Income Taxes

12 Months Ended

Dec. 31, 2019

18. Income Taxes

We provide for income taxes based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries are considered resident for income tax purposes. The relationship between our pre-tax income or loss and our income tax provision or benefit varies from period to period as a result of various factors which include changes in total pre-tax income or loss, the jurisdictions in which our income is earned, the tax laws in those jurisdictions and in our operating structure. On September 26, 2019, our parent company ceased to be a Swiss tax resident and became an Irish tax resident subject to tax under the Irish tax regime. Our income derived from sources outside Switzerland are exempt from Swiss cantonal and communal tax and are also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying investments in subsidiaries. The participation relief should result in a full exemption of participation income from Swiss federal income tax.

Our income tax provision from continuing operations consisted of the following:



	Successor			Predecessor
	Period From			Period From
	12/14/19			1/1/2019			Years Ended
	through			through			December 31,
(Dollars in millions)	12/31/2019			12/13/2019			2018			2017
Total Current Provision	$	(9	)	$	(110	)	$	(113	)	$	(162	)
Total Deferred (Provision) Benefit	—			(25		)	79			25
Provision for Income Taxes	$	(9	)	$	(135	)	$	(34	)	$	(137	)

The difference between the income tax provision at the Irish and Swiss income tax rate and the income tax (provision) benefit attributable to “Loss Before Income Taxes” for the 2019 Successor and Predecessor Periods, and the Predecessor years ended December 31, 2018 and 2017 is analyzed below:



	Successor			Predecessor
	Period From			Period From
	12/14/19			1/1/2019			Years Ended
	through			through			December 31,
(Dollars in millions)	12/31/2019			12/13/2019			2018			2017
Irish or Swiss Income Tax rate at 12.5% and 7.83%, respectively	$	2		$	(299	)	$	216		$	208
Tax on Operating Earnings Subject to Rates Different than the Irish or Swiss Federal Income Tax Rate	(65		)	197			(387		)	123
Estimated Tax on Settlement of Liabilities Subject to Compromise and Fresh Start Accounting	—			(495		)	—			—
Change in Valuation Allowance Attributed to Estimated Tax on Settlement of Liabilities Subject to Compromise and Fresh Start Accounting	—			463			—			—
U.S. Tax Reform - Remeasure of U.S. Deferred Tax Assets	—			—			—			(249		)
Change in Valuation Allowance Attributed to U.S. Tax Reform	—			—			—			301
Change in Valuation Allowance	56			17			166			(459		)
Change in Uncertain Tax Positions	(2		)	(18		)	(29		)	(61		)
Provision for Income Taxes	$	(9	)	$	(135	)	$	(34	)	$	(137	)

Our income tax provision in the Successor Period was $9 million on a loss before income taxes of $15 million. The primary drivers of the tax expense for the Successor Period included profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions that do not directly correlate to ordinary income or loss.

Our income tax provision in the 2019 Predecessor Period was $135 million on earnings before income taxes of $3.8 billion. The primary drivers of the tax expense for the 2019 Predecessor Period included profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions that do not directly correlate to ordinary income or loss. Our results for period also include $32 million of tax expense related to the Fresh Start accounting impacts and $14 million of tax benefit primarily related to goodwill and other asset impairments or write-downs. Other charges of approximately $77 million, related to restructuring expense and gain on the sale of businesses, resulted in $3 million in tax benefit. We also recognized $4.3 billion gain on Settlement of Liabilities Subject to Compromise as a result of the bankruptcy (See “Note 3 – Fresh Start Accounting”) with no tax impact due to it being attributed to Bermuda, which has no income tax regime, and the U.S., which resulted in the reduction of our U.S. unbenefited net operating losses carryforward under the operative tax statute and applicable regulations offset by the release of the valuation allowance. Prepetition charges (charges prior to Petition Date) and reorganization items (charges after Petition Date) had no significant tax impact.

Our income tax provision in 2018 was $34 million on a loss before income taxes of $2.8 billion. Results for the year ended December 31, 2018 include losses with no significant tax benefit. The tax expense for the year ended December 31, 2018 also includes withholding taxes and deemed profit taxes that do not directly correlate to ordinary income or loss. The primary driver of the tax expense was due to profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions. Our results for 2018 also include charges with $70 million tax benefit principally related to the $1.9 billion goodwill impairment. The other asset write-downs and other charges, including $238 million in long-lived asset impairments, $126 million in restructuring charges and the warrant fair value adjustment of $70 million resulted in no significant tax benefit.

