Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

A reconciliation of the U.S. federal statutory rate to the effective rate for the years ended December 31, was as follows: 

(Millions of dollars)
	2021				2020				2019
Taxes computed at U.S. statutory rates	$	146	21.0	%	$	91	21.0	%	$	132	21.0	%
(Decreases) increases in taxes resulting from:
State Income Tax, net of Federal Tax	3		0.4	%	(1)		(0.2)	%	1		0.2	%
Non-U.S. Subsidiaries taxed at other than the U.S. rate	22		3.2	%	26		6.0	%	34		5.4	%
Prior year tax adjustments	—		—	%	3		0.7	%	9		1.4	%
Valuation allowances	5		0.7	%	10		2.3	%	21		3.4	%
Other, net	2		0.3	%	(3)		(0.7)	%	(1)		(0.2)	%
Provision for income taxes	$	178	25.6	%	$	126	29.1	%	$	196	31.2	%

Included in the line item above labeled “Non-U.S. subsidiaries taxed at other than the U.S. rate” are the effects of local and U.S. taxes related to earnings of non-U.S. subsidiaries and other permanent differences between tax and U.S. GAAP results.

The provision for income taxes includes a prior year net tax charge of $3 million for 2020 and $9 million for 2019 to reduce non-U.S. deferred tax assets in certain jurisdictions to balances supporting the expected reversal of temporary differences between tax and U.S. GAAP balances.

The provision for income taxes for 2021, 2020 and 2019 also includes an increase in valuation allowance for non-U.S. deferred tax assets due to a decrease in consistent and/or sustainable profitability to support their recognition in certain jurisdictions, resulting in a $5 million, $10 million and $21 million non-cash expense, respectively.

Distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. We have not recorded a deferred tax liability for withholding taxes in non-U.S. jurisdictions where earnings are considered indefinitely reinvested. If management intentions or U.S. tax law changes in the future, there could be an impact on the provision for income taxes to record an incremental tax liability in the period the change occurs.

The components of Profit before income taxes for the years ended December 31, were as follows: 

(Millions of dollars)
	2021		2020		2019
U.S.	$	288	$	99	$	257
Non-U.S.	407		335		371
Total	$	695	$	434	$	628

Profit before income taxes, as shown above, is based on the location of the entity to which such earnings are attributable.  Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located.  Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the Provision for income taxes were as follows for the years ended December 31: 

(Millions of dollars)
	2021		2020		2019
Current income tax provision:
U.S.	$	101	$	46	$	13
Non-U.S.	162		80		161
State (U.S.)	5		1		2
	268		127		176
Deferred income tax provision:
U.S.	(56)		(45)		32
Non-U.S.	(33)		46		(11)
State (U.S.)	(1)		(2)		(1)
	(90)		(1)		20
Total Provision for income taxes	$	178	$	126	$	196

Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax returns.  We join Caterpillar in the filing of a consolidated U.S. Federal income tax return and certain state income tax returns. In accordance with our tax sharing agreement with Caterpillar, we generally pay to or receive from Caterpillar our allocated share of income taxes or credits reflected in these consolidated filings. This amount is calculated on a separate return basis by taking taxable income times the applicable statutory tax rate and includes payment for certain tax attributes earned during the year.

Income taxes payable were $279 million and $198 million as of December 31, 2021 and 2020, respectively, and are included in Other liabilities in the Consolidated Statements of Financial Position.

Accounting for income taxes under generally accepted accounting principles requires individual tax-paying entities of the Company to offset deferred income tax assets and liabilities within each particular tax jurisdiction and present them as a single amount in the Consolidated Statements of Financial Position.  Amounts in different tax jurisdictions cannot be offset against each other.  The amounts of deferred income taxes at December 31, included in the following lines in our Consolidated Statements of Financial Position were: 

(Millions of dollars)
	2021		2020
Assets:
Other assets	$	107	$	102
Liabilities:
Other liabilities	(592)		(629)
Deferred income taxes, net	$	(485)	$	(527)

Our consolidated deferred income taxes consisted of the following components as of December 31: 

(Millions of dollars)
	2021		2020
Deferred income tax assets:
Allowance for credit losses	$	90	$	100
Tax carryforwards	78		61
	168		161
Deferred income tax liabilities (primarily lease basis differences)	(425)		(508)
Valuation allowance for deferred income tax assets	(39)		(33)
Deferred income tax on translation adjustment	(189)		(147)
Deferred income taxes, net	$	(485)	$	(527)

As of December 31, 2021, amounts and expiration dates of net operating loss (NOL) carryforwards in various U.S. state taxing jurisdictions were: 

(Millions of dollars)
2022		2023		2024		2025		2026-2041		Unlimited		Total
$	5	$	6	$	—	$	—	$	77	$	5	$	93

The gross deferred income tax asset associated with these NOL carryforwards is $7 million as of December 31, 2021, partially offset by a valuation allowance of $1 million.

In some U.S. state income tax jurisdictions, we join with other Caterpillar entities in filing combined income tax returns.  In other U.S. state income tax jurisdictions, we file on a separate, stand-alone basis.

At December 31, 2021, approximately $1 million of U.S. foreign tax credits from 2017 were available for carryforward. These credits expire in 2028.

As of December 31, 2021, amounts and expiration dates of NOL carryforwards in various non-U.S. taxing jurisdictions were: 

(Millions of dollars)
2022		2023		2024		2025		2026-2032		Unlimited		Total
$	—	$	2	$	3	$	1	$	32	$	284	$	322

Valuation allowances of $38 million have been recorded at certain non-U.S. subsidiaries that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred income tax assets.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for uncertain income tax positions, including positions impacting only the timing of income tax benefits was as follows: 

(Millions of dollars)
	2021		2020		2019
Reconciliation of unrecognized income tax benefits(1):
Balance at beginning of year	$	119	$	119	$	119
Additions for income tax positions related to current year	2		—		—
Additions for income tax positions related to prior year	10		—		—
Balance at end of year	$	131	$	119	$	119
Amount that, if recognized, would impact the effective tax rate	$	131	$	119	$	119

(1) Foreign currency translation amounts are included within each line as applicable.

We classify interest and penalties on income taxes as a component of the provision for income taxes.  During the years ended December 31, 2021, 2020 and 2019, we recognized an expense of $1 million, a benefit of less than $1 million and an expense of less than $1 million in interest and penalties, respectively.  As of December 31, 2021 and 2020, the total amount of accrued interest and penalties was $1 million.

Caterpillar received a Revenue Agent’s Report (RAR) from the IRS indicating the end of field examination of our U.S. tax returns for 2010 to 2012. Tax years prior to 2007 are generally no longer subject to U.S. tax assessment. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to ten years. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.