Income Taxes

12 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 11 – Income Taxes

We use the liability method of accounting for income taxes under which deferred tax assets and liabilities are adjusted to reflect changes in tax rates and laws in the period such changes are enacted resulting in adjustments to the current fiscal year’s provision for income taxes.

TMCC files a consolidated federal income tax return with TFSIC and its subsidiaries. Current and deferred federal income taxes are allocated to TMCC as if it were a separate taxpayer. TMCC’s net operating losses and tax credits are utilized when those losses and credits are used by TFSIC and its subsidiaries including TMCC in the consolidated federal income tax return. TMCC files either separate or consolidated/combined state income tax returns with TMNA, TFSIC, or subsidiaries of TMCC. State income tax expense is generally recognized as if TMCC and its subsidiaries filed their tax returns on a stand-alone basis. In those states where TMCC and its subsidiaries join in the filing of consolidated or combined income tax returns, TMCC and its subsidiaries are allocated their share of the total income tax expense based on combined allocation/apportionment factors and separate company income or loss. Based on the federal and state tax sharing agreements, TFSIC and TMCC and its subsidiaries pay for their share of the income tax expense and are reimbursed for the benefit of any of their tax losses and credits utilized in the federal and state income tax returns.

The provision for income taxes consisted of the following:

	Years ended March 31,
	2023			2022			2021
Current
Federal	$	(1,859	)	$	1,774		$	2,756
State		(1	)		281			386
Foreign		16			22			11
Total		(1,844	)		2,077			3,153
Deferred
Federal		2,100			(1,166	)		(2,243	)
State		78			(123	)		(276	)
Foreign		(5	)		1			(2	)
Total		2,173			(1,288	)		(2,521	)
Provision for income taxes	$	329		$	789		$	632

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:

	Years ended March 31,
	2023	2022	2021
Provision for income taxes at U.S. federal statutory tax rate	21.0%	21.0%	21.0%
State and local taxes (net of federal tax benefit)	4.2%	3.7%	3.9%
Changes in unrecognized tax benefits	1.3%	-	-
Federal tax credits 1	(1.0)%	(1.0)%	(0.5)%
Other, net	(0.3)%	-	(0.5)%
Effective tax rate	25.2%	23.7%	23.9%

1.The amounts in Federal tax credits include tax benefits from foreign tax credits, plug-in vehicle credits, and research and development credits for fiscal 2023, 2022, and 2021. The amounts in Federal tax credits also include credits for qualified commercial clean vehicles for fiscal 2023 and alternative fuel vehicle credits for fiscal 2022 and 2021.

Note 11 – Income Taxes (Continued)

Our net deferred income tax liability consisted of the following deferred tax liabilities and assets:

	March 31,
	2023			2022
Liabilities:
Lease transactions	$	4,786		$	1,504
Voluntary protection dealer commissions		403			348
State taxes, net of federal tax benefit		356			275
Mark-to-market of investments in marketable securities and derivatives		-			24
Other		72			82
Deferred tax liabilities	$	5,617		$	2,233
Assets:
Net operating loss and tax credit carryforwards		1,007			14
Provision for credit and residual value losses		478			394
Deferred costs and fees		197			179
Mark-to-market of investments in marketable securities and derivatives		150			-
Accrued expenses		23			45
Lease obligations		20			23
Other		17			14
Deferred tax assets		1,892			669
Valuation allowance		(2	)		-
Net deferred tax assets	$	1,890		$	669
Net deferred income tax liability 1	$	3,727		$	1,564

1.Balance includes deferred tax assets of $16 million and $6 million at March 31, 2023 and 2022, respectively, attributable to unrealized losses included in accumulated other comprehensive loss. The change in this balance is not included in the total deferred tax expense.

We have deferred tax assets related to cumulative federal net operating loss carry forwards of $955 million at March 31, 2023 and none at March 31, 2022, respectively. We have deferred tax assets related to cumulative state net operating loss carry forwards of $37 million and $13 million at March 31, 2023 and 2022, respectively. State net operating loss carryforwards will expire beginning in fiscal 2024.

We have deferred tax assets related to federal tax credits for plug-in vehicles and qualified commercial clean vehicles of $11 million and federal tax credit for research and development of $4 million at March 31, 2023. We had no deferred tax assets related to federal tax credits for vehicles or research and development at March 31, 2022. The deferred tax assets related to federal tax credit for foreign tax were not significant as of March 31, 2023 and 2022, respectively. The federal tax credit carryforwards will expire beginning in fiscal 2032.

The valuation allowance on deferred tax assets was not significant as of March 31, 2023 and 2022, respectively. The determination of the valuation allowance is based on management’s estimate of future taxable income during the respective carryforward periods. Apart from the valuation allowance, we believe that the remaining deferred tax assets will be realized in full. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

Note 11 – Income Taxes (Continued)

We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, other than the deemed repatriation tax that is provided pursuant to the Tax Cuts and Jobs Act of 2017, state and local taxes have not been provided for unremitted earnings of our foreign subsidiary. At March 31, 2023 and 2022, these unremitted earnings totaled $307 million and $288 million, respectively. Determination of the amount of the deferred state and local tax liability is not practicable, and accordingly no estimate of the unrecorded deferred state and local tax liability is provided.

Although we do not foresee any events causing repatriation of earnings, possible examples may include but are not limited to parent company capital needs or exiting the business in the foreign country.

We had an income tax receivable of $28 million and an income tax payable of $52 million for our share of the income tax in those states where we filed consolidated or combined returns with TMNA and its subsidiaries at March 31, 2023 and 2022, respectively. Additionally, our federal and state income tax payable or receivable from TMCC affiliated companies, including TFSIC, TFSB, and Toyota Financial Services Securities USA Corporation, was not significant for both March 31, 2023 and 2022.

The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain. The change in unrecognized tax benefits are as follows:

	March 31,
	2023		2022		2021
Balance at beginning of the year	$	22	$	15	$	19
Increases related to positions taken during the current year		2		1		1
Increases recorded in current year related to positions taken     during prior years		19		6		2
Expirations due to lapse of statute		-		-		(7	)
Balance at end of year	$	43	$	22	$	15

At March 31, 2023, 2022 and 2021 approximately $43 million, $22 million and $14 million of the respective unrecognized tax benefits would, if recognized, have an effect on the effective tax rate. The remaining amounts in the respective unrecognized tax benefits at March 31, 2023, 2022, and 2021 are related to timing matters. During fiscal 2023, $21 million of the net increase in unrecognized tax benefits had an effect on the effective tax rate. We do not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months.

We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal 2023, 2022, and 2021, accrued interest was not significant and no penalties were accrued.

In August 2022, the Inflation Reduction Act ("the Act") was signed into law. The Act modifies climate and clean energy corporate tax provisions, including amendments to the federal tax credit for plug-in vehicles available under current tax law. The Act also includes a 15 percent corporate alternative minimum tax based on modified financial statement net income, applying to tax years beginning after December 31, 2022, which we expect to be applicable in fiscal 2024. As additional guidance related to the Act is issued, we will evaluate any impact to our consolidated financial statements. The Act does not have a material impact on our results of operations for fiscal 2023.

Tax-related Contingencies

As of March 31, 2023, we remained under IRS examination for fiscal 2018 through fiscal 2023.