Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 11.    Income Taxes

A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:

(in millions)	Unrecognised Tax Benefits			Interest and Penalties			Total
Opening balance at January 1, 2019	$	13.4		$	0.6		$	14.0
Additions for tax positions of prior periods		1.0			1.4			2.4
Closing balance at 31 December, 2019		14.4			2.0			16.4
Current		—			—			—
Non-current	$	14.4		$	2.0		$	16.4
Opening balance at January 1, 2020	$	14.4		$	2.0		$	16.4
Reductions for tax positions of prior periods		(1.2	)		(0.2	)		(1.4	)
Additions for tax positions of prior periods		0.4			0.6			1.0
Closing balance at 31 December, 2020		13.6			2.4			16.0
Current		—			—			—
Non-current	$	13.6		$	2.4		$	16.0
Opening balance at January 1, 2021	$	13.6		$	2.4		$	16.0
Reductions for tax positions of prior periods		(1.3	)		0.0			(1.3	)
Additions for tax positions of prior periods		0.9			0.7			1.6
Closing balance at 31 December, 2021		13.2			3.1			16.3
Current		—			—			—
Non-current	$	13.2		$	3.1		$	16.3

All of the $16.3 million of unrecognised tax benefits would impact our effective tax rate if recognised.

During 2021, a non-U.S. subsidiary, Innospec Limited, entered into a review by the U.K. tax authorities under the U.K.’s Profit Diversion Compliance Facility (“PDCF”). The Company determined that additional tax and interest totaling $1.0 million may arise during the course of the PDCF review process which is currently ongoing.

As previously disclosed, a non-U.S. subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $3.3 million may arise as a consequence of the tax audit. This includes additional interest accrued of $0.1 million and a reduction for foreign exchange movements of $0.2 million recorded during 2021. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement.

As previously disclosed, in 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has determined that additional tax, interest and penalties totaling $12.0 million may arise in relation to this item. This includes a reduction in the unrecognized tax benefit of $0.9 million related to adjustments recognized during 2021 that would offset adjustments arising as a consequence of the Tax Act. This also includes an increase in interest accrued of $0.5 million during 2021.

In addition to the items noted above, an amount of $0.2 million was also released during 2021 in relation to a non-significant position taken in a prior period in relation to one of the Company’s non-U.S. subsidiaries. This was released following confirmation from the tax authorities that no further amounts fall due.

The Company and its U.S. subsidiaries remain open to examination by the IRS for certain elements of year 2017 and for years 2018 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including Spain (2018 onwards), France (2019 onwards), Germany (2018 onwards), Switzerland (2017 onwards) and the U.K. (2017 onwards).

The sources of income before income taxes were as follows:

(in millions)	2021		2020			2019
Domestic	$	53.2	$	(0.7	)	$	52.4
Foreign		81.2		40.4			98.0
	$	134.4	$	39.7		$	150.4

The components of income tax expense are summarized as follows:

(in millions)	2021			2020			2019
Current:
Federal	$	12.4		$	6.1		$	13.8
State and local		2.6			0.5			2.3
Foreign		19.4			6.8			22.9
		34.4			13.4			39.0
Deferred:
Federal		(1.9	)		(2.8	)		(3.0	)
State and local		(0.3	)		(0.4	)		(0.5	)
Foreign		9.1			0.8			2.7
		6.9			(2.4	)		(0.8	)
	$	41.3		$	11.0		$	38.2

Cash payments for income taxes were $36.8 million, $23.4 million and $37.6 million during 2021, 2020 and 2019, respectively.

The effective tax rate varies from the U.S. federal statutory rate because of the factors indicated below:

(in percent)	2021			2020			2019
Statutory rate		21.0	%		21.0	%		21.0	%
Foreign income inclusions		1.7			7.1			0.3
Foreign tax rate differential		1.0			4.2			(0.3	)
Tax charge/(credit) from previous years		0.6			3.7			1.8
Net charge/(credit) from unrecognized tax benefits		0.4			(1.7	)		1.1
Foreign currency transactions		0.1			(4.5	)		(1.0	)
Effect of U.S. tax law change		—			—			0.6
Tax on unremitted earnings		0.1			0.3			(0.1	)
Non-deductible foreign interest		—			0.7			0.8
Change in U.K. statutory tax rate		5.4			6.9			—
State and local taxes		1.3			1.5			1.4
U.S. incentive for foreign derived intangible income		(1.5	)		(1.5	)		(0.5	)
Innovation incentives – current year		(1.1	)		(4.9	)		(0.6	)
Innovation incentives – prior years		—			(5.3	)		—
Non-deductible officer compensation		0.2			1.8			0.2
Tax on closure of legacy operations		1.6			—			—
Other items and adjustments, net		(0.1	)		(1.6	)		0.7
		30.7	%		27.7	%		25.4	%

