Income Taxes

12 Months Ended

Dec. 31, 2019

8. INCOME TAXES

For the years ended December 31, income (loss) from continuing operations before income taxes consisted of the following:



In millions	2019			2018			2017
Income (loss) before income taxes
United States	$	(25	)	$	(262	)	$	149
Foreign	366			301			333
Total income (loss) from continuing operations before income taxes	$	341		$	39		$	482

For the years ended December 31, income tax expense (benefit) consisted of the following:



In millions	2019			2018			2017
Income tax expense (benefit)
Current
Federal	$	1		$	18		$	14
State	2			—			2
Foreign	78			42			54
Deferred
Federal	(19		)	(2		)	178
State	—			1			(3		)
Foreign	(335		)	14			(3		)
Total income tax expense (benefit)	$	(273	)	$	73		$	242

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:



In millions	2019			2018			2017
Income tax expense at the U.S. federal tax rate of 21% for 2019 and 2018, respectively and 35% for 2017	$	72		$	8		$	169
Foreign income tax differential	10			20			(38		)
State and local income taxes (net of federal effect)	3			2			(1		)
Other U.S. permanent book/tax differences	3			—			1
Meals and entertainment expense	2			2			2
Executive compensation	9			4			1
Employee share-based payments	2			3			(3		)
Impact of intangible asset transfer	(245		)	—			—
Gains/losses on entity liquidations	(12		)	—			—
Foreign derived intangible income deduction	(7		)	(1		)	—
Change in branch tax status	(17		)	(9		)	—
Goodwill impairment	—			30			—
Research and development tax credits	(5		)	(6		)	(4		)
U.S. manufacturing deduction	—			—			(9		)
U.S. valuation allowance ⁽¹⁾	(16		)	16			—
U.S tax reform	—			37			130
Foreign valuation allowance	(74		)	2			—
Change in liability for unrecognized tax benefits ⁽¹⁾	4			(23		)	(2		)
Prior period adjustments	(1		)	(11		)	—
Other, net	(1		)	(1		)	(4		)
Total income tax expense (benefit)	$	(273	)	$	73		$	242

⁽¹⁾ Does not include the impact of items included in the U.S. Tax Reform category

NCR's tax provisions include a provision for income taxes in certain tax jurisdictions where its subsidiaries are profitable, but reflect only a portion of the tax benefits related to certain foreign subsidiaries' tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. During 2019, our tax rate was impacted by the transfer of certain intangible assets among our wholly-owned subsidiaries, resulting in a variety of tax effects including the establishment of deferred tax assets, recognition of tax gains and losses and other deferred tax adjustments. In total, these tax impacts created a net tax benefit associated with the intangible asset transfer of $264 million. Our tax rate was also impacted by foreign valuation allowance releases of $74 million. During 2018, the tax rate was impacted by $37 million relating to U.S. Tax Reform. During 2017, the tax rate was impacted by a provisional charge of $130 million relating to U.S. Tax Reform.

During 2019, we transferred certain intangible assets among our wholly-owned subsidiaries, which resulted in the establishment of deferred tax assets of $274 million. The establishment of deferred tax assets from intra-entity transfers of intangible assets required us to make significant estimates and assumptions to determine the fair value of such intangible assets. Critical estimates in valuing the intangible assets include, but are not limited to, internal revenue and expense forecasts, and discount rates. The sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.

NCR did not provide additional U.S. income tax or foreign withholding taxes, if any, on approximately $3.1 billion of undistributed earnings of its foreign subsidiaries, given the intention continues to be that those earnings are reinvested indefinitely. The amount of unrecognized deferred tax liability associated with these indefinitely reinvested earnings is approximately $222 million. The unrecognized deferred tax liability is made up of a combination of U.S. and state income taxes and foreign withholding taxes.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income/loss, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.

Deferred income tax assets and liabilities included in the Consolidated Balance Sheets as of December 31 were as follows:



In millions	2019			2018
Deferred income tax assets
Employee pensions and other benefits	$	243		$	223
Other balance sheet reserves and allowances	182			141
Tax loss and credit carryforwards	625			682
Capitalized research and development	47			53
Lease liabilities	104			—
Intangibles	127			—
Property, plant and equipment	11			11
Other	9			38
Total deferred income tax assets	1,348			1,148
Valuation allowance	(352		)	(485		)
Net deferred income tax assets	996			663
Deferred income tax liabilities
Intangibles	—			151
Right of use assets	102			—
Capitalized software	98			78
Other	—			7
Total deferred income tax liabilities	200			236
Total net deferred income tax assets	$	796		$	427

NCR recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of the future benefits from those assets. The valuation allowances cover deferred tax assets, primarily tax loss carryforwards and foreign tax credits, in tax jurisdictions where there is uncertainty as to the ultimate realization of those tax losses and credits. If we are unable to generate sufficient future taxable income of the proper source in the time period within which the temporary differences underlying our deferred tax assets become deductible, or before the expiration of our loss and credit carryforwards, additional valuation allowances could be required.

As of December 31, 2019, NCR had U.S. federal, U.S. state (tax effected), and foreign tax attribute carryforwards of approximately $1.5 billion. The net operating loss carryforwards that are subject to expiration will expire in the years 2020 through 2038. This includes U.S. tax credit carryforwards of $263 million. Approximately $5 million of the credit carryforwards will be refunded by 2022 due to U.S. Tax Reform, and $258 million of the credit carryforwards expire in the years 2020 through 2039. As a result of stock ownership changes our U.S. tax attributes could be subject to limitations under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, if further material stock ownership changes occur.

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the years ended December 31:



In millions	2019			2018			2017
Gross unrecognized tax benefits - January 1	$	110		$	196		$	183
Increases related to tax positions from prior years	7			9			3
Decreases related to tax positions from prior years	(4		)	(50		)	(1		)
Increases related to tax provisions taken during the current year	14			9			23
Settlements with tax authorities	(5		)	(45		)	(4		)
Lapses of statutes of limitation	(1		)	(9		)	(8		)
Total gross unrecognized tax benefits - December 31	$	121		$	110		$	196

Of the total amount of gross unrecognized tax benefits as of December 31, 2019, $87 million would affect NCR’s effective tax rate if realized. The Company’s liability arising from uncertain tax positions is recorded in income tax accruals and other current liabilities in the Consolidated Balance Sheets.

We recognized interest and penalties associated with uncertain tax positions as part of the provision for income taxes in our Consolidated Statements of Operations of $2 million of expense, $9 million of benefit, and $2 million of expense for the years ended December 31, 2019, 2018, and 2017, respectively. The gross amount of interest and penalties accrued as of December 31, 2019 and 2018 was $35 million and $33 million, respectively.

In the U.S., NCR files consolidated federal and state income tax returns where statutes of limitations generally range from three to five years. U.S. federal tax years remain open from 2015 forward. Years beginning on or after 2001 are still open to examination by certain foreign taxing authorities, including India, Egypt, and other major taxing jurisdictions.

During 2020, the Company expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As of December 31, 2019, we estimate that it is reasonably possible that unrecognized tax benefits may decrease by $12 million to $19 million in the next 12 months due to the resolution of these tax matters.