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INCOME TAXES

12 Months Ended

Dec. 31, 2019

The financial statements for Dow Inc. and TDCC are substantially similar, including the reporting of current and deferred tax expense (benefit), provision for income taxes on continuing operations, and deferred tax asset and liability balances. As a result, the following income tax discussion pertains to Dow Inc. only.



Geographic Allocation of Income and Provision for Income Taxes on Continuing Operations
In millions	2019			2018			2017
Income (loss) from continuing operations before income taxes
Domestic ¹	$	(1,196	)	$	745		$	(2,226	)
Foreign ²	(51		)	3,004			2,463
Income (loss) from continuing operations before income taxes	$	(1,247	)	$	3,749		$	237
Current tax expense (benefit)
Federal	$	(287	)	$	324		$	(864	)
State and local	25			13			4
Foreign	960			901			971
Total current tax expense	$	698		$	1,238		$	111
Deferred tax expense (benefit)
Federal ³	$	52		$	(318	)	$	1,499
State and local	19			(32		)	85
Foreign	(299		)	(79		)	(171		)
Total deferred tax expense (benefit)	$	(228	)	$	(429	)	$	1,413
Provision for income taxes on continuing operations	$	470		$	809		$	1,524
Income (loss) from continuing operations, net of tax	$	(1,717	)	$	2,940		$	(1,287	)


1.	The 2019 amount includes approximately $1.4 billion of expense related to goodwill impairment and environmental matters. The 2017 amount includes approximately $1.4 billion of expense related to goodwill impairment and litigation settlements. See Notes 14 and 17 for additional information.


2.	The 2019 amount includes approximately $1.8 billion of expense related to Sadara related charges. See Note 13 for additional information.


3.	The 2018 and 2017 amounts reflect the tax impact of The Act which accelerated the utilization of tax credits and required remeasurement of all U.S. deferred tax assets and liabilities.

In 2017, as a result of the Merger and subsequent change in the Company's ownership, certain net operating loss carryforwards available for the Company’s consolidated German tax group were derecognized. In addition, the sale of stock between two consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the business separations. As a result, in 2017, the Company recorded a charge of $267 million to “Provision for income taxes on continuing operations” in the consolidated statements of income.



Reconciliation to U.S. Statutory Rate	2019		2018		2017
Statutory U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
Equity earnings effect	(3.2	)	(3.3	)	(52.7	)
Foreign income taxed at rates other than the statutory U.S. federal income tax rate¹	(14.8	)	6.7		(61.2	)
U.S. tax effect of foreign earnings and dividends	1.9		(0.7	)	(8.4	)
Unrecognized tax benefits	1.0		0.2		13.5
Divestitures ²	—		0.8		142.0
Impact of tax reform ³	11.1		(3.4	)	367.8
Federal tax accrual adjustment ⁴	10.4		—		—
State and local income taxes	(4.4	)	0.4		11.4
Sadara related charges ⁵	(29.5	)	—		—
Goodwill impairment ⁶	(17.5	)	—		220.8
Excess tax benefits from stock-based compensation	1.2		(1.0	)	(39.7	)
Other - net	(14.9	)	0.9		14.5
Effective Tax Rate	(37.7	)%	21.6	%	643.0	%


1.	Includes the impact of valuation allowances in foreign jurisdictions.


2.	See Note 6 for additional information.


3.	Includes the impact of tax reform in Switzerland and the U.S.


4.	Primarily related to the favorable impact of the restoration of tax basis in assets, driven by a recent court judgment that did not involve the Company.


5.	See Note 13 for additional information.


6.	See Note 14 for additional information.

On December 22, 2017, The Act was enacted. The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and moved to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, income tax effects of The Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.

•

As a result of The Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. The Company recorded a cumulative benefit of $81 million ($79 million benefit in 2018 and $2 million benefit in 2017) to “Provision for income taxes on continuing operations” in the consolidated statements of income with respect to the remeasurement of the Company's deferred tax balances.

•

The Act required a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits, which resulted in a one-time transition tax. The Company recorded a cumulative charge of $789 million ($85 million benefit in 2018 and $874 million charge in 2017) to "Provision for income taxes on continuing operations" in the consolidated statements of income with respect to the one-time transition tax.


