Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Components of Income Tax Expense

Components of earnings before income taxes are as follows:

Years ended December 31	2023		2022		2021
United States	$	1,744	$	1,312	$	1,030
Other nations	402		203		522
	$	2,146	$	1,515	$	1,552

Components of income tax expense are as follows:

Years ended December 31	2023		2022		2021
United States Federal	$	269	$	240	$	134
Other nations	125		159		98
States (U.S.)	70		83		36
Current income tax expense	464		482		268
United States Federal	(30)		(179)		(2)
Other nations	(9)		(118)		22
States (U.S.)	7		(37)		14
Deferred income tax expense (benefit)	(32)		(334)		34
Total income tax expense	$	432	$	148	$	302

Differences between income tax expense computed at the U.S. federal statutory tax rate of 21% and income tax expense as reflected in the Consolidated Statements of Operations are as follows:

Years ended December 31	2023				2022				2021
Income tax expense at statutory rate	$	450	21.0	%	$	318	21.0	%	$	326	21.0	%
State income taxes, net of federal benefit	71		3.3	%	76		5.0	%	55		3.5	%
Non-U.S. tax expense on non-U.S. earnings	15		0.7	%	1		0.1	%	8		0.5	%
U.S. tax expense (benefit) on undistributed non-U.S. earnings	(44)		(2.1)	%	(43)		(2.8)	%	6		0.4	%
Intra-group IP transfer	—		—	%	(77)		(5.1)	%	—		—	%
Stock compensation	(33)		(1.5)	%	(68)		(4.5)	%	(32)		(2.1)	%
Valuation allowances	(13)		(0.6)	%	(51)		(3.4)	%	(34)		(2.2)	%
Research credits	(19)		(0.9)	%	(16)		(1.1)	%	(20)		(1.3)	%
Reserve for uncertain tax positions	(3)		(0.1)	%	(6)		(0.4)	%	(10)		(0.6)	%
Other tax expense (benefit)	8		0.4	%	14		0.9	%	3		0.2	%
	$	432	20.1	%	$	148	9.8	%	$	302	19.5	%

The effective tax rate for 2023 was below the current U.S. federal statutory rate of 21% primarily due to the recognition of excess tax benefits on share-based compensation, the foreign derived intangible income deduction, and generation of research and development credits, offset by 2023 estimated U.S. state income taxes.

In 2021, the Organization of Economic Cooperation and Development ("OECD") introduced its Pillar Two Framework Model Rules ("Pillar 2"), that was supported by over 130 countries worldwide, which is designed to impose a 15% global minimum tax on adjusted financial results. Certain aspects of Pillar 2 took effect on January 1, 2024, while other aspects go into effect on January 1, 2025. The Company is evaluating the potential impact of Pillar 2 on its business, as the countries in which it operates are enacting legislation implementing Pillar 2. While many aspects of the application of Pillar 2 remain to be clarified, the Company does not expect Pillar 2 to materially impact its tax liability.

Deferred tax balances that were recorded within Accumulated other comprehensive loss in the Company’s Consolidated Balance Sheet, rather than Income tax expense, are the result of retirement benefit adjustments and currency translation adjustments. The adjustments were benefits of $14 million for the year ended December 31, 2023, charges of $2 million for the year ended December 31, 2022 and charges of $21 million for the year ended December 31, 2021.

The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and generally, except for certain earnings that the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign income tax applicable to the earnings. As a result of the 2017 U.S. Tax Cuts and Jobs Act ("the Tax Act"), dividends from foreign subsidiaries are now exempt

or the earnings have been previously subject to U.S. tax. As a result, the tax accrual for undistributed foreign earnings is limited primarily to foreign withholding taxes and tax on inherent capital gains that would result from distribution of foreign earnings which are not permanently reinvested, and such earnings may be distributed without an additional charge.

Undistributed foreign earnings that the Company intends to reinvest indefinitely amounted to, in the aggregate, $1.8 billion at December 31, 2023. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities on such earnings; however, due to the above-mentioned changes made under the Tax Act, the Company believes that the additional U.S. or foreign income tax charge with respect to such earnings, if distributed, would be immaterial.