During 2021, an income tax rate increase was enacted in the U.K.. The increase in the rate of tax from 19% to 25% will take effect on 1 April 2023. The Company’s U.K. deferred tax liabilities have been revalued at the higher rate. This revaluation increased the 2021 tax charge by $7.3 million and had a significant negative impact on the effective tax rate.

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. tax regulations. Foreign tax credits can fully or partially offset these incremental U.S. taxes from foreign income inclusions. The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may prevent offset. The effective tax rate is negatively impacted by the net impact of foreign inclusions post foreign tax credit usage in 2021.

During 2021, to facilitate the closure of legal entities who had historically operated as part of the Octane Additives business segment, that ceased to operate in June 2020, a reorganization took place to distribute assets unrelated to the Octane Additives business prior to commencing liquidation proceedings. Tax arising on the distribution of assets in relation to the reorganization totaled $2.2 million and this had a negative impact on the effective tax rate.

The effective tax rate was positively impacted by an increase in foreign-derived intangible income, as a result of U.S. subsidaries serving non-U.S. markets. This reduced the tax charge in 2021 by $2.0 million which had a positive impact on the effective tax rate.

Other items do not have a significant impact on the effective tax rate.

Details of deferred tax assets and liabilities are analyzed as follows:

(in millions)	2021			2020
Deferred tax assets:
Stock compensation	$	5.2		$	5.3
Net operating loss carry forwards		12.0			9.8
Other intangible assets		11.1			10.6
Accretion expense		3.2			3.2
Restructuring provision		2.0			1.4
Employee related liabilities		4.1			0.2
Foreign tax credits		1.9			2.0
Operating lease liabilities		10.6			9.2
Other		7.4			6.7
Subtotal		57.5			48.4
Less valuation allowance		(0.8	)		(1.1	)
Total net deferred tax assets	$	56.7		$	47.3
Deferred tax liabilities:
Property, plant and equipment	$	(23.6	)	$	(21.3	)
Intangible assets including goodwill		(29.8	)		(28.3	)
Pension asset		(38.2	)		(20.5	)
Customer relationships		(4.5	)		(4.4	)
Unremitted overseas earnings		(1.9	)		(2.0	)
Right-of-use assets		(10.6	)		(9.2	)
Other		(2.5	)		(0.9	)
Total deferred tax liabilities	$	(111.1	)	$	(86.6	)
Net deferred tax liability	$	(54.4	)	$	(39.3	)
Deferred tax assets	$	6.4		$	7.6
Deferred tax liabilities		(60.8	)		(46.9	)
	$	(54.4	)	$	(39.3	)

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Available evidence considered in determining the use of deferred tax assets includes, but is not limited to, cumulative losses arising in recent accounting periods, the Company’s estimate of future taxable income and any applicable tax-planning strategies. Based on such

evidence, if it is more likely than not that some portion or all of such deferred tax assets will not be realized, a valuation allowance is recorded to reduce the Company’s deferred tax assets. On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $0.8 million has been recorded to recognise only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carry forward period are reduced or increased or if other evidence becomes available.

As of December 31, 2021, the Company has approximately $5.4 million of tax-effected U.S. federal net operating loss carryforwards. These loss carryforwards can be carried forward indefinitely without expiration, and the Company expects to utilize the losses in their entirety. The Company has approximately $0.4 million of tax-effected state net operating loss carryforwards, net of federal benefit. Some of these loss carryforwards will begin to expire in 2036 if not utilized, while other can be carried forward indefinitely. The Company also has approximately $5.4 million of tax-effected foreign net operating loss carryforwards, net of valuation allowance, across five of the Company’s foreign subsidiaries, which can also be carried forward indefinitely.