Income taxes

12 Months Ended

Dec. 31, 2019

Reconciliation of the U.S. federal statutory rate to effective rate:



	Years ended December 31,
(Millions of dollars)	2019					2018					2017
Taxes at U.S. statutory rate	$	1,641		21.0	%	$	1,643		21.0	%	$	1,429		35.0	%
(Decreases) increases resulting from:
Non-U.S. subsidiaries taxed at other than the U.S. rate	365			4.7	%	282			3.6	%	(282		)	(6.9	)%
State and local taxes, net of federal ¹	59			0.8	%	22			0.3	%	27			0.7	%
Interest and penalties, net of tax	34			0.4	%	33			0.4	%	28			0.7	%
U.S. tax incentives	(149		)	(1.9	)%	(106		)	(1.3	)%	(52		)	(1.3	)%
Net excess tax benefits from stock-based compensation	(41		)	(0.5	)%	(56		)	(0.7	)%	(64		)	(1.6	)%
Mandatory deemed repatriation of non-U.S. earnings	(178		)	(2.3	)%	50			0.7	%	1,775			43.5	%
U.S. deferred tax rate change	—			—	%	(154		)	(2.0	)%	596			14.6	%
Valuation allowances	—			—	%	(29		)	(0.4	)%	(111		)	(2.7	)%
Other—net	15			0.2	%	13			0.1	%	(7		)	(0.2	)%
Provision (benefit) for income taxes	$	1,746		22.4	%	$	1,698		21.7	%	$	3,339		81.8	%

¹ Excludes amounts included in valuation allowances and mandatory deemed repatriation of non-U.S. earnings.

Included in the line item above labeled “Non-U.S. subsidiaries taxed at other than the U.S. rate” are the effects of local and U.S. taxes related to earnings of non-U.S. subsidiaries, changes in the amount of unrecognized tax benefits associated with these earnings, losses at non-U.S. subsidiaries without local tax benefits due to valuation allowances and other permanent differences between tax and U.S. GAAP results. Although not individually significant by jurisdiction, pre-tax permanent differences due to nondeductible net foreign exchange gains/losses of non-U.S. subsidiaries were approximately $36 million of net losses in 2019, $180 million of net losses in 2018 and $160 million of net gains in 2017.

Included in the line item above labeled “Valuation allowances” are decreases in the valuation allowance for U.S. state deferred tax assets resulting in a $63 million non-cash benefit in 2018, net of federal deferred tax adjustment at 21 percent, compared to a $111 million non-cash benefit in 2017, net of federal deferred tax adjustment at 35 percent. The primary driver of the decreases in the U.S. state valuation allowance was improved U.S. GAAP profits expected to recur in certain state jurisdictions.

Also included in 2018 was a decrease in the valuation allowance for a non-U.S. subsidiary of $25 million offset by a charge of $59 million to correct for an error which resulted in an understatement of the valuation allowance offsetting deferred tax assets for prior years. This error had the effect of overstating profit by $17 million for the year ended December 31, 2017. Management has concluded that the error was not material to any period presented.

On December 22, 2017, U.S. tax legislation was enacted containing a broad range of tax reform provisions including a corporate tax rate reduction and changes in the U.S. taxation of non-U.S. earnings. In 2018, measurement period adjustments of $104 million reduced the provisionally estimated charge of $2.371 billion recognized during the fourth quarter of 2017. A $154 million benefit revised the estimated impact of the write-down of U.S. net deferred tax assets to reflect the reduction in the U.S. corporate tax rate from 35 percent to 21 percent. This benefit primarily related to the decision to make an additional discretionary pension contribution of $1.0 billion to U.S. pension plans in 2018 which was treated as deductible on the 2017 U.S. tax return. A $50 million charge revised the estimated cost of a mandatory deemed repatriation of non-U.S. earnings, including changes in the deferred tax liability related to the amount of earnings considered not indefinitely reinvested as well as the amount of unrecognized tax benefits and state tax liabilities associated with these tax positions. During 2019, a $178 million tax benefit was recorded to adjust previously unrecognized tax benefits as a result of receipt of additional guidance related to the calculation of the mandatory deemed repatriation of non-U.S. earnings.

As a result of U.S. tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. Undistributed profits of non-U.S. subsidiaries of approximately $14 billion are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due to our legal entity structure and the complexity of U.S. and local tax laws.



The components of profit (loss) before taxes were:
	Years ended December 31,
(Millions of dollars)	2019		2018		2017
U.S.	$	2,888	$	2,131	$	240
Non-U.S.	4,924		5,691		3,842
	$	7,812	$	7,822	$	4,082

Profit before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located. Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.



