Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year Ended December 31,
	2022		2021		2020
U.S.	$	(69)	$	328	$	33
Outside U.S.	613		640		527
Total	$	544	$	968	$	560

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

	Year Ended December 31,
	2022		2021		2020
Current:
Federal	$	141	$	63	$	6
State	22		12		1
Foreign	126		124		89
Total current	$	289	$	199	$	96
Deferred:
Federal	(168)		(48)		(25)
State	(22)		(12)		(5)
Foreign	(18)		(8)		(10)
Total deferred	$	(208)	$	(68)	$	(40)
Total	$	81	$	131	$	56

The Company’s effective tax rates were 14.9%, 13.5% and 10.0% for the years ended December 31, 2022, 2021 and 2020, 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,
	2022		2021		2020
Provision computed at statutory rate	21.0	%	21.0	%	21.0	%
Remeasurement of deferred taxes	(0.4)		(1.0)		(0.6)
Change in valuation allowance	0.1		(0.1)		0.1
U.S. impact of Enterprise acquisition	0.4		0.3		0.3
Change in contingent income tax reserves	(0.3)		(0.2)		(0.4)
Foreign earnings subject to U.S. taxation	(3.5)		(2.0)		1.5
Foreign rate differential	(3.4)		(1.7)		(5.5)
State income tax, net of federal tax benefit	(0.5)		0.3		0.4
Tax credits	(3.1)		(2.0)		(2.9)
Equity compensation deductions	(0.1)		(2.4)		(3.2)
Return to provision and other true ups	1.5		(0.9)		(2.5)
Settlements with tax authorities	2.0		0.0		0.0
Permanent differences and other	1.2		2.2		1.8
Provision for income taxes	14.9	%	13.5	%	10.0	%

For the year ended December 31, 2022, 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 foreign

earnings subject to U.S. taxation. 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.

The Company evaluated the provisions of the Inflation Reduction Act of 2022, signed into law on August 16, 2022; 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 years. Management continues to monitor guidance regarding these laws and developments related to other coronavirus tax relief throughout the world for potential impacts.

In December of 2021, the Organization for Economic Co-operation and Development (“OECD”) released Pillar Two Model Rules defining the global minimum tax rules, which contemplate a minimum tax rate of 15%. The OECD continues to release additional guidance on these rules and the framework calls for law enactment by OECD members to take effect in 2024. The Company will continue to monitor developments but believes the impact to future effective tax rates and corporate tax liability will be minimal.

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. 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 2023. 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,
	2022		2021
Deferred tax assets:
Capitalized research expenditures	$	138	$	14
Deferred revenue	93		85
Tax credits	32		37
Net operating loss carryforwards	432		438
Other accruals	31		40
Inventory items	21		15
Sales return/rebate reserve	81		61
Share-based compensation expense	14		12
Legal accrual	55		2
Lease liabilities	23		12
Valuation allowance	(420)		(422)
Total deferred tax assets	$	500	$	294
Deferred tax liabilities:
Depreciation and amortization	127		84
Unrealized gains and losses on securities and investments	12		5
Undistributed earnings	2		4
Right of use lease assets	20		11
Other	7		4
Total deferred tax liabilities	$	168	$	108
Net deferred tax assets	$	332	$	186

For tax years beginning in 2022, the Tax Cuts and Jobs Act of 2017 imposed a requirement that all R&D expenses be capitalized and amortized for U.S. tax purposes. The effect of this new provision is an increase of approximately $130 million to deferred tax assets with a corresponding increase to the current tax liability.

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, 2022.

As of December 31, 2022, the Company had approximately $432 million (tax effected) of “NOLs” and $32 million of credit carryforwards. Approximately $183 million of NOLs will expire beginning in 2023 through 2040, and $25 million of credits will expire beginning in 2023 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 $19 million and $20 million for the years ended December 31, 2022 and 2021, respectively, and an income tax expense of $8 million for the year ended December 31, 2020. 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,
	2022		2021
Balance at beginning of year	$	7	$	8
Additions for tax positions related to prior years	3		—
Settlements for tax positions	(2)		—
Lapse of statutes	(1)		(1)
Balance at end of year	$	7	$	7

As of December 31, 2022 and December 31, 2021, there were $7 million of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Additionally, fiscal years 2009 through 2022 remain open to examination by multiple foreign and U.S. state taxing jurisdictions.

As of December 31, 2022, 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 less than $1 million of net tax benefit associated with interest and penalties related to income tax matters during the year ended December 31, 2022. The Company recognized no net tax benefit and a tax benefit of $2 million for interest and penalties during the years ended December 31, 2021 and 2020, respectively. The expense or benefit associated with interest and penalties was reflected within Income tax expense on the Consolidated Statements of Operations. The Company has included $5 million and $6 million of estimated interest and penalty obligations within Other long-term liabilities on the Consolidated Balance Sheets each as of December 31, 2022 and 2021.