Our income tax provision in 2017 was $137 million on a loss before income taxes of $2.7 billion. The primary driver of the tax expense was due to profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions. In addition, the Company concluded that it needed to record a valuation allowance of $73 million in the fourth quarter of 2017 against certain previously benefited deferred tax assets since it cannot support that it is more likely than not that the deferred tax assets will be realized. The additional valuation allowance was partially offset by a one-time $52 million benefit as a result of the recent U.S tax reform. Our results for 2017 also include charges with no significant tax benefit principally related to asset write-downs and other charges including $928 million in long-lived asset impairments, $540 million inventory charges including excess and obsolete, $230 million in the write-down of Venezuelan receivables and $66 million of other write-downs charges and credits, $183 million in restructuring charges and the warrant fair value adjustment of $86 million.

On December 22, 2017, the U.S. enacted into law a comprehensive tax reform bill (the “Tax Cuts and Jobs Act,” or “TCJA”). The TCJA significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries as of 2017 held in cash and illiquid assets (with the latter taxed at a lower rate), and a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a partial territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base, such as the base erosion and anti-abuse tax). The permanent reduction in the U.S. statutory corporate tax rate to 21% from 35% decreased the amount of the U.S. deferred tax assets and liabilities by $249 million with a decrease to the valuation allowance of $301 million for a net tax benefit of $52 million recorded for the year ended December 31, 2017. The TCJA did not have other impacts on the Company’s effective tax rate because of the valuation allowance against the U.S. deferred tax assets. Any potential impact would be offset by un-benefitted U.S. net operating loss carryforwards. As we did not have all the necessary information to analyze all effects of this tax reform as of December 31, 2017, this was a provisional amount which we believed represented a reasonable estimate of the accounting implications of this tax reform. We finalized our accounting for this matter during 2018 and concluded that no adjustments to the provisional amounts recorded during 2017 were identified during the twelve months ended December 31, 2019 or 2018.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in which we have operations.

The components of the net deferred tax asset (liability) attributable to continuing operations were as follows:



	Successor			Predecessor
	December 31,			December 31,
(Dollars in millions)	2019			2018
Deferred Tax Assets:
Net Operating Losses Carryforwards	$	696		$	1,002
Accrued Liabilities and Reserves	155			331
Tax Credit Carryforwards	11			94
Employee Benefits	26			29
Property, Plant and Equipment	63			—
Inventory	67			67
Other Differences between Financial and Tax Basis	264			324
Valuation Allowance	(1,166		)	(1,702		)
Total Deferred Tax Assets	116			145
Deferred Tax Liabilities:
Property, Plant and Equipment	—			(15		)
Intangible Assets	(90		)	(57		)
Other Differences between Financial and Tax Basis	(31		)	(52		)
Total Deferred Tax Liabilities	(121		)	(124		)
Net Deferred Tax Asset (Liability)	$	(5	)	$	21

We record deferred tax assets for net operating losses and temporary differences between the book and tax basis of assets and liabilities that are expected to produce tax deductions in future periods. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) when determining whether a valuation allowance is required. The Company evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies, and the impact of fresh start accounting in making this assessment. The realizability of the deferred tax assets is dependent upon judgments and assumptions inherent in the determination of future taxable income, including factors such as future operation conditions (particularly as related to prevailing oil prices and market demand for our products and services).

We will continue to evaluate whether valuation allowances are needed in future reporting periods. Valuation allowances will remain until the Company can determine that net deferred tax assets are more likely than not to be realized. In the event that the Company were to determine that it would be able to realize the deferred income tax assets in the future as a result of significant improvement in earnings as a result of market conditions, the Company would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.

The decrease in the valuation allowance in 2019 is primarily attributable to a decrease of un-benefited net operating loss carryforwards, primarily attributed to the US (see discussion below), and the foreign exchange remeasurement of our net deferred tax assets.

Deferred income taxes generally have not been recognized on the cumulative undistributed earnings of our non-Irish subsidiaries because they are considered to be indefinitely reinvested. Distribution of these earnings in the form of dividends or otherwise may result in a combination of income and withholding taxes payable in various countries. As of December 31, 2019, the pool of positive undistributed earnings of our non-Irish subsidiaries that are considered indefinitely reinvested and may be subject to tax if distributed amounts to approximately$1.6 billion. Due to complexities in the tax laws and the manner of repatriation, it is not practicable to estimate the unrecognized amount of deferred income taxes and the related dividend withholding taxes associated with these undistributed earnings.

