Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Pre-tax income applicable to U.S. and non-U.S. operations is as follows: 

(Millions of dollars) Year Ended December 31,	2021		2020		2019
United States	$	2,020	$	1,253	$	1,161
Non-U.S.	3,079		2,131		1,766
Total income before income taxes	$	5,099	$	3,384	$	2,927

Provision for Income Taxes

The following is an analysis of the provision for income taxes: 

(Millions of dollars) Year Ended December 31,	2021		2020		2019(a)
Current tax expense (benefit)
U.S. federal	$	287	$	185	$	64
State and local	87		17		39
Non-U.S.	1,142		1,013		969
	1,516		1,215		1,072
Deferred tax expense (benefit)
U.S. federal	63		20		85
State and local	8		7		—
Non-U.S.	(325)		(395)		(388)
	(254)		(368)		(303)
Total income taxes	$	1,262	$	847	$	769

(a)2019 includes $70 million related to divestitures, non-U.S. current tax expense of $48 million and non-U.S. deferred tax expense of $22 million.

U.S. Tax Cuts and Jobs Act (Tax Act) 2018

As of December 31, 2021 and 2020, the tax payable related to the deemed repatriation tax is $178 million and $230 million, respectively, of which $178 million and $204 million is classified as other long-term liabilities on the consolidated balance sheet (See Note 7), respectively. The company is required to fund the balance in annual installments through 2025.

Effective Tax Rate Reconciliation

For purposes of the effective tax rate reconciliation, the company utilizes the U.S. statutory income tax rate of 21%. An analysis of the difference between the provision for income taxes and the amount computed by applying the U.S. statutory income tax rate to pre-tax income follows:      

(Dollar amounts in millions) Year Ended December 31,	2021				2020				2019
U.S. statutory income tax	$	1,071	21.0	%	$	711	21.0	%	$	615	21.0	%
State and local taxes – net of federal benefit	83		1.6	%	21		0.6	%	31		1.1	%
U.S. tax credits and deductions (a)	(23)		(0.5)	%	(8)		(0.2)	%	(31)		(1.1)	%
Non-U.S. tax differentials (b) (c)	219		4.3	%	167		4.9	%	113		3.9	%
Share-Based compensation	(56)		(1.1)	%	(53)		(1.6)	%	(41)		(1.4)	%
Divestitures	—		—	%	—		—	%	36		1.2	%
Other – net (d)	(32)		(0.6)	%	9		0.3	%	46		1.6	%
Provision for income taxes	$	1,262	24.7	%	$	847	25.0	%	$	769	26.3	%

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(a)U.S. tax credits and deductions relate to non-U.S. derived intangible income and the research and experimentation tax credit in 2021, 2020 and 2019.

(b)Primarily related to differences between the U.S. tax rate and the statutory tax rate in the countries where the company operates. Excluding (c), other permanent items and tax rate changes were not significant.

(c)2021 includes an $83 million deferred income tax charge related to a tax rate increase in the United Kingdom.

(d)Other - net includes $8 million, $11 million and $26 million of U.S tax related to Global Intangible Low-Taxed Income in 2021, 2020 and 2019, respectively and a decrease in unrecognized tax benefits and accrued interest and penalties of $47 million in 2021.

Net Deferred Tax Liabilities

Net deferred tax liabilities included in the consolidated balance sheets are comprised of the following: 

(Millions of dollars) December 31,	2021		2020
Deferred tax liabilities
Fixed assets	$	3,177	$	3,430
Goodwill	166		173
Other intangible assets (a)	3,263		3,703
Subsidiary/equity investments	586		609
Other (b)	634		791
	$	7,826	$	8,706
Deferred tax assets
Carryforwards	$	358	$	386
Benefit plans and related (c)	607		814
Inventory	57		70
Accruals and other (d)	1,042		1,243
	$	2,064	$	2,513
Less: Valuation allowances (e)	(235)		(243)
	$	1,829	$	2,270
Net deferred tax liabilities	$	5,997	$	6,436
Recorded in the consolidated balance sheets as (Note 7):
Other long-term assets	242		268
Deferred credits	6,239		6,704
	$	5,997	$	6,436

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(a)Excludes $230 million of Intangibles in 2021 due to the effects of the deconsolidation of a joint venture with operations in APAC (See Note 2).

(b)Includes $236 million in 2021 and $255 million in 2020 related to right-of-use lease assets.

(c)Includes deferred taxes of $305 million and $560 million in 2021 and 2020, respectively, related to pension / OPEB funded status (See Notes 7 and 16).

(d)Includes $246 million in 2021 and $255 million in 2020 related to lease liabilities and $42 million and $63 million in 2021 and 2020, respectively, related to research and development costs.

