Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

In 2023, NXP generated income before income taxes of $3,352 million (2022: income of $3,363 million; 2021: income of $2,180 million). The components of income (loss) before income taxes are as follows: 

	2023	2022	2021
Netherlands	1,398	1,520	942
Foreign	1,954	1,843	1,238
	3,352	3,363	2,180

The components of income tax benefit (expense) are as follows:

	2023	2022	2021
Current taxes:
Netherlands	(281)	(285)	(106)
Foreign	(509)	(480)	(186)
	(790)	(765)	(292)
Deferred taxes:
Netherlands	4	(10)	10
Foreign	263	246	10
	267	236	20
Total income tax benefit (expense)	(523)	(529)	(272)

A reconciliation of the statutory income tax rate in the Netherlands as a percentage of income (loss) before income taxes and the effective income tax rate is as follows:

	2023		2022		2021
	amount	%	amount	%	amount	%
Statutory income tax rate in the Netherlands	865	25.8	868	25.8	545	25.0
Rate differential between the local statutory rates and the statutory rate of the Netherlands	(77)	(2.3)	(80)	(2.4)	(42)	(1.9)
Net change in valuation allowance	(3)	(0.1)	—	—	(20)	(0.9)
Non-deductible expenses/losses	60	1.8	56	1.7	53	2.5
Netherlands tax incentives	(111)	(3.3)	(113)	(3.4)	(69)	(3.2)
Foreign tax incentives	(251)	(7.5)	(266)	(7.9)	(163)	(7.5)
Changes in estimates of prior years' income taxes	(17)	(0.5)	(2)	(0.1)	(21)	(1.0)
Withholding taxes	13	0.4	8	0.3	(8)	(0.4)
Other differences	44	1.3	58	1.7	(3)	(0.1)
Effective tax rate	523	15.6	529	15.7	272	12.5

.

We recorded an income tax expense of $523 million in 2023, which reflects an effective tax rate of 15.6% compared to an expense of $529 million and an effective rate of 15.7% in 2022. The effective tax rate reflects the impact of tax incentives, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate, changes in estimates of prior years' income taxes, change in valuation allowance, non-deductible expenses and withholding taxes. The impact of these items results in offsetting factors that attribute to the change in the effective tax rate between the two periods, with the significant drivers outlined below:

•The Company benefits from certain tax incentives, which reduce the effective tax rate. The dollar amount of the incentive in any given year is commensurate with the taxable income in that same period. In 2023, the foreign tax incentives are lower compared to 2022 primarily due to less qualifying investments. For 2022, the foreign tax and Netherlands tax incentives were higher than 2021 by $147 million, mainly due to the fact that NXP benefited from higher qualifying income and also taking into account the effect of specific U.S. tax law that became effective as from 2022.

•The movement in the valuation allowance was mostly due to new Dutch corporate income tax law applicable as from 2019. A portion of the interest expenses is non-deductible in the year it is recorded but can be carried forward without expiration. The release of the valuation allowance in 2021 is due to higher qualifying income compared to 2020 and 2019.

•The higher favorable changes in estimates of prior years' income taxes in 2023 is primarily as a result of new guidance released by the Internal Revenue Service to clarify the treatment of specified research and experimental expenditures under Section 174.

•The movement in the withholding taxes in 2022 as compared to 2021 is mainly due to considering more undistributed earnings as indefinitely reinvested in 2021, resulting in a 2021 tax benefit of $17 million.

•The other differences tax expense in 2023 and 2022 are mainly relating to excess tax benefits, unrecognized tax benefits, FX-effects and taxes due on Global Intangible Low-Taxed Income (GILTI) inclusions in U.S. compared to the same period in 2021. GILTI is recognized as a current period expense when incurred.

The Company benefits from income tax holidays in certain jurisdictions which provide that we pay reduced income taxes in those jurisdictions for a fixed period of time that varies depending on the jurisdiction. The predominant income tax holiday is expected to expire at the end of 2026. The impact of this tax holiday decreased foreign income taxes by $13 million in 2023 (2022: $17 million; 2021: $14 million). The benefit of this tax holiday on net income per share (diluted) was $0.05 in 2023 (2022: $0.07; 2021: $0.05).

