Income Taxes (Note)

12 Months Ended

Dec. 31, 2020

The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows:


In millions	2020		2019		2018
Earnings (loss)
U.S.	$	727	$	1,342	$	1,450
Non-U.S.	(77)		262		331
Earnings (loss) from continuing operations before income taxes and equity earnings (losses)	$	650	$	1,604	$	1,781

The provision (benefit) for income taxes from continuing operations (excluding noncontrolling interests) by taxing jurisdiction was as follows:


In millions	2020		2019		2018
Current tax provision (benefit)
U.S. federal	$	124	$	271	$	227
U.S. state and local	35		29		37
Non-U.S.	77		122		165
	$	236	$	422	$	429
Deferred tax provision (benefit)
U.S. federal	$	(6)	$	44	$	12
U.S. state and local	1		(23)		50
Non-U.S.	14		191		(46)
	$	9	$	212	$	16
Income tax provision (benefit)	$	245	$	634	$	445

The Company’s deferred income tax provision (benefit) includes a $2 million benefit, a $44 million benefit and a $13 million benefit for 2020, 2019 and 2018, respectively, for the effect of various changes in non-U.S. and U.S. federal and state tax rates.

International Paper made income tax payments, net of refunds, of $162 million, $349 million and $388 million in 2020, 2019 and 2018, respectively.

A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows:


In millions	2020			2019			2018
Earnings (loss) from continuing operations before income taxes and equity earnings	$	650		$	1,604		$	1,781
Statutory U.S. income tax rate	21		%	21		%	21		%
Tax expense (benefit) using statutory U.S. income tax rate	137			337			374
State and local income taxes	28			6			72
Impact of rate differential on non-U.S. permanent differences and earnings	22			31			35
Foreign valuation allowance	—			203			—
Tax expense (benefit) on manufacturing activities	—			—			(1)
Non-deductible business expenses	5			7			6
Non-deductible impairments	92			31			—
Non-deductible compensation	11			3			11
Tax audits	(38)			—			28
Deemed repatriation, net of foreign tax credits	14			1			(25)
U.S. federal tax rate change	7			—			(13)
Foreign derived intangible income deduction	—			2			(25)
US tax on non-U.S. earnings (GILTI and Subpart F)	11			36			19
Foreign tax credits	(4)			(2)			(15)
General business and other tax credits	(45)			(33)			(26)
Tax expense (benefit) on equity earnings	8			10			10
Other, net	(3)			2			(5)
Income tax provision (benefit)	$	245		$	634		$	445
Effective income tax rate	38		%	40		%	25		%

The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2020 and 2019, were as follows:


In millions	2020		2019
Deferred income tax assets:
Postretirement benefit accruals	$	91	$	90
Pension obligations	288		421
Tax credits	296		290
Net operating and capital loss carryforwards	590		621
Compensation reserves	179		181
Lease obligations	114		106
Environmental reserves	117		93
Other	218		126
Gross deferred income tax assets	$	1,893	$	1,928
Less: valuation allowance (a)	(685)		(691)
Net deferred income tax asset	$	1,208	$	1,237
Deferred income tax liabilities:
Intangibles	$	(159)	$	(152)
Investments	(251)		(265)
Right of use assets	(114)		(106)
Plants, properties and equipment	(1,958)		(1,866)
Forestlands, related installment sales, and investment in subsidiary	(1,400)		(1,407)
Gross deferred income tax liabilities	$	(3,882)	$	(3,796)
Net deferred income tax liability	$	(2,674)	$	(2,559)

(a) The net change in the total valuation allowance for the years ended December 31, 2020 and 2019 was a decrease of $(6) million and an increase of $250 million, respectively. The net change in the prior year is primarily due to tax law changes in foreign jurisdictions impacting future utilization of deferred tax assets of $203 million.

Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred charges and other assets and Deferred income taxes. Of the $1.4 billion of deferred tax liabilities for forestlands, related installment sales, and investment in subsidiary, $887 million is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $488 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 15).

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 is as follows:


In millions	2020		2019		2018
Balance at January 1	$	(189)	$	(220)	$	(188)
(Additions) reductions for tax positions related to current year	(10)		(5)		(7)
(Additions) for tax positions related to prior years	(10)		(6)		(37)
Reductions for tax positions related to prior years	30		5		5
Settlements	13		31		2
Expiration of statutes of limitations	1		3		2
Currency translation adjustment	(1)		3		3
Balance at December 31	$	(166)	$	(189)	$	(220)

If the Company were to prevail on the unrecognized tax benefits recorded, substantially all of the balances at December 31, 2020, 2019 and 2018 would benefit the effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. The Company had approximately $17 million and $21 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at December 31, 2020 and 2019, respectively.

The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2007 through 2019 remain open and subject to examination by the relevant tax authorities. The Company frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature, and amount of deductions and the allocation of income among various tax jurisdictions. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $16 million during the next twelve months.

The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by International Paper do Brasil Ltda., a wholly-owned subsidiary of the Company. The Company received assessments for the tax years 2007-2015 totaling approximately $114 million in tax, and $367 million in interest, penalties, and fees as of December 31, 2020 (adjusted for variation in currency exchange rates). After a previous favorable ruling challenging the basis for these assessments, we received other subsequent unfavorable decisions from the Brazilian Administrative Council of Tax Appeals. The Company has appealed and intends to further appeal these and any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. The Company believes that it has appropriately evaluated the transaction underlying these assessments, and has concluded based on Brazilian tax law, that its tax position would be sustained. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015.

The Company provides for foreign withholding taxes and any applicable U.S. state income taxes on earnings intended to be repatriated from non-U.S. subsidiaries, which we believe will be limited in the future to each year's current earnings. No provision for these taxes on approximately $2.3 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2020 has been made, as these earnings are considered indefinitely invested. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted in a taxable manner is not practicable.

If management decided to monetize the Company’s foreign investments, we would recognize the tax cost related to the excess of the book value over the tax basis of those investments. This would include foreign withholding taxes and any applicable U.S. Federal and state income taxes. Determination of the

tax cost that would be incurred upon monetization of the Company’s foreign investments is not practicable; however, we do not believe it would be material.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act ("the CARES Act"). The CARES Act provides various types of economic relief for individuals and businesses due to the COVID-19 pandemic, including temporary corporate tax relief. We currently do not believe there to be a material impact to the income tax provision resulting from the CARES Act.

The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards:


In millions	2021 Through 2030		2031 Through 2040		Indefinite		Total
U.S. federal and non-U.S. NOLs	$	2	$	53	$	457	$	512
State taxing jurisdiction NOLs (a)	61		16		—		77
U.S. federal, non- U.S. and state tax credit carryforwards (a)	169		8		119		296
Total	$	232	$	77	$	576	$	885
Less: valuation allowance (a)	(145)		(49)		(410)		(604)
Total, net	$	87	$	28	$	166	$	281

(a) State amounts are presented net of federal benefit.

- 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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