(e)Summary of changes in valuation allowances relating to deferred tax assets follows (millions of dollars):

	2021		2020		2019
Balance, January 1,	$	(243)	$	(222)	$	(237)
Income tax (charge) benefit	8		(21)		(31)
Merger with Linde AG	—		—		18
Other, including write-offs (i)	—		2		26
Translation adjustments	—		(2)		2
Balance, December 31,	$	(235)	$	(243)	$	(222)

(i)2019 includes $26 million related to the squeeze out of Linde AG (See Note 14).

The company evaluates deferred tax assets quarterly to ensure that estimated future taxable income will be sufficient in character (e.g., capital gain versus ordinary income treatment), amount and timing to result in their recovery. After considering the positive and negative evidence, a valuation allowance is established to reduce the assets to their realizable value when management determines that it is more likely than not (i.e., greater than 50% likelihood) that a deferred tax asset will not be realized. Considerable judgment is required in establishing deferred tax valuation allowances.

As of December 31, 2021, the company had $358 million of deferred tax assets relating to net operating losses (“NOLs”) and tax credits and $235 million of valuation allowances. These deferred tax assets include $266 million relating to NOLs of which $84 million expire within 5 years, $53 million expire after 5 years and $129 million have no expiration. The deferred tax assets also include $92 million related to credits of which $5 million expire within 5 years, $83 million expire after 5 years, and $4 million have no expiration. The valuation allowances of $235 million primarily relate to NOLs and are required because management has determined, based on financial projections and available tax strategies, that it is unlikely that the NOLs will be utilized before they expire. If events or circumstances change, valuation allowances are adjusted at that time resulting in an income tax benefit or charge.

The company has $586 million of non-U.S. income taxes accrued related to its investments in subsidiaries and equity investments as of December 31, 2021. A provision has not been made for any additional non-U.S. income tax at December 31, 2021 on approximately $32 billion related to its investments in subsidiaries because the company intends to remain indefinitely reinvested. While the $32 billion could become subject to additional non-U.S. income tax if there is a sale of a subsidiary, or earnings are remitted as dividends, it is not practicable to estimate the unrecognized deferred tax liability.

Uncertain Tax Positions

Unrecognized income tax benefits represent income tax positions taken on income tax returns but not yet recognized in the consolidated financial statements. The company has unrecognized income tax benefits totaling $387 million, $452 million and $472 million as of December 31, 2021, 2020 and 2019, respectively. If recognized, essentially all of the unrecognized tax benefits and related interest and penalties would be recorded as a benefit to income tax expense on the consolidated statements of income.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 

(Millions of dollars)	2021		2020		2019
Unrecognized income tax benefits, January 1	$	452	$	472	$	319
Additions for tax positions of prior years (a)	11		35		151
Reductions for tax positions of prior years	(11)		(34)		(3)
Additions for current year tax positions	19		11		33
Reductions for settlements with taxing authorities (b)	(60)		(39)		(26)
Foreign currency translation and other	(24)		7		(2)
Unrecognized income tax benefits, December 31	$	387	$	452	$	472

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(a)Increase primarily relates to tax positions in the United States and Europe, $66 million in 2019 related to the merger with Linde AG.

(b)Settlements are uncertain tax positions that were effectively settled with the taxing authorities, including positions where the company has agreed to amend its tax returns to eliminate the uncertainty.

The company classifies interest income and expense related to income taxes as tax expense in the consolidated statements of income. The company recognized net interest benefit of $15 million, and expense of $29 million and $1 million for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. The company had $40 million and $99 million of accrued interest and penalties as of December 31, 2021 and December 31, 2020, respectively which were recorded in other long-term liabilities in the consolidated balance sheets (See Note 7).

As of December 31, 2021, the company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below: 

Major tax jurisdictions	Open Years
North and South America
United States	2017 through 2021
Canada	2014 through 2021
Mexico	2014 through 2021
Brazil	2003 through 2021
Europe and Africa
France	2014 through 2021
Germany	2016 through 2021
Republic of South Africa	2018 through 2021
Spain	2010 through 2021
United Kingdom	2016 through 2021
Asia and Australia
Australia	2017 through 2021
China	2016 through 2021
India	2006 through 2021
South Korea	2016 through 2021

The company is currently under audit in a number of jurisdictions. As a result, it is reasonably possible that some of these matters will conclude or reach the stage where a change in unrecognized income tax benefits may occur within the next twelve months. At the time new information becomes available, the company will record any adjustment to income tax expense as required. Final determinations, if any, are not expected to be material to the consolidated financial statements. The company is also subject to income taxes in many hundreds of state and local taxing jurisdictions that are open to tax examinations.