The components of the provision (benefit) for income taxes were:
	Years ended December 31,
(Millions of dollars)	2019			2018			2017
Current tax provision (benefit):
U.S.¹	$	405		$	179		$	963
Non-U.S.	1,261			1,291			1,124
State (U.S.)	52			8			39
	1,718			1,478			2,126

Deferred tax provision (benefit):
U.S.¹	17			298			1,385
Non-U.S.	(7		)	4			(17		)
State (U.S.)	18			(82		)	(155		)
	28			220			1,213
Total provision (benefit) for income taxes	$	1,746		$	1,698		$	3,339
¹ Includes U.S. taxes related to non-U.S. earnings. We account for U.S. taxes on global intangible low-taxed income as a period cost.

We paid net income tax and related interest of $1,847 million, $1,429 million and $1,404 million in 2019, 2018 and 2017, respectively.

Accounting for income taxes under U.S. GAAP requires that individual tax-paying entities of the company offset all deferred tax liabilities and assets within each particular tax jurisdiction and present them as a noncurrent deferred tax liability or asset in the Consolidated Financial Position. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes at December 31, included on the following lines in Statement 3, are as follows:



	December 31,
(Millions of dollars)	2019		2018
Assets:
Noncurrent deferred and refundable income taxes	$	1,324	$	1,363
Liabilities:
Other liabilities	414		331
Deferred income taxes—net	$	910	$	1,032



The components of deferred tax assets and liabilities were:
	December 31,
(Millions of dollars)	2019			2018
Deferred income tax assets:
Tax carryforwards	$	1,218		$	1,312
Postemployment benefits other than pensions	876			793
Pension	445			785
Warranty reserves	263			237
Research expenditures	219			—
Allowance for credit losses	171			155
Post sale discounts	200			158
Other employee compensation and benefits	197			186
Lease obligations	157			—
Stock-based compensation	107			121
Other—net	250			298
	4,103			4,045

Deferred income tax liabilities:
Capital and intangible assets, including lease basis differences	(1,574		)	(1,381		)
Bond discount	(122		)	(127		)
Translation	(194		)	(190		)
Other outside basis differences	(257		)	(271		)
Undistributed profits of non-U.S. subsidiaries	(118		)	(129		)
	(2,265		)	(2,098		)
Valuation allowance for deferred tax assets	(928		)	(915		)
Deferred income taxes—net	$	910		$	1,032

At December 31, 2019, approximately $1,320 million of U.S. state tax net operating losses (NOLs) and $125 million of U.S. state tax credit carryforwards were available. The state NOLs primarily expire over the next twenty years. The state tax credit carryforwards primarily expire over the next fifteen years, with some credits having an unlimited carryforward period. In total, we have established a valuation allowance of $172 million related to certain of these carryforwards.

At December 31, 2019, approximately $264 million of U.S. foreign tax credits were available for carryforward. These credits expire in 2028.

At December 31, 2019, amounts and expiration dates of net operating loss and interest carryforwards in various non-U.S. taxing jurisdictions were:



(Millions of dollars)
2020		2021		2022		2023-2025		2026-2040		Unlimited		Total
$	104	$	53	$	81	$	59	$	451	$	3,627	$	4,375

At December 31, 2019, non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the realization of net deferred tax assets have recorded valuation allowances of $750 million, including certain entities in Luxembourg.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, follows.



Reconciliation of unrecognized tax benefits: ¹
	Years ended December 31,
(Millions of dollars)	2019			2018			2017
Balance at January 1,	$	1,796		$	1,286		$	1,032

Additions for tax positions related to current year	72			61			270
Additions for tax positions related to prior years	112			461			20
Reductions for tax positions related to prior years	(201		)	(5		)	(27		)
Reductions for settlements ²	—			(6		)	(9		)
Reductions for expiration of statute of limitations	(1		)	(1		)	—

Balance at December 31,	$	1,778		$	1,796		$	1,286

Amount that, if recognized, would impact the effective tax rate	$	1,616		$	1,716		$	1,209


¹	Foreign currency impacts are included within each line as applicable.


²	Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as a component of the provision for income taxes. We recognized a net provision for interest and penalties of $43 million, $42 million and $38 million during the years ended December 31, 2019, 2018 and 2017, respectively. The total amount of interest and penalties accrued was $233 million and $190 million as of December 31, 2019 and 2018, respectively.

On January 31, 2018, we received a Revenue Agent’s Report from the IRS indicating the end of the field examination of our U.S. income tax returns for 2010 to 2012. In the audits of 2007 to 2012 including the impact of a loss carryback to 2005, the IRS has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL (CSARL), based on the IRS examination team’s application of the “substance-over-form” or “assignment-of-income” judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant change to our unrecognized tax benefits for this position within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

With the exception of a loss carryback to 2005, tax years prior to 2007 are generally no longer subject to U.S. tax assessment. In our major non-U.S. jurisdictions including Australia, Brazil, China, Germany, India, Japan, Mexico, Switzerland, Singapore and the U.K., tax years are typically subject to examination for three to ten years. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.