Income Taxes

3 Months Ended

Dec. 31, 2019

14. Income Taxes

In calculating the provision for income taxes, Adient uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based on changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three months ended December 31, 2019, Adient’s income tax expense was $54 million. The income tax expense was higher than the statutory rate impact of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset with a tax benefit related to the impairment of Adient’s YFAI investment. For the three months ended December 31, 2018, Adient’s income tax expense was $10 million equating to an effective tax rate of 48%. The income tax expense was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax rate change in China.

Valuation Allowances

As a result of the Company's first quarter fiscal 2020 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that no changes to valuation allowances were required.

Adient reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred tax asset are considered, along with any other positive or negative evidence. All of the factors that Adient considers in evaluating whether and when to establish or release all or a portion of the deferred tax asset valuation allowance involve significant judgment. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.

Uncertain Tax Positions

At December 31, 2019, Adient had gross tax effected unrecognized tax benefits of $425 million. If recognized, $125 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest at December 31, 2019 was approximately $11 million (net of tax benefit). The interest and penalties accrued for the three months ended December 31,

2019 was $1 million. Adient recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Impacts of Tax Legislation and Change in Statutory Tax Rates

During the first quarter of fiscal 2019, Guangzhou Adient Automotive Seating Co., Ltd. was approved for High and New Tech Enterprise status for the three-year period of 2018 to 2020, thereby reducing their tax rate from 25% to 15%. As a result, a $7 million income tax benefit was recorded on the reduction of deferred tax liabilities and a reduction of 2018 calendar year income taxes.

Other tax legislation was adopted during the quarter in various jurisdictions, which did not have a material impact on Adient’s consolidated financial statements.

Other Tax Matters

During the first quarter of fiscal 2020, Adient recognized a pre-tax non-cash impairment of $216 million in equity income related to Adient's YFAI investment. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $4 million.