Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The geographical sources of income before income taxes were as follows (in millions):

	Year Ended December 31,
	2021		2020		2019
United States	$	328	$	33	$	83
Outside United States	640		527		515
Total	$	968	$	560	$	598

Income tax expense (benefit) consisted of the following (in millions):

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	63	$	6	$	16
State	12		1		(1)
Foreign	124		89		81
Total current	$	199	$	96	$	96
Deferred:
Federal	(48)		(25)		(32)
State	(12)		(5)		(5)
Foreign	(8)		(10)		(5)
Total deferred	$	(68)	$	(40)	$	(42)
Total	$	131	$	56	$	54

The Company’s effective tax rates were 13.5%, 10.0% and 9.0% for the years ended December 31, 2021, 2020 and 2019, respectively.

A reconciliation of the U.S. federal statutory income tax rate to our actual income tax rate is provided below:

	Year Ended December 31,
	2021		2020		2019
Provision computed at statutory rate	21.0	%	21.0	%	21.0	%
Remeasurement of deferred taxes	(1.0)		(0.6)		0.2
Change in valuation allowance	(0.1)		0.1		(1.7)
U.S. impact of Enterprise acquisition	0.3		0.3		1.0
Change in contingent income tax reserves	(0.2)		(0.4)		(3.3)
Foreign earnings subject to U.S. taxation	(2.0)		1.5		1.8
Foreign rate differential	(1.7)		(5.5)		(0.7)
State income tax, net of federal tax benefit	0.3		0.4		(0.2)
Tax credits	(2.0)		(2.9)		(2.3)
Equity compensation deductions	(2.4)		(3.2)		(4.0)
Return to provision and other true ups	(0.9)		(2.5)		(2.0)
Permanent differences and other	2.2		1.8		(0.8)
Provision for income taxes	13.5	%	10.0	%	9.0	%

For the years ended December 31, 2021 and 2020, the Company’s effective tax rate was lower than the federal statutory rate of 21% primarily due to lower tax rates in foreign jurisdictions, the generation of tax credits and the favorable impacts of share-based compensation benefits.

For the year ended December 31, 2019, the Company’s effective tax rate was lower than the federal statutory rate of 21% primarily due to the favorable impacts of share-based compensation benefits, lapses of the statute of limitations on uncertain tax positions, and the generation of tax credits. These benefits were partially offset by the impacts of foreign earnings and deemed royalties taxed in the U.S.

The Company evaluated the provisions of the American Rescue Plan Act, signed into law on March 11, 2021; the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020; and the Coronavirus Aid, Relief and Economic Security Act, signed into law on March 27, 2020. The provisions of these laws did not have a significant impact to our effective tax rate in either the current or prior year. Management continues to monitor guidance regarding these laws and developments related to other coronavirus tax relief throughout the world for potential impacts.

The Company earns a significant amount of its operating income outside of the U.S that is taxed at rates different than the U.S. federal statutory rate. The Company’s principal foreign jurisdictions that provide sources of operating income are the U.K. and Singapore. During the second quarter of 2021, the U.K. government enacted a change in law that increases the corporate tax rate from 19% to 25%, with such rate change becoming effective in April 2023. Upon enactment, we remeasured our deferred tax assets to reflect the 25% statutory rate to the extent such tax benefits are expected to be realized in the future at the amended statutory rate. In addition, the Company has received an incentivized tax rate from the Singapore Economic Development Board, which reduces the income tax rate in that jurisdiction effective for calendar years 2019 to 2023. The Company has committed to making additional investments in Singapore over the period 2019 to 2022. However, should the Company not make these investments in accordance with the agreement, any incentive benefit would have to be repaid to the Singapore tax authorities.

Tax effects of temporary differences that resulted in deferred tax assets and liabilities are as follows (in millions):

	December 31,
	2021		2020
Deferred tax assets:
Capitalized research expenditures	$	14	$	18
Deferred revenue	85		38
Tax credits	37		36
Net operating loss carryforwards	438		406
Other accruals	39		32
Inventory items	15		17
Sales return/rebate reserve	61		46
Share-based compensation expense	12		9
Unrealized gains and losses on securities and investments	—		19
Valuation allowance	(422)		(413)
Total deferred tax assets	$	279	$	208
Deferred tax liabilities:
Depreciation and amortization	84		67
Unrealized gains and losses on securities and investments	5		—
Undistributed earnings	4		2
Total deferred tax liabilities	$	93	$	69
Net deferred tax assets	$	186	$	139

The Company’s valuation allowance primarily relates to Luxembourg reorganization activities in 2019, which had resulted in the realization of deferred tax liabilities and a corresponding increase in valuation allowances related to depreciation and amortization. The Company’s valuation allowance also consists of certain net operating loss (“NOL”) and credit carryforwards for which the Company believes it is more likely than not that a tax benefit will not be realized. With respect to all other deferred tax assets, the Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize a tax benefit. There were no significant adjustments to the Company’s valuation allowance during the year ended December 31, 2021.

As of December 31, 2021, the Company had approximately $438 million (tax effected) of “NOLs” and $37 million of credit carryforwards. Approximately $186 million of NOLs will expire beginning in 2022 through 2040, and $30 million of credits will expire beginning in 2022 through 2037, with the remaining amounts of NOLs and credit carryforwards having no expiration dates.

The Company is subject to the GILTI, BEAT and FDII provisions, for which we recorded an income tax benefit of $20 million for the year ended December 31, 2021, and an income tax expense of $8 million and $12 million for the years ended December 31, 2020 and 2019, respectively. These impacts are included in the calculation of the Company’s effective tax rate.

The Company is not permanently reinvested with respect to its U.S. directly-owned foreign subsidiaries. The Company is subject to U.S. income tax on substantially all foreign earnings under GILTI, while any remaining foreign earnings are eligible for a dividends received deduction. As a result, future repatriation of earnings will not be subject to additional U.S. federal income tax but may be subject to currency translation gains or losses. Where required, the Company has recorded a deferred tax liability for foreign withholding taxes on current earnings. Additionally, gains and losses on any future taxable dispositions of U.S.-owned foreign affiliates continue to be subject to U.S. income tax.

The Company has not recognized deferred tax liabilities in the U.S. with respect to its outside basis differences in its directly-owned foreign affiliates. It is not practicable to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.

Unrecognized tax benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

	Year ended December 31,
	2021		2020
Balance at beginning of year	$	8	$	10
Settlements for tax positions	—		(1)
Lapse of statutes	(1)		(1)
Balance at end of year	$	7	$	8

As of December 31, 2021 and December 31, 2020, there were $7 million and $8 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. The Company is currently undergoing U.S. federal income tax audits for tax years 2017 and 2018. Additionally, fiscal years 2009 through 2021 remain open to examination by multiple foreign and U.S. state taxing jurisdictions.

As of December 31, 2021, no significant uncertain tax positions are expected to be settled within the next twelve months. Due to uncertainties in any tax audit or litigation outcome, the Company’s estimates of the ultimate settlements of uncertain tax positions may change and the actual tax benefits may differ significantly from estimates.

The Company recognized no net tax expense associated with interest and penalties related to income tax matters during the year ended December 31, 2021. The Company recognized a net tax benefit of $2 million and a net tax expense of $6 million for interest and penalties during the years ended December 31, 2020 and 2019, respectively. The net benefit or expense associated with interest and penalties was reflected within Income tax expense on the Consolidated Statements of Operations. The Company has included $6 million of estimated interest and penalty obligations within Other long-term liabilities on the Consolidated Balance Sheets each as of December 31, 2021 and 2020.