During 2018, the Company recognized income tax expense of $31, primarily as a result of income from certain foreign operations. In the United States, disallowed interest expense resulted in current year taxable income which utilized a net operating loss carryforward. The disallowed interest expense carryforward of $283 generated a deferred tax asset. The decrease in the valuation allowance due to the net operating loss utilization was offset by an increase in the valuation allowance recorded on the interest expense carryforward deferred tax asset. The Company had a Global Intangible Low Tax Income (“GILTI”) inclusion of $21, which was fully offset by our net operating loss. This further reduced our valuation allowance.

During the Predecessor period January 1, 2019 through July 1, 2019, the Predecessor Company recorded income tax expense of $40 for reorganization adjustments, primarily consisting of tax expense of $50 for the gain recognized between fair value and tax basis (the gain in Predecessor Company will be substantially offset by the Predecessor Company’s tax attributes, including net operating losses and previously disallowed interest expense). A tax benefit of $10 was recorded for the removal of a valuation allowance for certain foreign jurisdictions. Pursuant to the Plan, the Successor Company is obligated to indemnify the Predecessor Company for any tax related liabilities. The Predecessor Company recorded income tax expense of $201 in the Predecessor period, primarily related to the increase in deferred tax liabilities resulting from fresh start accounting.

The Predecessor Company’s U.S. net operating loss carryforward of $1,053 and certain state net operating loss carryforwards, along with other tax attributes, have been utilized or forfeited as a result of the taxable gain realized upon Emergence. Certain foreign net operating losses and other carryforwards of the Predecessor Company were forfeited upon Emergence.

Upon the Emergence, the Successor Company applied fresh start accounting (see Note 6 for more information regarding fresh start accounting) and therefore the deferred tax assets and liabilities were adjusted based on the revised U.S. GAAP financial statements. As a result of the step-up in U.S. GAAP basis in the Successor Company’s foreign assets without a corresponding step-up in the tax basis of the foreign assets, the Successor Company’s deferred tax liability increased. An Internal Revenue Code §338(h)(10) election was made to treat the Emergence as an asset sale for U.S. income tax purposes. As a result, the Emergence was treated as a deemed sale of assets of the Predecessor Company while the Successor Company received a step-up in U.S. tax basis to fair value. The Successor Company elected bonus depreciation on the stepped-up U.S. eligible fixed assets. The Successor Company elected to amortize the stepped-up basis of intangibles over a 15-year period and the Successor Company’s depreciation and amortization expense generated a U.S. net operating loss for both the tax years ended December 31, 2020 and 2019. The U.S. net operating loss will be carried forward indefinitely, but will be subject to an 80% limitation on U.S. taxable income starting in 2021.

During the Successor period July 2, 2019 through December 31, 2019, the Company recognized income tax benefit of $10, primarily as a result of losses from certain foreign operations of which the deferred tax asset created is not offset by a valuation allowance. Losses in the United States created a deferred tax asset which was completely offset by an increase to the valuation allowance. The Company recognized a GILTI inclusion of $5, which was fully offset by our net operating loss and further reduced our valuation allowance. As previously discussed above, the Company elected bonus depreciation in 2019.


	Successor				Predecessor
	December 31, 2020		July 2, 2019 through December 31, 2019		January 1, 2019 through July 1, 2019		Year Ended December 31, 2018

Current:
Federal	$	(14)	$	(1)	$	36	$	(4)
State and local	—		4		13		1
Foreign	22		1		11		25
Total current	8		4		60		22
Deferred:
Federal	3		9		(2)		1
State and local	(1)		1		—		—
Foreign	4		(24)		143		8
Total deferred	6		(14)		141		9
Income tax expense (benefit) (1)	$	14	$	(10)	$	201	$	31

(1)Excludes income tax expense of $1, $1, $21, and $9 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019, and the year ended December 31, 2018, respectively, related to the Held for Sale Business.

A reconciliation of the Company’s combined differences between income taxes computed at the federal statutory tax rate of 21% and the provisions for income taxes for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:


	Successor				Predecessor
	December 31, 2020		July 2, 2019 through December 31, 2019		January 1, 2019 through July 1, 2019		Year Ended December 31, 2018

Income tax (benefit) expense computed at federal statutory tax rate	$	(31)	$	(21)	$	622	$	(35)
State tax (benefit) expense, net of federal benefit	(5)		(2)		9		1
Foreign tax rate expense differential	1		2		33		13
Foreign source income subject to U.S. taxation	—		3		1		2

Non-deductible losses and other expenses	—		—		5		9
Increase (decrease) in the taxes due to changes in valuation allowance	46		17		(433)		25
Additional (benefit) expense on foreign unrepatriated earnings	(3)		—		—		1
Additional (benefit) expense for uncertain tax positions	(4)		—		44		15
Tax recognized in other comprehensive income	—		(1)		(4)		—
Changes in enacted tax laws and tax rates	6		—		—		—

Tax benefit for fresh start accounting and reorganization adjustments	—		—		(68)		—
Other decrease (increase) of deferred tax assets	4		(8)		(8)		—
Income tax expense (benefit)(1)	$	14	$	(10)	$	201	$	31

The domestic and foreign components of the Company’s loss before income taxes for year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:

(1)Excludes (loss) income before income taxes of $(70), $5, $155, and $38 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively, related to the Held for Sale Business.