Deferred tax assets and liabilities

The principal components of deferred tax assets and liabilities are presented below:

	2023	2022
Operating loss and tax credit carryforwards	273	287
Disallowed interest and tax incentive carryforwards	31	41
Identified intangible assets, net	600	331
Property, plant and equipment, net	8	—
Other accrued liabilities	111	111
Pensions	63	51
Other non-current liabilities	47	55
Share-based compensation	10	11
Restructuring liabilities	23	3
Receivables	118	126
Inventories	16	14
Total Deferred Tax Assets	1,300	1,030
Valuation allowance	(144)	(154)
Total Deferred Tax Assets, net of valuation allowance	1,156	876
Undistributed earnings of foreign subsidiaries	(36)	(33)
Property, plant and equipment, net	—	(11)
Goodwill	(115)	(97)
Other current and non-current assets	(57)	(64)
Total Deferred Tax Liabilities	(208)	(205)
Net Deferred Tax Position	948	671

The classification of the deferred tax assets and liabilities in the Company’s Consolidated Balance Sheets is as follows:

	2023	2022
Deferred tax assets within other non-current assets	992	716
Deferred tax liabilities within non-current liabilities	(44)	(45)
	948	671

The Company has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income or income taxes payable in future periods. Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The realization of our deferred tax assets depends on our ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The valuation allowance decreased by $10 million during 2023 (2022: $7 million decrease). Besides the net change in the valuation allowance of $3 million this mainly includes a decrease of the valuation allowance due to expiration of tax attributes for $4 million and for the remainder due to changes in estimates of prior years' income taxes.

We consider all available evidence in forming a judgment regarding the valuation allowance as of December 31, 2023, including events that occur subsequent to year end but prior to the issuance of the financial statements. The deferred tax assets are recognized to the extent that we consider it more likely than not that these assets will be realized. In making such a determination, we consider all available positive and negative evidence, including reversal of existing temporary differences, projected future taxable income and tax planning strategies.

At December 31, 2023 tax loss carryforwards of $398 million (inclusive of $79 million of U.S. state tax losses) will expire as follows:

	Balance	Scheduled expiration
	December 31,
	2023	2024	2025	2026	2027	2028	2029-2033	later	unlimited
Tax loss carryforwards	398	3	7	7	4	—	74	3	300

This overview is excluding carried forward tax incentives of $130 million which have an unlimited expiration date.

The Company also has tax credit carryforwards of $227 million (excluding the effect of unrecognized tax benefits), which are available to offset future tax, if any, and which will expire as follows:

	Balance	Scheduled expiration
	December 31,
	2023	2024	2025	2026	2027	2028	2029-2033	later	unlimited
Tax credit carryforwards	227	10	18	22	7	7	58	56	49

The net income tax payable (excluding the liability for unrecognized tax benefits) as of December 31, 2023 amounted to $117 million (2022: net income tax payable of $268 million) and includes amounts directly receivable from or payable to tax authorities.

The Company does not indefinitely reinvest the majority of the undistributed earnings of its subsidiaries. Consequently, the Company has recognized a deferred tax liability of $36 million at December 31, 2023 (2022: $33 million) for the additional income taxes and withholding taxes payable upon the future remittances of these earnings of foreign subsidiaries. The Company considers $614 million of the undistributed earnings indefinitely reinvested although the timing of the reversal can be controlled. Upon repatriation of those earnings, the Company would be subject to tax of $54 million, which is not recognized as deferred tax liability at December 31, 2023.

A reconciliation of the beginning and ending amount of unrecognized tax benefits excluding interest and penalties is as follows:

	2023	2022	2021
Balance as of January 1	173	176	161
Translation differences	—	(4)	(1)
Lapse of statute of limitations	(3)	(3)	(1)
Increases from tax positions taken during prior periods	13	1	7
Decreases from tax positions taken during prior periods	(3)	(4)	(1)
Increases from tax positions taken during current period	11	11	11
Decreases relating to settlements with the tax authorities	(5)	(4)	—
Balance as of December 31	186	173	176

Of the total unrecognized tax benefits at December 31, 2023, $165 million, if recognized, would impact the effective tax rate. All other unrecognized tax benefits, if recognized, would not affect the effective tax rate as these would be offset by compensating adjustments in the Company’s deferred tax assets that would be subject to valuation allowance based on conditions existing at the reporting date.

The Company classifies interest related to an underpayment of income taxes as financial expense and penalties as income tax expense. The total related interest and penalties recorded during the year 2023 amounted

to a $16 million expense (2022: $1 million expense; 2021: $5 million expense). As of December 31, 2023, the Company has recognized a liability for related interest and penalties of $32 million (2022: $16 million; 2021: $18 million). It is reasonably possible that the total amount of unrecognized tax benefits may significantly increase/decrease within the next 12 months of the reporting date due to, for example, completion of tax examinations. It is estimated that this reasonably possible change will not be significant.

The Company files income tax returns in the Netherlands, the United States of America and in various other foreign jurisdictions. Tax filings of our subsidiaries are routinely audited in the normal course of business by tax authorities around the world. Tax years that remain subject to examination by major tax jurisdictions: the Netherlands (2018, 2020-2022), Germany (2017-2022), USA (2005-2022), China (2013-2022), Taiwan (2018-2022), Thailand (2018-2022), Malaysia (2016-2022) and India (2004, 2006-2022).