Municipal lease income not taxable		(.9)		(.8)		(.8)
State and local income taxes, net of federal income tax benefit		3.8		1.0		7.8
Other – net		8.5		(7.7)		(10.8)
Provision (credit) for income taxes	$	134.1	$	95.5	$	(217.2)

At November 1, 2020, accumulated earnings in certain subsidiaries outside the U.S. totaled $51.6 million.  A provision for foreign withholding taxes has not been made since these earnings are expected to remain indefinitely reinvested outside the U.S. Determination of the amount of foreign withholding tax liability on these unremitted earnings is not practicable.

Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of deferred income tax assets and liabilities at November 1, 2020 and November 3, 2019 was as follows (in millions of dollars):

	2020				2019
	Deferred		Deferred		Deferred		Deferred
	Tax		Tax		Tax		Tax
	Assets		Liabilities		Assets		Liabilities
Lease transactions			$	404.6			$	571.5
Tax over book depreciation				3.8				4.7
Deferred retail note finance income				.8				3.2
Accrual for retirement and other benefits	$	6.2			$	4.9
Accrual for other employee benefits		12.1				11.6
Allowance for credit losses		37.1				29.1
Tax loss and tax credit carryforwards		25.3				24.6
Federal taxes on deferred state tax deductions		10.7				10.8
Miscellaneous accruals and other		13.5		4.5		9.1		2.5
Less valuation allowances		(10.0)				(2.7)
Deferred income tax assets and liabilities	$	94.9	$	413.7	$	87.4	$	581.9

At November 1, 2020, tax loss and tax credit carryforwards of $25.3 million were available, with $20.0 million expiring from 2021 through 2038 and $5.3 million with an indefinite carryforward period.

A reconciliation of the total amounts of unrecognized tax benefits at November 1, 2020, November 3, 2019, and October 28, 2018 was as follows (in millions of dollars):

	2020		2019		2018
Beginning of year balance	$	32.5	$	36.3	$	35.5
Increases to tax positions taken during the current year		7.4		6.9		9.1
Increases to tax positions taken during prior years		3.1		.8		.9
Decreases to tax positions taken during prior years		(4.9)		(7.1)		(4.6)
Decreases due to lapse of statute of limitations		(4.8)		(4.4)		(4.6)
End of year balance	$	33.3	$	32.5	$	36.3

The amount of unrecognized tax benefits at November 1, 2020 and November 3, 2019 that would affect the effective tax rate if the tax benefits were recognized was $17.2 million and $17.6 million, respectively. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.

The Company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company is included in the consolidated U.S. income tax return and various state returns of Deere & Company. The U.S. Internal Revenue Service has completed the examination of Deere & Company’s federal income tax returns for periods prior to 2015. The years 2015, 2016, and 2017 federal income tax returns are currently under examination. Various state and foreign income tax returns also remain subject to examination by taxing authorities.

The Company’s policy is to recognize interest related to income taxes in interest expense and other income, and recognize penalties in administrative and operating expenses. During 2020, 2019, and 2018, the total amount of expense from interest and penalties was $.5 million, none, and $1.8 million, respectively. The total amount of income from interest and penalties for 2020 and 2019 was $.7 million and $5.3 million, respectively, and was not significant in 2018. At November 1, 2020 and November 3, 2019, the liability for accrued interest and penalties totaled $14.6 million and $14.1 million, respectively.