Income Taxes

12 Months Ended

Mar. 31, 2022

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,
	2022			2021			2020
Current
Federal	$	1,774		$	2,756		$	(19	)
State		281			386			120
Foreign		22			11			8
Total		2,077			3,153			109
Deferred
Federal		(1,166	)		(2,243	)		145
State		(123	)		(276	)		(141	)
Foreign		1			(2	)		(2	)
Total		(1,288	)		(2,521	)		2
Provision for income taxes	$	789		$	632		$	111

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

	Years ended March 31,
	2022			2021			2020
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)		3.7	%		3.9	%		4.0	%
Effect of state tax law changes		0.3	%		(0.2	)%		(3.9	)%
Federal tax credits 1		(1.0	)%		(0.5	)%		(3.7	)%
Tax rate differential from tax loss carryback		-			-			(5.6	)%
Adjustment for prior year provision to return differences		(0.3	)%		(0.2	)%		(1.0	)%
Other, net		-			(0.1	)%		-
Effective tax rate		23.7	%		23.9	%		10.8	%

¹ The amounts in Federal tax credits include tax benefits from foreign tax credits, alternative fuel vehicle credits, plug-in vehicle credits, and research and development credits for fiscal 2022, 2021, and 2020.

Note 11 – Income Taxes (Continued)

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

	March 31,
	2022		2021
Liabilities:
Lease transactions	$	1,504	$	2,765
Voluntary protection dealer commissions		348		290
State taxes, net of federal tax benefit		275		377
Mark-to-market of investments in marketable securities and derivatives		24		34
Other		82		82
Deferred tax liabilities	$	2,233	$	3,548
Assets:
Provision for credit and residual value losses		394		421
Deferred costs and fees		179		187
Accrued expenses		45		21
Lease obligations		23		27
Net operating loss and tax credit carryforwards		14		29
Other		14		12
Deferred tax assets		669		697
Valuation allowance		-		(9	)
Net deferred tax assets	$	669	$	688
Net deferred income tax liability 1	$	1,564	$	2,860

^{1 Balance includes deferred tax assets (liabilities) of $6 million and $(2) million at March 31, 2022 and 2021, respectively, attributable to unrealized gains or losses included in accumulated other comprehensive income or loss, net. The change in this balance is not included in total deferred tax expense.}

We have no deferred tax assets related to cumulative federal net operating loss carry forwards at March 31, 2022 or March 31, 2021.  We have deferred tax assets related to cumulative state net operating loss carry forwards of $13 million and $25 million at March 31, 2022 and March 31, 2021, respectively.  State net operating loss carryforwards will expire beginning in fiscal 2024.  

We have deferred tax assets related to federal tax credit for foreign tax of less than $1 million and $3 million at March 31, 2022 and March 31, 2021, respectively.  The federal tax credit carryforwards will expire beginning in fiscal 2032.    

The deferred tax assets related to foreign tax credit is reduced by a valuation allowance of less than $1 million at March 31, 2022.  The deferred tax assets related to foreign tax credit and state tax net operating loss carryforwards were reduced by a valuation allowance of $9 million at March 31, 2021.  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, 2022 and 2021, these unremitted earnings totaled $288 million and $251 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 payable of $52 million and $35 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, 2022 and March 31, 2021, 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, 2022 and 2021.

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,
	2022		2021			2020
Balance at beginning of the year	$	15	$	19		$	7
Increases related to positions taken during the current year		1		1			12
Increases recorded in current year related to positions taken     during prior years		6		2			-
Expirations due to lapse of statute		-		(7	)		-
Balance at end of year	$	22	$	15		$	19

At March 31, 2022, 2021 and 2020 approximately $22 million, $14 million and $17 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, 2022, 2021 and 2020 are related to timing matters.  During fiscal 2022, $7 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 2022, 2021, and 2020, accrued interest was not significant and no penalties were accrued.

Tax-related Contingencies

As of March 31, 2022, we remained under IRS examination for fiscal 2018 through fiscal 2022.