Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 5. INCOME TAXES
The following table summarizes income before income taxes:
  Years ended December 31,
In millions 2023 2022 2021
U.S. (loss) income $ (541) $ 1,336  $ 1,251 
Foreign income 2,167  1,483  1,500 
Income before income taxes $ 1,626  $ 2,819  $ 2,751 
Income tax expense (benefit) consisted of the following:
  Years ended December 31,
In millions 2023 2022 2021
Current      
U.S. federal and state $ 611  $ 425  $ 261 
Foreign 632  485  319 
Total current income tax expense 1,243  910  580 
Deferred      
U.S. federal and state (468) (229) (12)
Foreign 11  (45) 19 
Total deferred income tax (benefit) expense (457) (274) 7 
Income tax expense $ 786  $ 636  $ 587 
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
  Years ended December 31,
  2023 2022 2021
Statutory U.S. federal income tax rate 21.0  % 21.0  % 21.0  %
State income tax, net of federal effect (0.4) 1.3  1.1 
Differences in rates and taxability of foreign subsidiaries and joint ventures (1)
11.9  3.1  0.1 
Research tax credits (4.7) (1.8) (0.6)
Foreign derived intangible income (4.2) (2.0) (1.0)
Agreement in Principle, federal impact (2)
22.4  —  — 
Agreement in Principle, state impact (2)
2.1  —  — 
Other, net 0.2  1.0  0.7 
Effective tax rate 48.3  % 22.6  % 21.3  %
(1) Includes the jurisdictional mix of pre-tax income and impact of actual and planned repatriation of earnings back to the U.S.
(2) See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.
The year ended December 31, 2023, contained unfavorable net discrete items of $397 million, primarily due to $398 million in the fourth quarter related to the $2.0 billion charge from the Agreement in Principle, $22 million of unfavorable adjustments for uncertain tax positions and $3 million of net unfavorable other discrete tax items, partially offset by $21 million of favorable return to provision adjustments and $5 million of favorable share-based compensation tax benefit. See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.
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 Atmus 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.
At December 31, 2023, $6.0 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 2023 2022
Deferred tax assets    
U.S. and state carryforward benefits $ 272  $ 272 
Foreign carryforward benefits 609  527 
Employee benefit plans 347  258 
Warranty expenses 483  458 
Lease liabilities 125  110 
Capitalized research and development expenditures 591  238 
Accrued expenses 253  174 
Other 78  126 
Gross deferred tax assets 2,758  2,163 
Valuation allowance (789) (704)
Total deferred tax assets 1,969  1,459 
Deferred tax liabilities    
Property, plant and equipment (367) (369)
Unremitted income of foreign subsidiaries and joint ventures (179) (210)
Employee benefit plans (278) (311)
Lease assets (123) (108)
Intangible assets (406) (435)
Other (64) (50)
Total deferred tax liabilities (1,417) (1,483)
Net deferred tax (liabilities) assets $ 552  $ (24)
Our 2023 U.S. carryforward benefits include $272 million of state credit and net operating loss carryforward benefits that begin to expire in 2024. Our foreign carryforward benefits include $609 million of net operating loss carryforwards that begin to expire in 2024. 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 $789 million and increased in 2023 by a net $85 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 2023 2022
Prepaid expenses and other current assets    
Refundable income taxes $ 81  $ 83 
Other assets
Deferred income tax assets 1,082  625 
Long-term refundable income taxes 27  14 
Other accrued expenses
Income tax payable 242  173 
Other liabilities
Long-term income taxes 111  192 
Deferred income tax liabilities 530  649 
A reconciliation of unrecognized tax benefits for the years ended December 31, 2023, 2022 and 2021 was as follows:
December 31,
In millions 2023 2022 2021
Balance at beginning of year $ 283  $ 89  $ 122 
Additions to tax positions due to acquisitions 8  189  — 
Additions to current year tax positions 21  17  11 
Additions to prior years' tax positions 19  17  16 
Reductions to prior years' tax positions (1) (1) (28)
Reductions for tax positions due to settlements with taxing authorities —  (28) (32)
Balance at end of year $ 330  $ 283  $ 89 
Included in the December 31, 2023, 2022 and 2021, balances are $314 million, $270 million and $85 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 $33 million, $18 million and $15 million as of December 31, 2023, 2022 and 2021, 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 2018.