Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income TaxesThe components of income from continuing operations before income taxes were as follows:

For the year ended December 31,	2022		2021		2020
United States	$	287	$	28	$	84
Foreign	319		296		87
Total	$	606	$	324	$	171

The provision for income taxes consisted of the following:

For the year ended December 31,	2022		2021		2020
Current:
Federal(1)	$	3	$	(9)	$	(2)
Foreign	53		39		2
State and local	—		(2)		(2)
	56		28		(2)
Deferred:
Federal	71		22		(67)
Foreign	5		11		11
State and local	5		5		18
	81		38		(38)
Total	$	137	$	66	$	(40)

(1)Includes U.S. taxes related to foreign income.

A reconciliation of the U.S. federal statutory rate to Howmet’s effective tax rate was as follows (the effective tax rate for 2022 and 2021 was a provision on income and for 2020 was a benefit on income):

For the year ended December 31,	2022		2021		2020
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
Foreign tax rate differential	0.1		(0.7)		(1.2)
U.S. and residual tax on foreign earnings(1)	1.2		6.5		5.6
U.S. state and local taxes	0.7		1.0		2.2
Federal cost of state tax	(0.2)		(0.3)		(2.0)
Permanent differences related to asset disposals and items included in restructuring and other charges	—		(0.3)		6.8
Non-deductible officer compensation	1.2		1.6		3.5
Statutory tax rate and law changes(2)	0.1		1.0		(15.9)
Tax holidays	(0.5)		(0.4)		(0.4)
Tax credits(3)	(0.9)		(10.4)		(0.4)
Changes in valuation allowances(4)	1.4		5.1		74.8
Changes in uncertain tax positions(5)	—		—		(116.9)
Excess benefit for stock compensation	(0.8)		(0.3)		(0.7)
Prior year tax adjustments	(0.1)		(3.7)		(1.7)
Other	(0.6)		0.3		1.9
Effective tax rate	22.6	%	20.4	%	(23.4)	%

(1)It is Howmet’s policy to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.

(2)In 2020, final regulations were issued that provided an election to exclude from GILTI any foreign earnings subject to a local country tax rate of at least 90% of the U.S. tax rate. The Company recorded a $30 benefit related to this tax law change.

(3)In 2021, a $32 benefit for income tax credits related to development incentives in Hungary was recognized.

(4)In 2020, a $104 valuation allowance was recorded related to deferred tax assets that were previously subject to a reserve that was otherwise released in 2020 as a result of a favorable Spanish tax case decision.

(5)In 2020, the Company released a $64 reserve liability and a $104 reserve recorded as a contra balance against deferred tax assets as a result of a favorable Spanish tax case decision. A $30 benefit related to a previously uncertain U.S. tax position was also recognized in 2020.

The components of net deferred tax assets and liabilities were as follows:

	2022				2021
December 31,	Deferred tax assets		Deferred tax liabilities		Deferred tax assets		Deferred tax liabilities
Depreciation	$	11	$	492	$	8	$	538
Employee benefits	232		1		300		3
Loss provisions	26		1		20		1
Deferred income/expense	62		1,161		50		1,098
Interest	99		—		105		—
Tax loss carryforwards	2,955		—		3,226		—
Tax credit carryforwards	268		—		358		—
Other	6		6		10		7
	$	3,659	$	1,661	$	4,077	$	1,647
Valuation allowance	(1,965)		—		(2,279)		—
	$	1,694	$	1,661	$	1,798	$	1,647

The following table details the expiration periods of the deferred tax assets presented above:

December 31, 2022	Expires within 10 years		Expires within 11-20 years		No Expiration(1)		Other(2)		Total
Tax loss carryforwards	$	362	$	533	$	2,060	$	—	$	2,955
Tax credit carryforwards	196		59		13		—		268
Other(3)	—		—		380		56		436
Valuation allowance	(522)		(234)		(1,204)		(5)		(1,965)
	$	36	$	358	$	1,249	$	51	$	1,694

(1)Deferred tax assets with no expiration may still have annual limitations on utilization.

(2)Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference.

(3)A substantial amount of Other deferred tax assets relates to employee benefits that will become deductible for tax purposes in jurisdictions with unlimited expiration over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.

The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (4%), and taxable temporary differences that reverse within the carryforward period (96%).

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Howmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also remeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

It is Howmet’s policy to apply a tax law ordering approach when considering the need for a valuation allowance on net operating losses expected to offset GILTI income inclusions. Under this approach, reductions in cash tax savings are not considered as part of the valuation allowance assessment. Instead, future GILTI inclusions are considered a source of taxable income that support the realizability of deferred tax assets.

