Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

For interim tax reporting, the Company estimates its annual effective tax rate and applies it to year-to-date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The effect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

For the three months ended September 30, 2020, the Company recorded income tax expense of $648 million on income from continuing operations before income taxes of $168 million. This compares to an income tax benefit of $9 million on income from continuing operations of $69 million in the three months ended September 30, 2019.

For the nine months ended September 30, 2020, the Company recorded income tax expense of $453 million on loss from continuing operations before income taxes of $1.2 billion. This compares to an income tax expense of $5 million on income from continuing operations before income taxes of $23 million in the nine months ended September 30, 2019.

Income tax expense for the three months ended September 30, 2020 differs from the U.S. statutory rate due primarily to (i) a $369 million and $11 million non-cash charge relating to the establishment of valuation allowances on deferred tax assets recognized in prior years for the U.S. and France; (ii) a non-cash tax benefit of $2 million relating to the reversal of a valuation allowance in China; and (iii) a $145 million non-cash charge to adjust the estimated annual tax rate for the tax benefit that can no longer be recognized due to the change in positions for these respective entities.

Income tax benefit for the nine months ended September 30, 2020 differs from the U.S. statutory rate due primarily to $39 million of tax benefit recognized related to asset impairment charges of $883 million, the discrete items noted above, and pre-tax income taxed at rates higher than the U.S. statutory tax rate, and pre-tax losses with no tax benefit.

Income tax expense for the three and nine months ended September 30, 2019 differ from the U.S. statutory rate due primarily to $33 million of net tax benefit recognized relating to a valuation allowance release for an entity in Spain, pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.

The Company considers both positive and negative evidence and evaluates its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, reversals of existing taxable temporary differences and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.

Due to the sudden and sharp decline in industry demand, and the temporary suspension of production at the Company's U.S. manufacturing facilities as a result of the COVID-19 global pandemic, it incurred a significant U.S. pre-tax loss for the second quarter of 2020. Based on the market research and financial forecast available at that time, the Company expected that its U.S. business operations would be recovered substantially in the third and fourth quarters of 2020. However, based on the updated analysis in the current quarter, the third quarter and expected fourth quarter results did not provide enough positive evidence of profitability of the U.S. operations, therefore, the realizability of the U.S. deferred tax assets was re-assessed. While the disruption to the Company's business is expected to be temporary, there is considerable uncertainty around the extent and duration of that disruption. Combined with restructuring, impairment and integration expenses incurred in the most recent three-years, the Company will have a cumulative loss in the three-year period ending December 31, 2020. The Company has concluded that it was no longer more likely than not that it will be able to utilize the U.S. deferred tax assets. Therefore, it established a $369 million full valuation allowance against the deferred tax assets in the U.S. during the three and nine months ended September 30, 2020. Under current tax laws, the valuation allowance will not limit the Company’s ability to utilize U.S. deferred tax assets provided it can generate sufficient future taxable income in the U.S. The Company anticipates it will continue to record a valuation allowance against the losses until such time as they are able to determine it is “more-likely-than-not” the deferred tax asset will be realized. This position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets.

Also, during the three months ended September 30, 2020, the Company evaluated its ability to realize deferred tax assets of its non-US jurisdictions with available positive and negative evidence with the Company’s assessment noted above. Based on the analysis performed, at September 30, 2020, the Company believed that it is more likely than not that the deferred tax assets will be realized in certain jurisdictions that have reported losses in 2020 and in some instances are reporting a projected three-year cumulative loss. While these entities have demonstrated a return to profit in the third quarter of 2020, if operational declines continue due to the COVID-19 pandemic in certain jurisdictions, the Company believes that there may be sufficient negative evidence for a valuation allowance to be recorded in the next twelve months in the amount of $69 million.

The Company believes it is reasonably possible up to $34 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.