Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.

The income tax provision for the three months ended September 30, 2019 was a benefit of $77 million resulting in an effective tax rate of 623.6% (on a pre-tax loss for the period), compared to a $31 million charge resulting in an effective tax rate of 19.0% for the same period in 2018. The income tax provision for the nine months ended September 30, 2019 was a benefit of $45 million resulting in an effective tax rate of (18.9)%, compared to an $82 million charge resulting in an effective tax rate of 20.1% for the same period in 2018. The effective tax rates for the three and nine month periods ended September 30, 2019 differ from the United States federal statutory rate primarily due to the income tax benefit that resulted from changes in tax law in Switzerland and the impact of the goodwill impairment charge on income before taxes in 2019.

Unrecognized Tax Benefits

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or litigation, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits at September 30, 2019 was $126 million, as compared to $136 million at December 31, 2018, which if ultimately recognized will reduce our effective tax rate. We believe that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $4 million within the next 12 months as a result of the expiration of certain statutes of limitations. We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of September 30, 2019, we had $8 million of interest accrued for unrecognized tax benefits.

In June 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest.  In July 2019, Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail on the proposed assessment and intends to vigorously defend our position through litigation. At this time, we have not recorded any unrecognized tax benefits related to this uncertain tax position.