Howmet’s foreign tax credits in the U.S. have a 10-year carryforward period with expirations ranging from 2023 to 2027 (as of December 31, 2022). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. Foreign tax credits of $68 and $22 expired at the end of 2022 and 2021, respectively, resulting in a corresponding decrease to the valuation allowance. In 2022, the Company decided to increase the valuation allowance by $12 in order to fully reserve the foreign tax credit carryover after weighing all available evidence including foreign source income projections. The valuation allowance was reduced in 2021 by $9 as a result of updated U.S. regulatory guidance concerning the utilization of foreign tax credits in connection with the one-time transition tax on the deemed repatriation of previously non-taxed post-1986 earnings and profits of certain foreign subsidiaries enacted as part of the 2017 Act, and by $4 as a result of a corresponding reduction in the deferred tax asset related to suspended foreign tax credits. At December 31, 2022, the cumulative amount of the valuation allowance was $124. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

During 2021, the Company concluded that it would not pursue a deduction related to a capital investment for which a deferred tax asset of $9 and offsetting valuation allowance had previously been recorded. As such, both the deferred tax asset and the valuation allowance were eliminated. The need for valuation allowances against other capital investments will be reassessed on a continuing basis. As of December 31, 2022, there is no valuation allowance recorded related to capital investments.

The Company recorded a net $1 decrease, $3 increase, and $20 increase to U.S. state valuation allowances in 2022, 2021, and 2020, respectively. After weighing all available positive and negative evidence, the Company determined the adjustments based on the underlying net deferred tax assets that were more likely than not realizable based on projected taxable income. Changes in fully reserved U.S. state tax losses, credits and other deferred tax assets resulting from expirations, audit adjustments, tax rate, and tax law changes also resulted in a corresponding net $142 decrease, $20 increase, and $58 decrease in the valuation allowance in 2022, 2021, and 2020, respectively. Valuation allowances of $489 remain against state deferred tax assets expected to expire before utilization. The need for valuation allowances against state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

In 2022, after weighing all available evidence, the Company released a $6 valuation allowance in the U.K. related to interest deduction carryforwards. In 2021, after weighing all available evidence, the Company recognized a discrete income tax cost to establish a valuation allowance of $8 in Switzerland. In 2020, the Company increased a valuation allowance by $104 as a result of releasing a tax reserve following a favorable Spanish tax case decision. The need for valuation allowances will be reassessed by entity and by jurisdiction on a continuous basis in future periods and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.

The following table details the changes in the valuation allowance:

December 31,	2022		2021		2020
Balance at beginning of year	$	2,279	$	2,307	$	2,121
Increase to allowance	40		113		136
Release of allowance	(154)		(94)		(50)
Tax apportionment, tax rate and tax law changes	(110)		63		(23)
Foreign currency translation	(90)		(110)		123
Balance at end of year	$	1,965	$	2,279	$	2,307

Foreign U.S. GAAP earnings that have not otherwise been subject to U.S. tax, will generally be exempt from future U.S. tax under the 2017 Act when distributed. Such distributions, as well as distributions of previously taxed foreign earnings, could potentially be subject to U.S. state tax in certain states, and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. Howmet would expect the potential withholding tax, U.S. state tax, and U.S. capital gains tax impacts to be immaterial and the potential deferred tax liability associated with future currency gains to be impracticable to determine.

Howmet and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Howmet is no longer subject to income tax examinations by tax authorities for years prior to 2014. All U.S. tax years prior to 2022 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining the Company’s income tax returns for various tax years through 2021. The Company had net cash income tax payments of $50 and $53 in 2022 and 2021, respectively, and net cash refunds of $33 in 2020.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:

December 31,	2022		2021		2020
Balance at beginning of year	$	2	$	2	$	176
Reductions for tax positions of prior years	—		—		(182)
Settlements with tax authorities	—		—		(1)
Foreign currency translation	—		—		9
Balance at end of year	$	2	$	2	$	2

For all periods presented, a portion of the balance pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2022, 2021, and 2020 would be approximately less than 1%, 1%, and 1%, respectively, of pre-tax book income. Howmet does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2023.

It is Howmet’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes in the Statement of Consolidated Operations. Howmet recognized interest of less than $1, less than $1, and $2 in 2022, 2021, and 2020, respectively. Due to the expiration of the statute of limitations, settlements with tax authorities, reductions in prior accruals, and refunded overpayments, Howmet recognized interest income of less than $1, $3, and $25 in 2022, 2021, and 2020, respectively. As of December 31, 2022, 2021, and 2020, the amount accrued for the payment of interest and penalties was less than $1, less than $1, and $2, respectively.