INCOME TAXES

3 Months Ended

Mar. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The effective income tax rate for the first quarter of 2022 was expense of 13.9% compared to expense of 14.7% for the first quarter of 2021. The decrease in the effective tax rate in the first quarter of 2022 was primarily due to the excess tax benefits recognized for employee share-based payments in the first quarter of 2022.

Brazil Tax Years 2005-2012

The Company has two Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $29 million plus $107 million of interest and penalties (translated at the March 31, 2022 exchange rate). The Company is challenging this assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April 27, 2022, the Company filed a motion for clarification relating to that decision, which is currently pending with the court. The Company intends to continue its challenge of this assessment in the judicial system, including appealing the April 18, 2022 decision, if necessary.

As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $35 million plus $115 million of interest and penalties (translated at the March 31, 2022 exchange rate), which the Company is challenging in the judicial system. This case is still pending resolution at the first judicial level.

Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of certain assets as security for the alleged deficiencies. As of March 31, 2022, the Company pledged Brazilian real estate assets with net book value of $22 million and provided additional security in the form of bank secured bonds totaling $113 million and a cash deposit of $20 million (translated at the March 31, 2022 exchange rate).

The Company believes that the final resolution of both of the assessments will not have a material impact on its condensed consolidated financial statements. The ultimate outcome of these matters cannot be predicted with certainty given the complex nature of tax controversies. Should the ultimate outcome of these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s condensed consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct.