Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The components of income tax expense for the years ended December 31 included in the Consolidated Statements of Income were as follows:

(Millions)	2021		2020		2019
Current income tax expense:
U.S. federal	$	1,656	$	1,122	$	1,108
U.S. state and local	351		339		276
Non-U.S.	328		639		437
Total current income tax expense	2,335		2,100		1,821
Deferred income tax (benefit) expense:
U.S. federal	231		(931)		(58)
U.S. state and local	22		(119)		(31)
Non-U.S.	41		111		(62)
Total deferred income tax (benefit) expense	294		(939)		(151)
Total income tax expense	$	2,629	$	1,161	$	1,670

A reconciliation of the U.S. federal statutory rate of 21 percent as of December 31, 2021, 2020 and 2019, to our actual income tax rate was as follows:

	2021		2020		2019
U.S. statutory federal income tax rate	21.0	%	21.0	%	21.0	%
(Decrease) increase in taxes resulting from:
Tax credits and tax-exempt income (a)	(0.1)		(4.1)		(1.9)
State and local income taxes, net of federal benefit	3.0		3.7		2.8
Non-U.S. subsidiaries' earnings	1.1		2.4		(0.5)
Tax settlements	(0.1)		(0.3)		(0.3)
Valuation allowances	—		4.0		(0.2)
Other	(0.3)		0.3		(1.1)
Actual tax rates	24.6	%	27.0	%	19.8	%

(a)Includes the implementation of PAM related to investments in QAH projects for the year ended December 31, 2021. Refer to Note 1 for further information.

We record a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:

(Millions)	2021		2020
Deferred tax assets:
Reserves not yet deducted for tax purposes	$	3,637	$	3,905
Employee compensation and benefits	359		383
Net operating loss and tax credit carryforwards	398		399
Other	809		765
Gross deferred tax assets	5,203		5,452
Valuation allowance	(472)		(418)
Deferred tax assets after valuation allowance	4,731		5,034
Deferred tax liabilities:
Intangibles and fixed assets	1,320		1,433
Deferred revenue	189		252
Deferred interest	133		148
Investment in joint ventures	183		135
Other	521		366
Gross deferred tax liabilities	2,346		2,334
Net deferred tax assets	$	2,385	$	2,700

The net operating loss and tax credit carryforward balance as of December 31, 2021, shown in the table above, is related to pre-tax U.S. federal and non-U.S. net operating loss (NOL) carryforwards of $84 million and $910 million, respectively, and foreign tax credit (FTC) carryforwards of $110 million. If not utilized, certain U.S. federal and non-U.S. NOL carryforwards will expire between 2022 and 2037, whereas others have an unlimited carryforward period. The FTC carryforwards will expire between 2029 and 2031.

A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances for both periods presented above are associated with certain non-U.S. deferred tax assets and FTC carryforwards.

Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $1.0 billion as of December 31, 2021, are intended to be permanently reinvested outside the U.S. We do not provide for state income and foreign withholding taxes on foreign earnings intended to be permanently reinvested outside the U.S. Accordingly, state income and foreign withholding taxes, which would have aggregated to approximately $0.1 billion as of December 31, 2021, have not been provided on those earnings.

Net income taxes paid by us during 2021, 2020 and 2019, were approximately $1.6 billion, $2.2 billion and $1.7 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.

We are subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, we must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. We adjust the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

We are under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which we have significant business operations. The tax years under examination and open for examination vary by jurisdiction. We are currently under examination by the IRS for the 2017 and 2018 tax years.

The following table presents changes in unrecognized tax benefits:

(Millions)	2021		2020		2019
Balance, January 1	$	790	$	726	$	701
Increases:
Current year tax positions	64		57		66
Tax positions related to prior years	225		105		78
Effects of foreign currency translations	—		—		10
Decreases:
Tax positions related to prior years	(14)		(24)		(14)
Settlements with tax authorities	(15)		(15)		(40)
Lapse of statute of limitations	(17)		(58)		(75)
Effects of foreign currency translations	(9)		(1)		—
Balance, December 31	$	1,024	$	790	$	726

Included in the unrecognized tax benefits of $1.0 billion, $0.8 billion and $0.7 billion for December 31, 2021, 2020 and 2019, respectively, are approximately $780 million, $580 million and $623 million, respectively, that, if recognized, would favorably affect the effective tax rate in a future period.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next twelve months by as much as $167 million, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $167 million of unrecognized tax benefits, approximately $132 million relates to amounts that, if recognized, would impact the effective tax rate in a future period.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the years ended December 31, 2021, 2020 and 2019, we recognized approximately $40 million, $260 million, and $5 million, respectively, in expenses for interest and penalties.

We had approximately $380 million and $350 million accrued for the payment of interest and penalties as of December 31, 2021 and 2020, respectively.