Income Taxes

12 Months Ended

Dec. 31, 2020

11. Income Taxes

Earnings before income taxes were as follows:

(In thousands)	2020		2019		2018
United States	$	72,593	$	38,356	$	80,641
Foreign		65,252		62,647		100,884
Total	$	137,845	$	101,003	$	181,525

The provision for income taxes was as follows:

(In thousands)	2020			2019			2018
Current income tax expense (benefit):
Federal ⁽¹⁾	$	9,660		$	12,994		$	(9,071	)
State		3,000			2,622			205
Foreign		24,418			22,680			23,187
		37,078			38,296			14,321
Deferred expense (benefit):
Federal		(6,918	)		(17,246	)		3,977
State		(565	)		18			3,164
Foreign		(1,222	)		(2,112	)		2,703
		(8,705	)		(19,340	)		9,844
Income taxes	$	28,373		$	18,956		$	24,165

⁽¹⁾

In 2018, this amount includes $3.9 million of income tax benefit related to a reduction in the 2017 estimate of the one-time transition tax on earnings of foreign subsidiaries enacted by the 2017 Tax Legislation (see discussion below).

The reconciliation between the U.S. Federal tax rate and the actual effective tax rate was as follows:

	2020			2019			2018
Taxes at statutory rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal income tax benefit		2.2			2.2			1.1
Tax credits		(1.5	)		(2.6	)		(1.5	)
Taxes on foreign earnings		2.8			5.1			(0.4	)
Global Intangible Low-Taxed Income		0.1			0.9			0.6
Foreign Derived Tangible Income		(1.1	)		(1.0	)		(0.6	)
Loss on balance sheet hedge		2.0			-			-
Resolution of prior years’ tax matters		(0.1	)		(0.4	)		(0.3	)
Valuation allowance adjustments		(3.7	)		(8.8	)		0.4
2017 Tax Legislation		-			-			(3.7	)
U.S. tax accounting method changes		-			-			(2.9	)
Other, net		(1.1	)		2.4			(0.4	)
Effective tax rate		20.6	%		18.8	%		13.3	%

Taxes on foreign earnings include the difference between the tax rates applied to foreign earnings relative to the U.S. statutory tax rate, accruals for foreign unrecognized tax benefits, and the impact of the U.S. foreign tax credit, not including the impact from Global Intangible Low-Taxed Income (GILTI). The impact on the Company’s effective tax rate varies from year to year based on the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rates in 2020 and 2019 were both impacted by tax costs related to the divestitures and the release of valuation allowances related to the foreign tax credit carryover. The 2019 effective tax rate was also impacted by valuation allowance adjustments related to foreign net operating losses. The effective tax rate in 2018 was also favorably impacted by U.S. tax accounting method changes that were filed with the IRS in the second quarter of 2018 and generation of foreign tax credits during 2018.

The Company’s valuation allowance at December 31, 2020 and 2019 was $47.8 million and $54.3 million, respectively. The valuation allowance was increased by $16.2 million in the first quarter of 2019 related to the increase in the foreign tax credit deferred tax asset. During 2019 and 2020, the Company completed tax planning strategies and Federal tax regulations were finalized that resulted in the partial release of this valuation allowance. The valuation allowance was also increased in 2019 by $6.8 million for the deferred tax assets related to net operating losses that the Company does not believe are more likely than not to be realized.

The decrease of the 2020 effective tax rate from GILTI compared to 2019 is primarily the result of the US Treasury releasing final regulations in 2020 that changed the high tax election for GILTI and Sensient applying the high tax election for 2020.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (2017 Tax Legislation). The 2017 Tax Legislation significantly changed the U.S. corporate income tax laws by reducing the U.S. corporate income tax rate to 21% beginning in 2018 and imposing a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries in 2017. Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Legislation. In accordance with SAB 118, the Company recorded a net charge of $18.4 million during the fourth quarter of 2017. The amount consists of reassessing the U.S. deferred tax assets and liabilities, adjustments to the Company’s foreign tax credit carryover, and the one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Based on additional guidance, changes in interpretation, additional analysis, and assumptions, the Company reduced this net charge by $6.6 million in 2018. Sensient considers $11.8 million to be the final net charge related to the 2017 Tax Legislation.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:

(In thousands)	2020			2019
Deferred tax assets:
Benefit plans	$	7,665		$	6,293
Liabilities and reserves		19,291			21,085
Operating loss and credit carryovers⁽¹⁾		77,756			82,000
Other		13,228			1,126
Gross deferred tax assets		117,940			110,504
Valuation allowance⁽¹⁾		(47,813	)		(54,326	)
Deferred tax assets		70,127			56,178
Deferred tax liabilities:
Property, plant, and equipment		(31,709	)		(29,869	)
Goodwill		(22,012	)		(21,744	)
Other		-			(5,192	)
Deferred tax liabilities		(53,721	)		(56,805	)
Net deferred tax assets (liabilities)	$	16,406		$	(627	)

⁽¹⁾

In the first quarter of 2019, the Company recognized an increase in its foreign tax credit carryover and corresponding valuation allowance of $16.2 million, related to the finalization of certain tax regulations.

At December 31, 2020, foreign tax credit carryovers were $39.3 million, all of which expires before 2035. At December 31, 2020, foreign operating loss carryovers were $110 million. Included in the foreign operating loss carryovers are losses of $11.8 million that expire through 2035, and $98.2 million that expire after 2035 or do not have an expiration date. At December 31, 2020, state operating loss carryovers were $132.6 million, which expire prior to 2035.

At December 31, 2020 and 2019, $0.1 million of deferred tax assets and $0.6 million of deferred tax liabilities, respectively, are classified as Liabilities held for sale on the Consolidated Balance Sheet.

The Company is electing to recognize GILTI as a period expense in the period the tax is incurred.

Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the U.S. during the year. At December 31, 2020, no additional income or withholding taxes have been provided for the $625 million of undistributed earnings or any additional outside basis differences inherent in these entities, as these amounts are considered to be invested indefinitely. If the undistributed earnings were repatriated, the Company estimates it would have a withholding tax liability of $28.3 million. The determination of the tax liability for any outside basis differences is not practicable.

A reconciliation of the change in the liability for unrecognized tax benefits for 2020 and 2019 is as follows:

(In thousands)	2020			2019
Balance at beginning of year	$	6,032		$	6,026
Increases for tax positions taken in the current year		805			750
Increases for tax positions taken in prior years		1,267			199
Decreases related to settlements with tax authorities		(386	)		(341	)
Decreases as a result of lapse of the applicable statutes of limitations		(625	)		(591	)
Foreign currency exchange rate changes		352			(11	)
Balance at the end of year	$	7,445		$	6,032

The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $6.6 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. As of December 31, 2020 and 2019, $0.7 million and $0.6 million, respectively, of accrued interest and penalties were reported as an income tax liability in each period. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other liabilities on the Company’s Consolidated Balance Sheet at December 31, 2020.

The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2020, will decrease by approximately $2.5 million during 2021, of which $0.3 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2021. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases in unrecognized tax benefits as a result of examinations, settlements, and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2015.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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