•	In 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to inventory was a charge of $38 million to "Provision for income taxes on continuing operations" in the consolidated statements of income.


•	For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.



Deferred Tax Balances at Dec 31	2019					2018
In millions	Assets			Liabilities		Assets			Liabilities
Property	$	494		$	3,177	$	406		$	2,519
Tax loss and credit carryforwards	1,920			—		2,079			—
Postretirement benefit obligations	2,432			210		2,115			143
Other accruals and reserves	1,678			43		1,220			151
Intangibles	120			688		157			954
Inventory	28			234		53			239
Investments	125			48		190			84
Other – net	851			120		620			247
Subtotal	$	7,648		$	4,520	$	6,840		$	4,337
Valuation allowances	(1,262		)	—		(1,225		)	—
Total	$	6,386		$	4,520	$	5,615		$	4,337



Operating Loss and Tax Credit Carryforwards at Dec 31	2019		2018
In millions	Assets		Assets
Operating loss carryforwards
Expire within 5 years	$	263	$	245
Expire after 5 years or indefinite expiration	1,133		1,196
Total operating loss carryforwards	$	1,396	$	1,441
Tax credit carryforwards
Expire within 5 years	$	32	$	32
Expire after 5 years or indefinite expiration	492		606
Total tax credit carryforwards	$	524	$	638
Total operating loss and tax credit carryforwards	$	1,920	$	2,079

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $6,851 million at December 31, 2019 and $6,014 million at December 31, 2018. The Act imposed U.S. tax on all post-1986 foreign unrepatriated earnings accumulated through December 31, 2017. Unrepatriated earnings generated after December 31, 2017, are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.

The following table provides a reconciliation of the Company's unrecognized tax benefits:



Total Gross Unrecognized Tax Benefits
In millions	2019			2018			2017
Total unrecognized tax benefits at Jan 1	$	314		$	255		$	231
Decreases related to positions taken on items from prior years	(1		)	(8		)	(4		)
Increases related to positions taken on items from prior years	16			68			37
Increases related to positions taken in the current year	10			2			12
Settlement of uncertain tax positions with tax authorities	(19		)	—			(12		)
Decreases due to expiration of statutes of limitations	—			(1		)	(9		)
Foreign exchange gain	(1		)	(2		)	—
Total unrecognized tax benefits at Dec 31	$	319		$	314		$	255
Total unrecognized tax benefits that, if recognized, would impact the effective tax rate	$	234		$	235		$	245
Total amount of interest and penalties (benefit) recognized in "Provision for income taxes on continuing operations"	$	(11	)	$	(12	)	$	2
Total accrual for interest and penalties recognized in the consolidated balance sheets	$	100		$	109		$	110

On January 9, 2017, the U.S. Supreme Court denied certiorari in the Company’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary. The Company has fully accrued the position and does not expect a future impact to “Provision for income taxes on continuing operations” in the consolidated statements of income as a result of the ruling.

Prior to the separation, TDCC and its consolidated subsidiaries were included in DowDuPont's consolidated federal income tax group and consolidated tax return. Generally, the consolidated tax liability of the DowDuPont U.S. tax group for each year will be apportioned among the members of the consolidated group based on each member’s separate taxable income. TDCC and DuPont intend that, to the extent federal and/or state corporate income tax liabilities are reduced through the utilization of tax attributes of the other, settlement of any receivable and payable generated from the use of the other party’s sub-group attributes will be in accordance with a tax sharing agreement and/or tax matters agreement. At December 31, 2019, the Company had a receivable of $312 million as part of the tax sharing agreement, which is included in "Noncurrent receivables" in the consolidated balance sheets. At December 31, 2018, the Company had a receivable related to the tax sharing agreement of $89 million, included in "Accounts and notes receivable - Other" in the consolidated balance sheets.

Each year, the Company files tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the Company's results of operations.

Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 2019	Earliest Open Year
Jurisdiction	Earliest Open Year
Argentina	2013
Brazil	2006
Canada	2012
China	2009
Germany	2010
Italy	2015
The Netherlands	2016
Switzerland	2016
United States:
Federal income tax	2004
State and local income tax	2004

The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $44 million at December 31, 2019 ($91 million at December 31, 2018). This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.