	December 31, 2020		December 31, 2019
Assets:
Non-pension post-employment	$	4	$	4
Accrued and other expenses	61		97
Property, plant and equipment	—		4
Loss, expense, and credit carryforwards	240		163
Intangible assets	11		—
Pension and postretirement benefit liabilities	47		14
Gross deferred tax assets	363		282
Valuation allowance	(217)		(122)
Net deferred tax asset	146		160
Liabilities:
Property, plant and equipment	(227)		(228)

Unrepatriated earnings of foreign subsidiaries	(7)		(10)
Intangible assets	(66)		(65)
Gross deferred tax liabilities	(300)		(303)
Net deferred tax liability(1)	$	(154)	$	(143)

Hexion Holdings, and its direct subsidiary Hexion Intermediate Holding 1, Inc. and its direct subsidiary Hexion Intermediate Holding 2, Inc. (the “Eligible Subsidiaries”) are not members of the registrant. Hexion Holdings and its Eligible Subsidiaries file a consolidated U.S. Federal income tax return. Therefore, the Company can utilize Hexion Holdings and its Eligible Subsidiaries’ tax attributes or vice versa.

As of December 31, 2020, the Company had a $217 valuation allowance against its net deferred tax assets that management believes, more likely than not, will not be realized. The Company’s deferred tax assets include federal, state and foreign net operating loss carryforwards as well as an interest expense carryforward. The federal net operating loss carryforwards available are $636, which excludes the cumulative income from Hexion Holdings and its Eligible Subsidiaries, as described above. The federal net operating loss will be carried forward indefinitely, but beginning in 2021, will be subject to an 80% limitation on U.S. taxable income. A valuation allowance has been recorded against these loss carryforwards. The Company has provided a valuation allowance against its state deferred tax assets, primarily related to state net operating loss carryforwards of $19. A valuation allowance of $97 has been recorded against a portion of foreign net operating loss carryforwards, primarily in the Netherlands.

The following table summarizes the changes in the valuation allowance for the year ended December 31, 2020, and the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:


	Balance at Beginning of Period	Changes in Related Gross Deferred Tax Assets/Liabilities	Charge / (Release)	Balance at End of Period
Valuation allowance on Deferred tax assets:
Predecessor

Year ended December 31, 2018	498	—	27	525
January 1, 2019 through July 1, 2019	525	—	(427)	98
Successor
July 2, 2019 through December 31, 2019	98	—	24	122
Year ended December 31, 2020(1)	122	41	54	217

The Company conducts business globally and, as a result, certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, China, Germany, Italy, Netherlands and the United Kingdom.

With minor exceptions, the Company’s closed tax years for major jurisdictions are years prior to: 2016 for United States, 2013 for Brazil, 2010 for Canada, 2015 for China, 2016 for Germany, 2016 for Italy, 2010 for Netherlands and 2017 for the United Kingdom.

The Company continuously reviews issues that are raised from ongoing examinations and open tax years to evaluate the adequacy of its liabilities. As the various taxing authorities continue with their audit/examination process, the Company will adjust its reserves accordingly to reflect the current status and settlements.


	Successor				Predecessor
	Year Ended December 31, 2020		July 2, 2019 through December 31, 2019		January 1, 2019 through July 1, 2019
Balance at beginning of period	$	130	$	133	$	94
Additions based on tax positions related to the current year	4		2		41
Additions for tax positions of prior years	14		—		5
Reductions for tax positions of prior years	(20)		(3)		(6)
Settlements	(1)		(4)		—
Foreign currency translation	2		2		(1)
Balance at end of period(1)	$	129	$	130	$	133

(1)Includes unrecognized tax benefits of $6, $5, and $11 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019 associated with the Held for Sale business.

During the year ended December 31, 2020 and the Successor period July 2, 2019 through December 31, 2019, the Company decreased the amount of its unrecognized tax benefits, including its accrual for interest and penalties, by $10 and $1, respectively, primarily as a result of decreases in the unrecognized tax benefit from negotiations with foreign jurisdictions, lapses of statute of limitations and settlements, offset by increases of unrecognized tax benefits for various intercompany transactions. During the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company recognized approximately $9, $2, $3 and $3, respectively, in interest and penalties. The Company had approximately $56, $56, and $54 accrued for the payment of interest and penalties at December 31, 2020 and 2019, and July 1, 2019, respectively.

$129 of unrecognized tax benefits, if recognized, would affect the effective tax rate; however, a portion of the unrecognized tax benefit would be in the form of a net operating loss carryforward, which would be subject to a full valuation allowance. The Company anticipates recognizing less than $15 of the total amount of unrecognized tax benefits within the next 12 months as a result of lapses of statute of limitations, negotiations with foreign jurisdictions, settlements, and completion of audit examinations.