Income Taxes

12 Months Ended

Dec. 31, 2020

The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with American Express, provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.

The components of income tax expense for the years ended December 31 included in Credco’s Consolidated Statements of Income were as follows:


(Millions)	2020		2019		2018
Current income tax expense (benefit):
U.S. federal	$	69	$	45	$	(14)
U.S. state and local	13		13		(6)
Non-U.S.	182		23		84
Total current income tax expense	264		81		64
Deferred income tax expense (benefit):
U.S. federal	(135)		11		(28)
U.S. state and local	(4)		—		1
Non-U.S.	(4)		2		(8)
Total deferred income tax expense (benefit)	(143)		13		(35)
Total income tax expense	$	121	$	94	$	29

A reconciliation of the U.S. federal statutory rate of 21 percent as of December 31, 2020, 2019 and 2018, to Credco’s actual income tax rate on continuing operations was as follows:


	2020		2019		2018
U.S. statutory federal income tax rate	21.0	%	21.0	%	21.0	%
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal benefit	2.5		0.8		(0.4)
Non-U.S. subsidiaries earnings(a)	14.9		(3.7)		(8.7)
Tax settlements(b)	(0.9)		—		—
U.S. Tax Act	—		—		(5.6)
Other(c)	0.1		0.3		0.7
Actual tax rate	37.6	%	18.4	%	7.0	%

(a)2020 included discrete tax charges related to the attribution and taxation of income to jurisdictions outside the U.S.

(b)Related to the resolution of tax matters in various jurisdictions.

(c)Results for all years include the impact of prior year tax returns filed in the current year.

Credco records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:


(Millions)	2020		2019
Deferred tax assets:
Reserves not yet deducted for tax purposes	$	26	$	29
State income taxes	10		9
Foreign exchange loss	41		32
Deferred tax attributes(a)	110		15
Other	11		10
Gross deferred tax assets	198		95
Deferred tax liabilities:
Investment in foreign subsidiaries(b)	83		74
Gross deferred tax liabilities	83		74
Net deferred tax assets	$	115	$	21

(a)Deferred foreign tax credits and other related adjustments.

(b)Deferred state income and foreign withholding tax consequences of future cash distributions from non-U.S. subsidiaries.

Credco is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which Credco operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, Credco must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on Credco’s management judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on Credco’s management best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. Credco adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. Credco is currently under examination by the IRS for the 2017 and 2018 tax years.

The following table presents changes in unrecognized tax benefits:


(Millions)	2020		2019		2018
Balance, January 1	$	60	$	53	$	24
Increases:
Current year tax positions	4		5		4
Tax positions related to prior years	37		4		26
Effects of foreign currency translation	1		—		—
Decreases:
Settlements with tax authorities	(3)		—		—
Lapse of statute of limitations	(1)		(2)		(1)
Balance, December 31	$	98	$	60	$	53

Included in the unrecognized tax benefits of $98 million, $60 million and $53 million for December 31, 2020, 2019 and 2018, respectively, are approximately $15 million, $38 million and $32 million, respectively, that if recognized, would favorably affect the effective tax rate in a future period.

Credco believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $3 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $3 million of unrecognized tax benefits, approximately $2 million relates to amounts that, if recognized, would impact the effective tax rate in a future period.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the year ended December 31, 2020, 2019 and 2018 Credco recognized a tax charge of $130 million, $3 million, and $20 million, respectively, for interest and penalties.

Credco had approximately $170 million and $29 million accrued for the payment of interest and penalties as of December 31, 2020 and 2019, respectively.

Current taxes due to American Express or affiliates as of December 31, 2020 and 2019 were $380 million and $431 million, respectively. The amount due to American Express for 2020 includes a $441 million payable related to the one time transition tax on the repatriated earnings and profits of certain foreign subsidiaries under the Tax Act.


	Payments due by year
(Millions)	2021		2022 - 2023		2024 – 2025		2026 and thereafter		Total
Deemed repatriation tax	$	—	$	6	$	254	$	181	$	441

Net income taxes paid by Credco during 2020 and 2019 were approximately $112 million and $359 million, respectively.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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