At December 31, 2019, we had approximately $4 billion of NOLs in various jurisdictions, $1.9 billion of which were generated by certain U.S. subsidiaries. On December 13, 2019 the company emerged from Chapter 11 of the U.S. bankruptcy code. As a result, in the U.S. approximately $480 million of cancellation of indebtedness (COD) income was realized for tax purposes. Under exceptions applying to COD income resulting from a bankruptcy reorganization, the U.S. subsidiaries were not required to recognize this COD income currently as taxable income. Instead, the company’s US net operating losses were reduced under the operative tax statute and applicable regulations, affecting the balance of deferred taxes. The Company also realized COD income attributable to Bermuda, which does not have an income tax regime. As a result, there was no impact from the COD Income. Our U.S. subsidiaries experienced an ownership change as the Company’s emergence from Chapter 11 bankruptcy proceedings is considered a “ownership change” for purposes of Internal Revenue Code section 382. The Internal Revenue Code sections 382 and 383 impose limitations on the ability of a company to utilize tax attributes after experiencing an “ownership change.” We estimate that we would have an annual limitation of approximately $23 million against the utilization of our U.S. loss carryforwards and other tax attributes, including credits, in the future, subject to the final valuation of the U.S. As a result, $1.2 billion of the U.S. loss carryforward will expire before it can be utilized. The gross amount of our U.S. subsidiaries NOLs that we will be able to utilize is not $1.9 billion and our net operating loss carryforward deferred tax asset decreased by $257 million (tax effect of the anticipated expired U.S. loss carryforward). The Company maintains a valuation allowance against the U.S. net deferred tax asset position so the adjustment to the U.S. loss carryforward had a corresponding reduction to the valuation allowance and therefore resulted in no current financial impact. The deferred tax asset, as of December 31, 2019, reflects the maximum amount of U.S. loss carryforward that the Company may be able to utilize, which is $639 million. Our non-indefinite loss carryforwards, if not utilized, will mostly expire for U.S. subsidiaries from 2030 through 2037 and at various dates from 2019 through 2038 for non-U.S. subsidiaries. At December 31, 2019, we had $77 million of tax credit carryovers, of which $66 million is for U.S. subsidiaries. The U.S. credits primarily consists of $35 million of research and development tax credit carryforwards which expire from 2020 through 2038, and $31 million of foreign tax credit carryforwards which expire from 2020 through 2038. We anticipate that all the U.S. credits will expire before they can be utilized because of the annual limitation. As a result, as of December 31, 2019, our tax credit carryforward is $11 million and the tax credit deferred tax asset has been decreased by $66 million with an offsetting reduction in valuation allowance.

A tabular reconciliation of the total amounts of uncertain tax positions at the beginning and end of the period is as follows:



	Successor			Predecessor
	Period From			Period From
	12/14/19			1/1/2019			Years Ended
	through			through			December 31,
(Dollars in millions)	12/31/2019			12/13/2019			2018			2017
Balance at Beginning of Year	$	213		$	195		$	217		$	208
Additions as a Result of Tax Positions Taken During a Prior Period	—			34			31			65
Reductions as a Result of Tax Positions Taken During a Prior Period	—			(1		)	(9		)	(1		)
Additions as a Result of Tax Positions Taken During the Current Period	2			17			14			12
Reductions Relating to Settlements with Taxing Authorities	(1		)	(20		)	(18		)	(29		)
Reductions as a Result of a Lapse of the Applicable Statute of Limitations	—			(5		)	(23		)	(38		)
Foreign Exchange Effects	—			(7		)	(17		)	—
Balance at End of Year	$	214		$	213		$	195		$	217

Substantially all of the uncertain tax positions, if recognized in future periods, would impact our effective tax rate. To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense and other non-current liabilities in the Consolidated Financial Statements in accordance with our accounting policy. We recorded an expense of $1 million, $15 million, $1 million and $10 million in interest and penalty for the 2019 Successor and Predecessor Periods and the years ended December 31, 2018 and 2017, respectively. The amounts in the table above exclude cumulative accrued interest and penalties of $77 million, $60 million, and $61 million at December 31, 2019, 2018 and 2017, respectively, which are included in other liabilities.

We are subject to income tax in many of the approximately 80 countries where we operate. As of December 31, 2019, the following table summarizes the tax years that remain subject to examination for the major jurisdictions in which we operate:



Canada	2011 - 2019
Mexico	2009 - 2019
Russia	2016 - 2019
Switzerland	2011 - 2019
United States	2016 - 2019

We are continuously under tax examination in various jurisdictions. We cannot predict the timing or outcome regarding resolution of these tax examinations or if they will have a material impact on our financial statements. As of December 31, 2019, we anticipate that it is reasonably possible that the amount of uncertain tax positions may decrease by up to $6 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.