Gross deferred tax assets were $2.1 billion and $2.2 billion for December 31, 2023 and December 31, 2022, respectively. Deferred tax assets, net of valuation allowances, were $2.0 billion at December 31, 2023 and December 31, 2022. Gross deferred tax liabilities were $1.0 billion at December 31, 2023 and December 31, 2022.

Significant components of deferred tax assets (liabilities) are as follows: 

December 31	2023		2022
Inventory	$	30	$	38
Accrued liabilities and allowances	77		67
Employee benefits	270		290
Capitalized items	146		95
Tax basis differences on investments	4		6
Depreciation tax basis differences on fixed assets	(2)		1
Undistributed non-U.S. earnings	(28)		(38)
Tax attribute carryforwards	115		298
Business reorganization	9		7
Warranty and customer liabilities	22		22
Deferred revenue and costs	406		382
Valuation allowances	(63)		(221)
Operating lease assets	(120)		(116)
Operating lease liabilities	129		129
Other	10		4
	$	1,005	$	964

At December 31, 2023 and December 31, 2022, the Company had valuation allowances of $63 million and $221 million, respectively, against its deferred tax assets, including $44 million and $46 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company’s U.S. valuation allowance decreased $156 million during 2023 primarily due to the expiration of the Company's U.S. foreign tax credits. The Company is evaluating a business initiative that, if implemented, could allow for additional utilization of its foreign tax credit carryforward on its 2023 U.S. tax return. As of December 31 2023, the Company was continuing to assess the initiative's feasibility and was not in a position to recognize the tax benefit associated with the utilization of additional foreign tax credit carryforward. If the Company decides to proceed with the initiative, the financial statement impact would be reflected in the period in which it makes its decision. The Company's Non-U.S. valuation allowance decreased $2 million during 2023 primarily due to a change in the realizability of certain Non-US deferred tax assets and the expiration of tax attributes. The Company believes that the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Tax attribute carryforwards are as follows: 

December 31, 2023	Gross Tax Loss		Tax Effected		Expiration Period
United States:
U.S. tax losses	$	129	$	27	2024-2037
General business credits	—		2		2030-2039
State tax losses	—		12		2024-2044
State tax credits	—		6		2024-2042
Non-U.S. subsidiaries:
Japan tax losses	6		2		2024-2029
United Kingdom tax losses	146		36		Unlimited
Canada tax losses	18		5		2034-2043
Canada tax credits	—		6		2037-2043
Spain tax credits	—		6		2024-2029
Other subsidiaries tax losses	49		10		Various
Other subsidiaries tax credits	—		3		Various
			$	115

The Company had unrecognized tax benefits of $32 million and $35 million at December 31, 2023 and December 31, 2022, respectively, of which approximately $27 million and $29 million, if recognized, would have affected the effective tax rate for 2023 and 2022, respectively.

A roll-forward of unrecognized tax benefits is as follows: 

(in millions)	2023		2022
Balance at January 1	$	35	$	43
Additions based on tax positions related to current year	1		1
Additions for tax positions of prior years	1		2
Reductions for tax positions of prior years	(1)		(1)
Settlements and agreements	—		(4)
Lapse of statute of limitations	(4)		(6)
Balance at December 31	$	32	$	35

The Company recorded $26 million and $29 million of unrecognized tax benefits in Other liabilities at December 31, 2023 and December 31, 2022, respectively.

The Company has several US state and non-U.S. audits pending. A summary of open tax years by major jurisdiction is presented below: 

Jurisdiction	Tax Years
United States	2020-2023
Australia	2019-2023
Canada	2019-2023
Germany	2018-2023
India	1997-2023
Israel	2019-2023
Poland	2018-2023
Malaysia	2016-2023
United Kingdom	2021-2023

Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or liquidity. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s results of operations in the periods, and as of the dates, on which the matters are ultimately resolved.

Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be up to a $4 million tax benefit.

At December 31, 2023, the Company had $23 million accrued for interest and $12 million accrued for penalties on unrecognized tax benefits. At December 31, 2022, the Company had $22 million and $12 million accrued for interest and penalties, respectively, on unrecognized tax benefits. The Company's policy is to classify the interest and penalty as a component of interest expense and other expense, respectively.