Income Taxes

12 Months Ended

Dec. 31, 2019

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made changes to the U.S. tax code, which included (1) a reduced U.S. corporate tax rate from 35 percent to 21 percent, (2) implementation of a base erosion and anti-abuse tax, (3) general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (4) a new provision designed to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries which allows for the possibility of utilizing foreign tax credits to offset the tax liability (subject to some limitations), (5) a lower effective U.S. tax rate on certain revenues from sources outside the U.S., and (6) a one-time transition tax on certain undistributed earnings of foreign subsidiaries. In the period ended December 31, 2017, we recorded a provisional discrete net tax benefit associated with the Tax Act and related matters. The provisional amounts recorded in 2017 related to the transition tax, remeasurement of deferred taxes, our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances, and actions taken in anticipation of the Tax Act were finalized and a net expense of $36 was recorded during 2018.

During 2018, we also recorded discrete net tax expense of $81 primarily related to new guidance issued during 2018 affecting tax benefits we recorded in the period ended December 31, 2017 for the transition tax and certain tax planning actions taken in anticipation of the Tax Act.

At December 31, 2018, we finalized our policy and have elected to use the period cost method for GILTI provisions and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.

In December 2019, we generated a nonrecurring capital loss from a legal entity restructuring. We recorded a net benefit of $47 in the fourth quarter. There is no capital loss carryforward deferred tax asset remaining after utilization for 2019 capital gains.

An analysis of the provision for income taxes follows:



	Year Ended December 31
	2019			2018			2017
Current income taxes
United States	$	215		$	177		$	463
State	94			63			52
Other countries	238			229			330
Total	547			469			845
Deferred income taxes
United States	50			16			(68		)
State	(16		)	22			(3		)
Other countries	(5		)	(36		)	2
Total	29			2			(69		)
Total provision for income taxes	$	576		$	471		$	776

Income before income taxes is earned in the following tax jurisdictions:



	Year Ended December 31
	2019		2018		2017
United States	$	2,252	$	1,606	$	1,995
Other countries	398		207		996
Total income before income taxes	$	2,650	$	1,813	$	2,991

Deferred income tax assets and liabilities are composed of the following:



	December 31
	2019			2018
Deferred tax assets
Pension and other postretirement benefits	$	253		$	252
Tax credits and loss carryforwards	411			387
Lease liability	104			—
Other	388			449
	1,156			1,088
Valuation allowances	(248		)	(220		)
Total deferred tax assets	908			868

Deferred tax liabilities
Property, plant and equipment, net	795			789
Investments in subsidiaries	103			102
Goodwill	66			72
Lease asset	105			—
Other	108			143
Total deferred tax liabilities	1,177			1,106
Net deferred tax assets (liabilities)	$	(269	)	$	(238	)

Valuation allowances at the end of 2019 primarily relate to tax credits, capital loss carryforwards, and income tax loss carryforwards of $860. If these items are not utilized against taxable income, $457 of the income tax loss carryforwards will expire from 2020 through 2039. The remaining $403 has no expiration date.

Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.

Presented below is a reconciliation of the income tax provision computed at the U.S. federal statutory tax rate to the actual effective tax rate:



	Year Ended December 31
	2019		2018		2017
U.S. statutory rate applied to income before income taxes	21.0	%	21.0	%	35.0	%
State income taxes, net of federal tax benefit	2.5		3.7		1.1
Statutory rates other than U.S. statutory rate	0.7		0.2		(3.1	)
Routine tax incentives	(3.5	)	(5.4	)	(2.7	)
Net tax (benefit) cost on foreign income	0.8		1.4		(0.7	)
Net impact of the Tax Act	—		6.4		(2.5	)
Valuation allowance	1.0		1.6		(0.1	)
Nonrecurring capital loss	(1.8	)	—		—
Other - net^(a)	1.0		(2.9	)	(1.1	)
Effective income tax rate	21.7	%	26.0	%	25.9	%


(a)	Other - net is composed of numerous items, none of which is greater than 1.05 percent and 1.75 percent of income before income taxes in 2019-2018 and 2017, respectively.

As of December 31, 2019, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $7.7 billion. Earnings of $5.6 billion were previously subject to tax, primarily due to the one-time transition tax on foreign earnings required by the Tax Act. Any additional taxes due with respect to such previously-taxed earnings, if repatriated, would generally be limited to foreign and U.S. state income taxes. Deferred taxes have been recorded on $0.9 billion of earnings, most of which were previously taxed for U.S. federal income tax purposes, of foreign consolidated subsidiaries expected to be repatriated. We do not intend to distribute the remaining $4.7 billion of previously-taxed foreign earnings and therefore have not recorded deferred taxes for foreign and U.S. state income taxes on such earnings.

Prior to the transition tax, we had an excess of the amount for financial reporting over the tax basis in our foreign subsidiaries. While the transition tax resulted in a reduction of the excess amount for financial reporting over the tax basis in our foreign subsidiaries, any remaining amount of financial reporting over tax basis after such reduction could be subject to additional taxes, if repatriated. However, we consider any excess to be indefinitely reinvested. The determination of deferred tax liabilities on the amount of financial reporting over tax basis or the $4.7 billion of previously taxed foreign earnings is not practicable.

Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits:



	2019			2018			2017
Balance at January 1	$	298		$	354		$	321
Gross increases for tax positions of prior years	36			75			50
Gross decreases for tax positions of prior years	(13		)	(86		)	(23		)
Gross increases for tax positions of the current year	87			41			37
Settlements	(13		)	(70		)	(19		)
Other	(12		)	(16		)	(12		)
Balance at December 31	$	383		$	298		$	354

Of the amounts recorded as unrecognized tax benefits at December 31, 2019, $326 would reduce our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During each of the three years ended December 31, 2019, the net impact of interest and penalties was not significant. Total accrued penalties and net accrued interest was $16 and $20 at December 31, 2019 and 2018, respectively.

It is reasonably possible that a number of uncertainties could be resolved within the next 12 months. The aggregate resolution of the uncertainties could be up to $180, while none of the uncertainties is individually significant. Resolution of these matters is not expected to have a material effect on our financial condition, results of operations or liquidity.

As of December 31, 2019, the following tax years remain subject to examination for the major jurisdictions where we conduct business:



Jurisdiction	Years
United States	2016 to 2019
United Kingdom	2016 to 2019
Brazil	2014 to 2019
Australia	2014 to 2019
China	2009 to 2019

Our U.S. federal income tax returns have been audited through 2015 and U.S. federal income tax amended returns are being audited for 2004, 2005, 2007 and 2013. We have various U.S. federal income tax return positions in administrative appeals for 2014 and 2015.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various state income tax return positions in the process of examination, administrative appeals or litigation.

The Brazilian tax authority, Secretaria da Receita Federal do Brasil ("RFB"), concluded an audit for the taxable periods from 2008-2013. This audit included a review of our determinations of amortization of certain goodwill arising from prior acquisitions in Brazil, and the RFB has proposed adjustments that effectively eliminate the goodwill amortization benefits related to these transactions. Administrative appeals have been exhausted, and the dispute is moving into the judicial phase. The amount of the proposed tax adjustments and penalties is approximately $90 as of December 31, 2019 (translated at the December 31, 2019 currency exchange rate). The amount ultimately in dispute will be significantly greater because of interest. We believe we have meritorious defenses and intend to vigorously defend these proposed adjustments; however, it is expected to take a number of years to reach resolution of this matter.