INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The components of the Company’s income from continuing operations before income taxes by taxing jurisdiction were as follows:

In millions	2022		2021		2020
U.S.	$	176	$	80	$	10
Non-U.S.	291		248		85
Income from continuing operations before income taxes	$	467	$	328	$	95

Income tax provision by taxing jurisdictions was as follows:

In millions	2022		2021		2020
Current tax provision
U.S. federal	$	56	$	26	$	(4)
U.S. state and local	15		5		2
Non-U.S.	67		76		59
	$	138	$	107	$	57
Deferred tax provision
U.S. federal	$	(11)	$	(3)	$	(4)
U.S. state and local	(1)		(1)		(1)
Non-U.S.	5		(2)		(44)
	$	(7)	$	(6)	$	(49)
Income tax provision	$	131	$	101	$	8

A reconciliation of income taxes using the statutory U.S. income tax rate of 21% compared to the reported income tax provision is summarized as follows:

In millions	2022			2021			2020
Income from continuing operations before income taxes	$	467		$	328		$	95
Statutory U.S. income tax rate	21		%	21		%	21		%
Income taxes using the statutory U.S. income tax rate	98			69			20
State and local income taxes	11			5			1
Impact of rate differential on non-U.S. permanent differences and earnings	11			27			(2)
Tax audits	—			—			(10)
U.S. tax on non-U.S. earnings (GILTI and Subpart F)	11			—			1
Other, net	—			—			(2)
Income tax provision	$	131		$	101		$	8
Effective income tax rate	28		%	31		%	8		%

The components of deferred income tax assets and liabilities are as follows:

In millions	2022		2021
Deferred income tax assets:
Net operating and capital loss carryforwards	$	21	$	22
Accrued payroll and benefits	31		25
Lease liabilities	7		6
Tax credits	24		4
Other	30		38
Gross deferred income tax assets	113		95
Less: valuation allowance	(32)		(9)
Net deferred income tax asset	$	81	$	86
Deferred income tax liabilities:
Intangibles	$	(44)	$	(37)
Right of use assets	(6)		(6)
Deferred foreign income	(50)		(40)
Plants, properties and equipment	(84)		(92)
Forestlands	(48)		(45)
Gross deferred income tax liabilities	(232)		(220)
Net deferred income tax liability	$	(151)	$	(134)

The Company recognizes deferred income tax assets for deductible temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized based on estimates of future taxable income. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Based on this evaluation, as of December 31, 2022, a valuation allowance of $32 million has been recorded to reduce the deferred tax asset to the amount that is more likely than not to be realized. The valuation allowance in 2022 is primarily attributable to certain state credits and Finnish deferred assets that cannot be realized, while the valuation allowance in 2021 was primarily attributable to French deferred assets.

Although prior to the spin-off we were historically included in the consolidated income tax returns of International Paper, our income taxes for periods prior to the spin-off were computed and are reported herein under the “separate return method.” During the year ended December 31, 2022, we recorded a $3 million adjustment to the deferred tax assets and liabilities allocated during the spin-off to reflect the actual current and deferred tax positions resulting from the spin-off. The adjustment is reflected as a “change in equity related to the spin-off” in the consolidated and combined statements of changes in equity.

The Company made income tax payments, net of refunds, of $133 million during 2022.

The reconciliation of the beginning and ending amount of unrecognized tax benefits were as follows:

In millions	2022		2021		2020
Balance at January 1	$	(3)	$	(18)	$	(28)
(Additions) reductions for tax positions related to current year	(1)		(2)		(1)
Reductions for tax positions related to prior years	—		—		11
Transfer of tax positions related to prior years to Parent	—		17		—
Balance at December 31	$	(4)	$	(3)	$	(18)

Included in the balance of unrecognized tax benefits as of December 31, 2022, December 31, 2021 and December 31, 2020 are $4 million, $3 million and $18 million, respectively, of tax benefits that if recognized would affect the effective tax rate. The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. During 2022, we accrued an immaterial amount of interest, and as of

December 31, 2022, recognized a liability for interest of $1 million. During 2021, we accrued $1 million of interest, and as of December 31, 2021, recognized a liability for interest of $2 million. During 2020, we did not accrue any interest, and as of December 31, 2020, recognized a liability for interest of $2 million.

The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by International Paper do Brasil Ltda., a wholly-owned subsidiary of the Company now named Sylvamo do Brasil Ltda. (“Sylvamo Brasil”). Sylvamo Brasil received assessments for the tax years 2007-2015 totaling approximately $111 million in tax and $361 million in interest, penalties and fees as of December 31, 2022 (adjusted for variation in currency exchange rates). International Paper challenged and is managing the litigation of this matter pursuant to the Tax Matters Agreement between us and International Paper. After a previous favorable ruling challenging the basis for these assessments, there were subsequent unfavorable decisions from the Brazilian Administrative Council of Tax Appeals. On behalf of Sylvamo Brasil, International Paper has appealed and at present, has advised us that it intends to further appeal these and any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. The Company believes that the transaction underlying these assessments was appropriately evaluated, and that the Company’s tax position would be sustained, based on Brazilian tax law.

Pursuant to the terms of the Tax Matters Agreement, International Paper will pay 60%, and Sylvamo will pay 40% on up to $300 million of any assessment related to this matter, and International Paper will pay all amounts of the assessment over $300 million. Also in connection with this agreement, all decisions concerning the conduct of the litigation related to this matter, including strategy, settlement, pursuit and abandonment, will continue to be made by International Paper, which is vigorously defending Sylvamo Brasil’s historic tax position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015.

The following details the scheduled expiration dates of the Company’s December 31, 2022 net operating loss and income tax credit carryforwards:

In millions	2023 Through 2032		Indefinite		Total
Non-U.S. NOLs	$	8	$	13	$	21
U.S. federal, non-U.S. and state tax credit carryforwards	—		24		24
Total	8		37		45
Less: valuation allowance	(8)		(24)		(32)
Total, net	$	—	$	13	$	13