Income Taxes

12 Months Ended

Dec. 31, 2020

In response to COVID-19, various global taxing authorities passed or are considering relief initiatives to aid taxpayers from an effective tax rate or cash flow perspective. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in the US in response to the global pandemic. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of social security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property and the creation of certain refundable employee retention credits. The Company does not currently expect the CARES Act to have a material impact on its tax expense. In Germany, the Company was approved for a deferral of corporate income tax payments for 2020. In December 2020, the US Congress approved an additional relief package that included individual relief payments, enhanced the employee retention credit, extended certain corporate tax credits including the carbon recapture credit, and extended certain sunsetting corporate tax provisions. The Company does not expect the additional relief package to have a material impact on current or future income tax expense. The Company will continue to monitor global legislative and regulatory developments related to COVID-19 and will record the associated tax impacts as discrete events in the periods the guidance is finalized, or the Company is able to estimate an impact.

In December 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted and was effective January 1, 2018. The US Treasury has issued various final and proposed regulatory packages supplementing the TCJA provisions since 2018, which the Company does not expect to have a material impact on current or future income tax expense. The Company will continue to monitor the expected impacts on the Company's filing positions and will record the impacts as discrete income tax expense adjustments in the period that the guidance is finalized or becomes effective.

Income Tax Provision

Earnings (loss) from continuing operations before tax by jurisdiction are as follows:


	Year Ended December 31,
	2020	2019	2018
	(In $ millions)
US	1,530	252	480
International	721	736	1,030
Total	2,251	988	1,510

The income tax provision (benefit) consists of the following:


	Year Ended December 31,
	2020	2019	2018
	(In $ millions)
Current
US	13	(8)	(184)
International	126	149	143
Total	139	141	(41)
Deferred
US	308	1	314
International	(200)	(18)	19
Total	108	(17)	333
Total	247	124	292

A reconciliation of the significant differences between the US federal statutory tax rate of 21% and the effective income tax rate on income from continuing operations is as follows:


	Year Ended December 31,
	2020		2019		2018
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	473		208		317
Change in valuation allowance	(1)		(47)		94
Equity income and dividends	(54)		(38)		(48)
(Income) expense not resulting in tax impact, net	(46)		(9)		(51)
US tax effect of foreign earnings and dividends	65		85		25
Foreign tax credits	(51)		(76)		(20)
Other foreign tax rate differentials	7		4		17
Legislative changes	1		(3)		(59)

State income taxes, net of federal benefit	4		6		4
Recognition of basis differences in investments in affiliates	(14)		—		—
Asset transfers between wholly owned foreign affiliates	(170)		—		—
Other, net	33		(6)		13
Income tax provision (benefit)	247		124		292

Effective income tax rate	11	%	13	%	19	%

On October 9, 2020, the Company completed the sale of its 45% joint venture equity interest in Polyplastics (see Note 7). The tax gain on this disposal was less than the related gain for financial reporting purposes due to basis differences. In November 2020, the Company relocated certain tangible and intangible assets in response to various geopolitical risks in certain regions in which it operates. The transfer of these assets between wholly owned foreign affiliates in this reorganization generated a deferred tax benefit of approximately $170 million. Included in the Other, net line in the effective income tax rate reconciliation above are charges of approximately $40 million related to changes in uncertain tax positions and impacts of amended tax return filings.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities are as follows:


	As of December 31,
	2020	2019
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations	132	140
Accrued expenses	32	57
Inventory	12	11
Net operating loss carryforwards	535	506
Tax credit carryforwards	247	273
Other	322	227
Subtotal	1,280	1,214
Valuation allowance(1)	(748)	(714)
Total	532	500
Deferred Tax Liabilities
Depreciation and amortization	256	411
Investments in affiliates	402	192
Other	124	58
Total	782	661
Net deferred tax assets (liabilities)	(250)	(161)

______________________________

(1)Includes deferred tax asset valuation allowances for the Company's deferred tax assets in the US, Luxembourg, Spain, China, the United Kingdom, Mexico, Canada and France. These valuation allowances relate primarily to net operating loss carryforward benefits and other net deferred tax assets, all of which may not be realizable.

As a result of the TCJA, US federal and state income taxes have been recorded on undistributed foreign earnings accumulated from 1986 through 2017. The Company's previously taxed income for its foreign subsidiaries significantly exceeds its offshore cash balances. The Company has not recorded a deferred tax liability for foreign withholding or other foreign local tax that would be due when cash is actually repatriated to the US because those foreign earnings are considered permanently reinvested in the business or may be remitted substantially free of any additional local taxes. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.

Tax Carryforwards

•Net Operating Loss Carryforwards

As of December 31, 2020, the Company had available US federal net operating loss carryforwards of $28 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2022. As of December 31, 2020, the Company also had available state net operating loss carryforwards, net of federal tax impact, of $28 million, $22 million of which are offset by a valuation allowance due to uncertain recoverability. The Company also has foreign net operating loss carryforwards available as of December 31, 2020 of $2.0 billion primarily for Luxembourg, Spain, China, Mexico and Canada, with various expiration dates. Net operating loss carryforwards of $140 million in China are scheduled to expire beginning in 2021 through 2025. Net operating losses in most other foreign jurisdictions do not have an expiration date.

•Tax Credit Carryforwards

The Company had available $224 million of foreign tax credit carryforwards, which are fully offset by a valuation allowance due to uncertain recoverability and $18 million of alternative minimum tax credit carryforwards in the US. The foreign tax credit carryforwards are subject to a ten-year carryforward period and expire beginning in 2027. The alternative minimum tax credits are subject to annual limitation due to prior ownership changes but have an unlimited carryforward period and can be used to offset federal tax liability in future years.

The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is necessary. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in the applicable carryback or carryforward periods. Changes in the Company's estimates of future taxable income and prudent and feasible tax planning strategies will affect the estimate of the realization of the tax benefits of these foreign tax credit carryforwards. As such, the Company is currently evaluating tax planning strategies to enable use of the foreign tax credit carryforwards that may decrease the Company's effective tax rate in future periods as the valuation allowance is reversed.

Uncertain Tax Positions

Activity related to uncertain tax positions is as follows:


	Year Ended December 31,
	2020	2019	2018
	(In $ millions)
As of the beginning of the year	134	162	119
Increases in tax positions for the current year	18	1	61
Increases in tax positions for prior years(1)	26	37	4
Decreases in tax positions for prior years	(13)	(41)	(21)
Decreases due to settlements	—	(25)	(1)


As of the end of the year	165	134	162

Total uncertain tax positions that if recognized would impact the effective tax rate	182	132	154
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations(2)	6	5	1
Total amount of interest expense and penalties recognized in the consolidated balance sheets	54	45	38

______________________________

(1)Includes the impact on uncertain tax positions for the year ended December 31, 2019 due to the closure of federal income tax audits for the years 2009 through 2012.

(2)This amount reflects interest on uncertain tax positions and release of certain tax positions as a result of an audit closure that was reflected in the consolidated statements of operations.

The increase in uncertain tax positions for the year ended December 31, 2020 was primarily due to increases in foreign tax positions.

The Company primarily operates in the US, Germany, Belgium, Canada, China, Italy, Mexico and Singapore. Examinations are ongoing in a number of these jurisdictions. The Company's US tax returns for the years 2013 through 2015 are currently under joint examination by the US, German and Dutch taxing authorities. The examinations are in the preliminary data gathering phase. The Company's German tax returns for the years 2008 through 2015 are under audit as well as certain of the Company's other subsidiaries within their respective jurisdictions. While it is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more of these audits, the Company is unable to estimate the amount of any such change.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details