Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impacts of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.

The estimated annual effective tax rate, before discrete items, applied to ordinary income was 34.5% in both the third quarter and nine months ended September 30, 2020, and 75.8% in both the third quarter and nine months ended September 30, 2019. The 2020 rate was higher than the U.S. federal statutory rate of 21% primarily due to U.S. tax on foreign earnings, incremental state tax and foreign taxes on earnings also subject to U.S. federal income tax, and higher nondeductible expenses. The 2019 rate was higher due to U.S. tax on foreign earnings including estimated U.S. tax on Global Intangible Low-Taxed Income ("GILTI"), nondeductible impairment of certain domestic and foreign long-lived assets, and other nondeductible expenses.

For the third quarter of 2020 and 2019, the tax rate including discrete items was 400.0% (benefit on a relatively small loss) and 64.4% (provision on income), respectively. For the third quarter of 2020, the Company recorded a discrete tax benefit of $41 related to a $36 benefit for a U.S. tax law change as described below, a net $6 benefit for prior year items, and a net $1 charge for other items. For the third quarter of 2019, the Company recorded a discrete tax charge of $14 related to a net $12 charge for prior year items, and a net $2 charge for other items.

For the nine months ended September 30, 2020 and 2019, the tax rate including discrete items was 5.0% (benefit on income) and 33.3% (provision on income), respectively. For the nine months ended September 30, 2020, the Company recorded a discrete tax benefit of $39 related to a $36 benefit for a U.S. tax law change as described below, a $6 charge for the remeasurement of deferred tax balances in various jurisdictions as a result of the Arconic Inc. Separation Transaction, a $5 benefit for stock compensation, a net $2 benefit for prior year items, and a net $2 benefit for other items. For the nine months ended September 30, 2019, the Company recorded a discrete tax benefit of $23 related to a $25 benefit to deduct prior year foreign taxes rather than claim a U.S. foreign tax credit, a $12 benefit to remeasure certain deferred tax assets as a result of a foreign tax rate change, a net $12 charge for prior year items, and a net $2 charge for other items.

The U.S. tax law change, applicable to taxable years beginning in 2018, relates to final regulations issued in July 2020 that provide for an exclusion of certain high-taxed foreign earnings from the calculation of tax on GILTI. The Company intends to amend its 2018 and 2019 U.S. income tax returns to elect the high-tax exclusion, thereby reducing the amount of GILTI in those years and resulting in a discrete tax benefit during the third quarter of 2020.

The tax provisions for the third quarter and nine months ended September 30, 2020 and 2019 were comprised of the following:

	Third quarter ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Pre-tax income (loss) at estimated annual effective income tax rate before discrete items	$	(4)	$	124	$	34	$	9
Impact of change in estimated annual effective tax rate on previous quarter’s pre-tax income	(2)		(37)		—		—
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized	(1)		4		—		18
Other discrete items	(41)		14		(39)		(23)
Provision (benefit) for income taxes	$	(48)	$	105	$	(5)	$	4