Income Taxes

12 Months Ended

Sep. 30, 2020

INCOME TAXES

Pretax earnings consist of the following:


	2018		2019	2020
United States	$	1,652	1,771	1,360
Non-U.S.	1,015		1,088	975
Total pretax earnings	$	2,667	2,859	2,335

The principal components of income tax expense follow:


	2018		2019	2020
Current:
U.S. federal	$	341	247	123
State and local	52		24	15
Non-U.S.	300		308	288

Deferred:
U.S. federal	(224)		(2)	(44)
State and local	(11)		12	1
Non-U.S.	(15)		(58)	(38)
Income tax expense	$	443	531	345

Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow. For fiscal 2018, the U.S. federal statutory rate was 35 percent for one quarter and 21 percent for three quarters.


	2018		2019		2020
U.S. federal statutory rate	24.5	%	21.0	%	21.0	%
State and local taxes, net of U.S. federal tax benefit	1.2		1.0		0.6
Non-U.S. rate differential	0.8		1.8		1.7
Non-U.S. tax holidays	(0.8)		(1.1)		(1.1)
Research and development credits	(0.2)		(0.3)		(1.8)
U.S. manufacturing deduction	(1.1)		—		—
Foreign derived intangible income	—		(1.1)		(1.2)
Gain on divestiture	1.0		—		—
Subsidiary restructuring	(2.0)		(2.6)		(4.4)
Transition impact of Tax Act	(7.1)		—		—
Other	0.3		(0.1)		—
Effective income tax rate	16.6	%	18.6	%	14.8	%

The tax rates for 2020, 2019 and 2018 include benefits from restructuring subsidiaries of $103 ($0.17 per share), $74 ($0.12 per share) and $53 ($0.08 per share), respectively. The increase in research and development credits in the current year was due to the impact of a research and development tax credit study.

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “Tax Act”), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Tax Act includes a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time “deemed repatriation” of accumulated non-U.S. earnings. During 2018, the Company recognized a net tax benefit of $189 ($0.30 per share) due to impacts of the Tax Act, consisting of a $94 benefit on revaluation of net deferred income tax liabilities to the lower tax rate, $35 of expense for the tax on deemed repatriation of accumulated non-U.S. earnings and withholding taxes, and the reversal of $130 accrued in previous periods for the planned repatriation of non-U.S. cash. The Company completed its accounting for the Tax Act in the first quarter of fiscal 2019.

Effective in fiscal 2019, the Tax Act also subjects the Company to U.S. tax on global intangible low-taxed income earned by certain of its non-U.S. subsidiaries. The Company has elected to recognize this tax as a period expense when it is incurred.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company expects to defer $75 of certain payroll taxes through the end of calendar year 2020, of which $48 was deferred through September 30, 2020.

Non-U.S. tax holidays reduce tax rates in certain jurisdictions and are expected to expire over the next two years.

Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (U.S. federal, state and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to change significantly within the next 12 months.


	2019		2020
Unrecognized tax benefits, beginning	$	158	159
Additions for current year tax positions	15		25
Additions for prior year tax positions	18		29
Reductions for prior year tax positions	(22)		(8)
Acquisitions and divestitures	4		—
Reductions for settlements with tax authorities	(5)		—
Reductions for expiration of statutes of limitations	(9)		(10)
Unrecognized tax benefits, ending	$	159	195

If none of the unrecognized tax benefits shown is ultimately paid, the tax provision and the calculation of the effective tax rate would be favorably impacted by $163, which is net of cross-jurisdictional tax credits and temporary differences. The Company accrues interest and penalties related to income taxes in income tax expense. Total interest and penalties recognized were $1, $4 and $2 in 2020, 2019 and 2018, respectively. As of September 30, 2020 and 2019, total accrued interest and penalties were $29 and $27, respectively.

The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed for years through 2013. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates.

The principal items that gave rise to deferred income tax assets and liabilities follow:


	2019		2020
Deferred tax assets:
Net operating losses, capital losses and tax credits	$	407	487
Accrued liabilities	228		219
Postretirement and postemployment benefits	36		33
Employee compensation and benefits	110		119
Pensions	95		69
Other	121		137
Total	$	997	1,064

Valuation allowances	$	(307)	(293)

Deferred tax liabilities:
Intangibles	$	(637)	(652)
Property, plant and equipment	(195)		(212)
Undistributed non-U.S. earnings	(49)		(36)
Other	(39)		(33)
Total	$	(920)	(933)

Net deferred income tax liability	$	(230)	(162)

Total income taxes paid were approximately $400, $650 and $680 in 2020, 2019 and 2018, respectively. Net operating losses, capital losses and tax credits include $126 of capital losses expected to be recovered in the next 12 months. More than half of the remaining $361 of net operating losses and tax credits expire over the next 9 years, while most of the remainder can be carried forward indefinitely.