Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Components of Income Tax Expense

Components of earnings before income taxes are as follows:

Years ended December 31	2021		2020		2019
United States	$	1,030	$	1,029	$	714
Other nations	522		145		287
	$	1,552	$	1,174	$	1,001

Components of income tax expense are as follows:

Years ended December 31	2021		2020		2019
United States	$	134	$	117	$	94
Other nations	98		98		93
States (U.S.)	36		31		27
Current income tax expense	268		246		214
United States	(2)		(21)		(61)
Other nations	22		8		(22)
States (U.S.)	14		(12)		(1)
Deferred income tax expense (benefit)	34		(25)		(84)
Total income tax expense	$	302	$	221	$	130

Differences between income tax expense computed at the U.S. federal statutory tax rate of 21% and income tax expense as reflected in the Consolidated Statements of Operations are as follows:

Years ended December 31	2021				2020				2019
Income tax expense at statutory rate	$	326	21.0	%	$	246	21.0	%	$	210	21.0	%
State income taxes, net of federal benefit	55		3.5	%	39		3.3	%	32		3.2	%
U.S. tax expense (benefit) on undistributed non-U.S. earnings	6		0.4	%	(2)		(0.2)	%	6		0.6	%
Non-U.S. tax expense on non-U.S. earnings	8		0.5	%	5		0.5	%	4		0.4	%
Reserve for uncertain tax positions	(10)		(0.6)	%	—		—	%	(3)		(0.3)	%
Other tax expense (benefit)	3		0.2	%	5		0.4	%	(3)		(0.3)	%
Research credits	(20)		(1.3)	%	(28)		(2.4)	%	(10)		(1.0)	%
Stock compensation	(32)		(2.1)	%	(48)		(4.1)	%	(27)		(2.7)	%
Valuation allowances	(34)		(2.2)	%	4		0.3	%	(79)		(7.9)	%
	$	302	19.5	%	$	221	18.8	%	$	130	13.0	%

The effective tax rate for 2021 was below the current U.S. federal statutory rate of 21% primarily due to the partial release of the valuation allowance recorded on the U.S. foreign tax credit carryforward and the recognition of excess tax benefits of share-based compensation.

Deferred tax balances that were recorded within Accumulated other comprehensive loss in the Company’s Consolidated Balance Sheet, rather than Income tax expense, are the result of retirement benefit adjustments and currency translation adjustments. The adjustments were charges of $21 million for the year ended December 31, 2021, benefits of $11 million for the year ended December 31, 2020 and charges of $97 million for the year ended December 31, 2019.

The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and generally, except for certain earnings that the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign income tax applicable to the earnings. As a result of the 2017 U.S. Tax Cuts and Jobs Act ("the Tax Act"), dividends from foreign subsidiaries are now exempt or the earnings have been previously subject to U.S. tax. As a result, the tax accrual for undistributed foreign earnings is limited primarily to foreign withholding taxes and tax on inherent capital gains that would result from distribution of foreign earnings which are not permanently reinvested, and such earnings may be distributed without an additional charge.

Undistributed foreign earnings that the Company intends to reinvest indefinitely amounted to, in the aggregate, $1.5 billion at December 31, 2021. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities on such earnings; however, due to the above-mentioned changes made under the Tax Act, the Company believes that the additional U.S. or foreign income tax charge with respect to such earnings, if distributed, would be immaterial.

Gross deferred tax assets were $2.0 billion and $2.1 billion for December 31, 2021 and December 31, 2020, respectively. Deferred tax assets, net of valuation allowances, were $1.8 billion and $1.7 billion at December 31, 2021 and December 31, 2020, respectively. Gross deferred tax liabilities were $1.0 billion and $926 million at December 31, 2021 and 2020, respectively.

Significant components of deferred tax assets (liabilities) are as follows: 

December 31	2021		2020
Inventory	$	29	$	22
Accrued liabilities and allowances	86		67
Employee benefits	321		372
Capitalized items	(86)		(61)
Tax basis differences on investments	(1)		(3)
Depreciation tax basis differences on fixed assets	23		52
Undistributed non-U.S. earnings	(36)		(33)
Tax attribute carryforwards	410		449
Business reorganization	8		16
Warranty and customer liabilities	27		24
Deferred revenue and costs	213		203
Valuation allowances	(275)		(341)
Operating lease assets	(95)		(103)
Operating lease liabilities	108		119
Other	1		3
	$	733	$	786

At December 31, 2021 and 2020, the Company had valuation allowances of $275 million and $341 million, respectively, against its deferred tax assets, including $53 million and $81 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company’s U.S. valuation allowance decreased $38 million during 2021 primarily due to a change in the Company's ability to utilize U.S. foreign tax credits and the expiration of tax attributes. The Company's non-U.S. valuation allowance decreased $28 million during 2021 primarily due to the expiration of tax attributes. The Company's valuation allowance for U.S. and non-U.S. decreased $5 million and $4 million, respectively, during 2020 primarily due to the expiration of tax attributes. The Company believes that the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Tax attribute carryforwards are as follows: 

December 31, 2021	Gross Tax Loss		Tax Effected		Expiration Period
United States:
U.S. tax losses	$	144	$	28	2028-2037
Foreign tax credits	—		264		2022-2023
General business credits	—		3		2030-2033
State tax losses	—		21		2022-2040
State tax credits	—		12		2022-2040
Non-U.S. subsidiaries:
Japan tax losses	11		3		2022-2029
United Kingdom tax losses	111		28		Unlimited
Singapore tax losses	7		1		Unlimited
Canada tax losses	19		5		2034-2040
Spain tax credits	—		19		2022-2029
Other subsidiaries tax losses	74		16		Various
Other subsidiaries tax credits	—		10		Various
			$	410

The Company had unrecognized tax benefits of $43 million and $64 million at December 31, 2021 and December 31, 2020, respectively, of which approximately $36 million and $53 million, if recognized, would have affected the effective tax rate for 2021 and 2020, respectively.

A roll-forward of unrecognized tax benefits is as follows: 

(in millions)	2021		2020
Balance at January 1	$	64	$	70
Additions based on tax positions related to current year	1		8
Additions for tax positions of prior years	2		2
Reductions for tax positions of prior years	—		(6)
Settlements and agreements	(18)		(8)
Lapse of statute of limitations	(6)		(2)
Balance at December 31	$	43	$	64

The Company recorded $36 million and $49 million of unrecognized tax benefits in other liabilities at December 31, 2021 and December 31, 2020, respectively.

The Internal Revenue Service ("IRS") has concluded the examination of the Company's 2014 and 2015 tax years. The Company also has several state and non-U.S. audits pending. A summary of open tax years by major jurisdiction is presented below: 

Jurisdiction	Tax Years
United States	2018-2021
Australia	2017-2021
Canada	2017-2021
Germany	2017-2021
India	1997-2021
Israel	2019-2021
Poland	2018-2021
Malaysia	2014-2021
United Kingdom	2020-2021

Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or liquidity. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s results of operations in the periods, and as of the dates, on which the matters are ultimately resolved.

Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be up to a $7 million tax benefit.

At December 31, 2021, the Company had $22 million accrued for interest and $15 million accrued for penalties on unrecognized tax benefits. At December 31, 2020, the Company had $33 million and $15 million accrued for interest and penalties, respectively, on unrecognized tax benefits. The Company's policy is to classify the interest and penalty as a component of interest expense and other expense, respectively.