
	Year Ended December 31,
(in millions)	2020			2019			2018
Income (loss) components:
Domestic	$	(33)		$	203		$	208
Foreign	318			213			377
Total pre-tax income	$	285		$	416		$	585
Income tax expense components:
Current:
Domestic – federal	$	24		$	39		$	9
Domestic – state and local	5			13			13
Foreign	33			40			61
Total Current	62			92			83
Deferred:
Domestic – federal	$	(21)		$	7		$	17
Domestic – state and local	(8)			(1)			5
Foreign	(2)			(83)			(69)
Total Deferred	(31)			(77)			(47)
Total income tax provision	$	31		$	15		$	36
Effective income tax rate	10.9		%	3.7		%	6.1		%

Reconciliations between taxes at the U.S. federal income tax rate and taxes at our effective income tax rate on earnings before income taxes are as follows:


	Year Ended December 31,
	2020		2019		2018
Tax provision at U.S. statutory rate	21.0	%	21.0	%	21.0	%
Increase (decrease) in tax rate resulting from:

State income taxes	0.7		2.7		2.3
Uncertain tax positions	(3.9)		0.4		2.6
Valuation allowance	0.5		1.2		(47.1)
Tax exempt interest	(4.5)		(3.0)		(1.4)
Foreign tax rate differential	(0.9)		0.7		2.9
Impact of foreign earnings, net	5.3		1.6		(1.7)
Tax incentives	(7.4)		(9.6)		(6.2)
Intercompany sale of assets	—		—		35.5
Other – net	2.2		1.7		(0.3)
Rate change	(1.3)		(18.1)		—

Goodwill impairment	2.9		7.8		—
Federal R&D tax credit	(1.3)		(1.2)		(0.8)
Stock compensation	(2.4)		(1.5)		(0.7)
Effective income tax rate	10.9	%	3.7	%	6.1	%

Certain prior year amounts included within the table of rate reconciliation above have been adjusted for consistency with the current year presentation. These adjustments had no effect on the reported Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, or Cash Flow.

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.


	December 31,
(in millions)	2020		2019
Deferred tax assets:
Employee benefits	$	127	$	106
Accrued expenses	35		26
Loss and other tax credit carryforwards	270		240
Inventory	6		6

Lease Liabilities	64		57

Other	41		3
	543		438
Valuation allowance	(217)		(191)
Net deferred tax asset	$	326	$	247
Deferred tax liabilities:
Intangibles	$	138	$	160
Investment in foreign subsidiaries	5		7
Property, plant and equipment	77		78
Lease right-of-use assets	62		57
Other	30		29
Total deferred tax liabilities	$	312	$	331

Management assesses all available positive and negative evidence, including prudent and feasible tax planning strategies, and estimates if sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $217 million has been established to reduce the deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards.


(in millions)	2020		2019		2018
Valuation allowance — January 1	$	191	$	234	$	350
Change in assessment (a)	1		(2)		1
Current year operations	7		2		(271)
Foreign currency and other (b)	18		(43)		154

Valuation allowance — December 31	$	217	$	191	$	234

(a) Increase in assessment in 2020 is primarily attributable to loss positions in various jurisdictions. Decrease in assessment in 2019 is primarily attributable to profitability of certain jurisdictions.

(b) Included in foreign currency and other in 2019 is a decrease in net operating losses due primarily to the liquidation of a foreign subsidiary for which a valuation allowance was maintained. Included in foreign currency and other in 2018 is an increase in net operating losses due to amended prior year tax returns for which a valuation allowance was recorded.


	December 31,
(in millions)	2020		2019

Non-current assets	$	256	$	226

Non-current liabilities	(242)		(310)
Total net deferred tax liabilities	$	14	$	(84)


(in millions)	December 31, 2020		First Year of Expiration
U.S. net operating loss	$	7	December 31, 2024
State net operating loss	97		December 31, 2021
State excess interest expense	10		Indefinitely

State tax credits	1		Indefinitely
Foreign net operating loss	1,153		December 31, 2021
Foreign tax credits	4		December 31, 2030

The Company has provided a deferred tax liability of $7 million for net foreign withholding taxes and state income taxes on $500 million of earnings expected to be repatriated to the U.S. parent, as of December 31, 2020. The Company currently does not intend to repatriate approximately $1.6 billion taxed under the Tax Act. The amount of deferred tax that would be recorded if such amounts were repatriated is not reasonably estimable.

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 upon the completion of the litigation process, based on the technical merits of the position. The tax benefits recognized in the 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(in millions)	2020		2019		2018
Unrecognized tax benefits — January 1	$	129	$	136	$	130
Current year tax positions	—		3		—
Prior year tax positions	(3)		(5)		7



Settlements	(12)		(5)		(1)
Unrecognized tax benefits — December 31	$	114	$	129	$	136

The amount of unrecognized tax benefits at December 31, 2020 which, if ultimately recognized, will reduce our effective tax rate is $114 million. We believe that it is reasonably possible that unrecognized tax benefits will be reduced by approximately $1 million within the next 12 months as a result of the expiration of certain statute of limitations.

We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as a component of income tax expense in our Consolidated Income Statements. The amount of accrued interest relating to unrecognized tax benefits as of December 31, 2020 and 2019 was $8 million and $8 million.

During 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. 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 is vigorously defending our position through litigation. As of December 31, 2020, we have not recorded any unrecognized tax benefits related to this uncertain tax position.