Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.22.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 5. INCOME TAXES
The following table summarizes income before income taxes:
  Years ended December 31,
In millions 2022 2021 2020
U.S. income $ 1,336  $ 1,251  $ 1,134 
Foreign income 1,483  1,500  1,204 
Income before income taxes $ 2,819  $ 2,751  $ 2,338 
Income tax expense (benefit) consisted of the following:
  Years ended December 31,
In millions 2022 2021 2020
Current      
U.S. federal and state $ 425  $ 261  $ 162 
Foreign 485  319  358 
Total current income tax expense 910  580  520 
Deferred      
U.S. federal and state (229) (12) 2 
Foreign (45) 19  22 
Impact of India tax law changes —  —  (17)
Total deferred income tax (benefit) expense (274) 7  7 
Income tax expense $ 636  $ 587  $ 527 
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
  Years ended December 31,
  2022 2021 2020
Statutory U.S. federal income tax rate 21.0  % 21.0  % 21.0  %
State income tax, net of federal effect 1.3  1.1  1.0 
Differences in rates and taxability of foreign subsidiaries and joint ventures 3.1  0.1  3.6 
Research tax credits (1.8) (0.6) (1.3)
Foreign derived intangible income (2.0) (1.0) (1.2)
Impact of India tax law changes —  —  (0.7)
Other, net 1.0  0.7  0.1 
Effective tax rate 22.6  % 21.3  % 22.5  %
The year ended December 31, 2022, contained discrete tax items that netted to zero, primarily due to $31 million of favorable changes in accrued withholding taxes, $29 million of favorable changes in tax reserves, $15 million of favorable valuation allowance adjustments and $9 million of favorable other net discrete items, offset by $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $15 million of unfavorable return to provision adjustments related to the 2021 filed tax returns.
The year ended December 31, 2021, contained $9 million of unfavorable net discrete tax items, primarily due to $12 million of unfavorable provision to return adjustments related to the 2020 filed tax returns, partially offset by $3 million of favorable other discrete tax items.
The year ended December 31, 2020, contained $26 million 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 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, 2022, $5.2 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes were not 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 assets (liabilities) were as follows:
  December 31,
In millions 2022 2021
Deferred tax assets    
U.S. and state carryforward benefits $ 272  $ 218 
Foreign carryforward benefits 527  177 
Employee benefit plans 258  254 
Warranty expenses 458  445 
Lease liabilities 110  108 
Capitalized research and development expenditures 238  — 
Accrued expenses 174  111 
Other 126  74 
Gross deferred tax assets 2,163  1,387 
Valuation allowance (704) (360)
Total deferred tax assets 1,459  1,027 
Deferred tax liabilities    
Property, plant and equipment (369) (272)
Unremitted income of foreign subsidiaries and joint ventures (210) (197)
Employee benefit plans (311) (355)
Lease assets (108) (105)
Intangible assets (435) (44)
Other (50) (29)
Total deferred tax liabilities (1,483) (1,002)
Net deferred tax (liabilities) assets $ (24) $ 25 
Our 2022 U.S. carryforward benefits include $272 million of state credit and net operating loss carryforward benefits that begin to expire in 2023. Our foreign carryforward benefits include $527 million of net operating loss carryforwards that begin to expire in 2023. 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 $704 million and increased in 2022 by a net $344 million primarily due to the Meritor acquisition. 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 2022 2021
Prepaid expenses and other current assets    
Refundable income taxes $ 83  $ 101 
Other assets
Deferred income tax assets 625  428 
Long-term refundable income taxes 14  — 
Other accrued expenses
Income tax payable 173  107 
Other liabilities
Long-term income taxes 192  263 
Deferred income tax liabilities 649  403 
A reconciliation of unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020 was as follows:
December 31,
In millions 2022 2021 2020
Balance at beginning of year $ 89  $ 122  $ 77 
Additions to tax positions due to acquisitions 189  —  — 
Additions to current year tax positions 17  11  9 
Additions to prior years' tax positions 17  16  49 
Reductions to prior years' tax positions (1) (28) (13)
Reductions for tax positions due to settlements with taxing authorities (28) (32) — 
Balance at end of year $ 283  $ 89  $ 122 
Included in the December 31, 2022, 2021 and 2020, balances are $270 million, $85 million and $114 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We also accrued interest expense related to the unrecognized tax benefits of $18 million, $15 million and $17 million as of December 31, 2022, 2021 and 2020, 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 2017.