Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.20.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 4. INCOME TAXES
The following table summarizes income before income taxes:
  Years ended December 31,
In millions 2020 2019 2018
U.S. income $ 1,134  $ 1,677  $ 1,239 
Foreign income 1,204  1,157  1,514 
Income before income taxes $ 2,338  $ 2,834  $ 2,753 
Income tax expense (benefit) consists of the following:
  Years ended December 31,
In millions 2020 2019 2018
Current      
U.S. federal and state $ 162  $ 288  $ 303 
Foreign 358  282  348 
Impact of tax law changes —  —  153 
Total current income tax expense 520  570  804 
Deferred      
U.S. federal and state 2  (32) (71)
Foreign 22  28  (26)
Impact of tax law changes (17) —  (141)
Total deferred income tax expense (benefit) 7  (4) (238)
Income tax expense $ 527  $ 566  $ 566 
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
  Years ended December 31,
  2020 2019 2018
Statutory U.S. federal income tax rate 21.0  % 21.0  % 21.0  %
State income tax, net of federal effect 1.0  1.1  0.9 
Differences in rates and taxability of foreign subsidiaries and joint ventures 3.6  1.5  (0.2)
Research tax credits (1.3) (1.5) (1.2)
Foreign derived intangible income (1.2) (1.3) (1.3)
Impact of tax law changes (0.7) —  0.5 
Other, net 0.1  (0.8) 0.9 
Effective tax rate 22.5  % 20.0  % 20.6  %
Our effective tax rate for 2020 was 22.5 percent compared to 20.0 percent for 2019 and 20.6 percent for 2018. The year ended December 31, 2020, contained $26 million, or $0.17 per share, of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million.
The year ended December 31, 2019, contained $34 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.
The year ended December 31, 2018, contained $14 million of favorable net discrete tax items, primarily due to $26 million of other favorable discrete tax items, partially offset by $12 million of unfavorable discrete tax items related to final adjustments for 2017 tax legislation.
The India Tax Law Change resulted in the following adjustments to the Consolidated Statements of Net Income for the year ended December 31, 2020:
In millions Favorable (Unfavorable)
Equity, royalty and interest income from investees $ 37 
Income tax expense (1)
17 
Less: Net income attributable to noncontrolling interests (19)
Net income statement impact $ 35 
(1) The adjustment to "Income tax expense" includes $15 million of favorable discrete items.
At December 31, 2020, $3.7 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes have not been provided. Determination of the related deferred tax liability, if any, is not practicable because of the complexities associated with the hypothetical calculation.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:
  December 31,
In millions 2020 2019
Deferred tax assets    
U.S. and state carryforward benefits $ 223  $ 207 
Foreign carryforward benefits 159  157 
Employee benefit plans 273  279 
Warranty expenses 445  427 
Lease liabilities 107  122 
Accrued expenses 93  76 
Other 52  44 
Gross deferred tax assets 1,352  1,312 
Valuation allowance (346) (317)
Total deferred tax assets 1,006  995 
Deferred tax liabilities    
Property, plant and equipment (258) (260)
Unremitted income of foreign subsidiaries and joint ventures (185) (181)
Employee benefit plans (229) (222)
Lease assets (103) (120)
Other (77) (77)
Total deferred tax liabilities (852) (860)
Net deferred tax assets $ 154  $ 135 
Our 2020 U.S. carryforward benefits include $223 million of state credit and net operating loss carryforward benefits that begin to expire in 2021. Our foreign carryforward benefits include $159 million of net operating loss carryforwards that begin to expire in 2021. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance is $346 million and increased in 2020 by a net $29 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.
Our Consolidated Balance Sheets contain the following tax related items:
December 31,
In millions 2020 2019
Prepaid expenses and other current assets    
Refundable income taxes $ 172  $ 191 
Other assets
Deferred income tax assets 479  441 
Long-term refundable income taxes 23  23 
Other accrued expenses
Income tax payable 82  52 
Other liabilities
One-time transition tax 289  293 
Deferred income tax liabilities 325  306 
A reconciliation of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 was as follows:
December 31,
In millions 2020 2019 2018
Balance at beginning of year $ 77  $ 71  $ 41 
Additions to current year tax positions 9  23  10 
Additions to prior years' tax positions 49  5  27 
Reductions to prior years' tax positions (13) (11) (2)
Reductions for tax positions due to settlements with taxing authorities —  (11) (5)
Balance at end of year $ 122  $ 77  $ 71 
Included in the December 31, 2020, 2019 and 2018, balances are $114 million, $69 million and $62 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We have also accrued interest expense related to the unrecognized tax benefits of $17 million, $5 million and $4 million as of December 31, 2020, 2019 and 2018, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2016.