N. Income Taxes – Alcoa Corporation’s estimated annualized effective tax rate (AETR) for 2020 as of June 30, 2020 differs from the U.S. federal statutory rate of 21% primarily due to losses in countries with full valuation reserves resulting in no tax benefit, as well as foreign income taxed in higher rate jurisdictions.

	Six months ended June 30,
	2020				2019
Income (loss) before income taxes	$	114			$	(85	)
Estimated annualized effective tax rate		(183.0	)	%		137.1	%
Income tax benefit	$	(209	)		$	(116	)
Unfavorable tax impact related to losses in jurisdictions with no tax benefit		333				381
Discrete tax charge		1				1
Provision for income taxes	$	125			$	266

Deferred taxes are recorded for future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. These future tax consequences result from differences between the financial and tax bases of Alcoa’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

The future realization of net deferred tax assets is reviewed quarterly, or more frequently if there are changes in the positive and negative evidence used in management’s assessments, and is based on projections of the respective future taxable income (defined as the sum of pretax income, other comprehensive income, and permanent tax differences), exclusive of reversing temporary differences and carryforwards.

Management’s forecasted taxable income is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels; and key inputs and raw materials, such as bauxite, alumina, caustic soda, calcined petroleum coke, liquid pitch, energy, labor, and transportation costs. These are the same assumptions utilized by management to develop the financial and operating plan that is used to manage the Company and measure performance against actual results. Additionally, uncertainty and changes in the macroeconomic environment and the economy in Alcoa’s operating locations may arise as a result of the COVID-19 pandemic. Adverse effects from these changes may impact the assumptions utilized to develop the forecasted taxable income and may result in the need for a valuation allowance on certain deferred tax assets.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management applies judgment in assessing all available positive and negative evidence and considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance.

At December 31, 2019, Alcoa Canada Company was in a three-year cumulative loss position without a valuation allowance where, in management’s judgment, the weight of the positive evidence more than offset the negative evidence of the cumulative losses. At June 30, 2020, in management’s judgment, the positive evidence continued to more than offset the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that Alcoa Canada Company’s deferred tax assets may not be realized, resulting in a future charge to establish a valuation allowance. Alcoa Canada Company’s net deferred tax assets were $80 and $137 at June 30, 2020 and December 31, 2019, respectively. The majority of the Alcoa Canada Company net deferred tax assets relate to pension obligations and derivatives.