Income Taxes

12 Months Ended

Dec. 31, 2022

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)
	2022				2021				2020
Taxes computed at U.S. statutory rates	$	154	21.0	%	$	146	21.0	%	$	91	21.0	%
(Decreases) increases in taxes resulting from:
State income tax, net of federal Tax	4		0.5	%	3		0.4	%	(1)		(0.2)	%
Non-U.S. subsidiaries taxed at other than the U.S. rate	19		2.6	%	22		3.2	%	29		6.7	%
Valuation allowances	15		2.1	%	5		0.7	%	10		2.3	%
Other, net	(3)		(0.4)	%	2		0.3	%	(3)		(0.7)	%
Provision for income taxes	$	189	25.8	%	$	178	25.6	%	$	126	29.1	%

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 for 2022, 2021 and 2020 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 $15 million, $5 million and $10 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. Undistributed profits of non-U.S. subsidiaries of approximately $4 billion are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested

profits is not feasible primarily due to our legal entity operating structure and the complexity of U.S. and local tax laws. 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)
	2022		2021		2020
U.S.	$	439	$	288	$	99
Non-U.S.	292		407		335
Total	$	731	$	695	$	434

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)
	2022		2021		2020
Current income tax provision:
U.S.	$	116	$	101	$	46
Non-U.S.	95		162		80
State (U.S.)	5		5		1
	216		268		127
Deferred income tax provision (benefit):
U.S.	(36)		(56)		(45)
Non-U.S.	8		(33)		46
State (U.S.)	1		(1)		(2)
	(27)		(90)		(1)
Total Provision for income taxes	$	189	$	178	$	126

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 $275 million and $279 million as of December 31, 2022 and 2021, respectively, and are included in Other liabilities in the Consolidated Statements of Financial Position.

Accounting for income taxes under U.S. GAAP 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)
	2022		2021
Assets:
Other assets	$	115	$	107
Liabilities:
Other liabilities	(610)		(592)
Deferred income taxes, net	$	(495)	$	(485)

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

(Millions of dollars)
	2022		2021
Deferred income tax assets:
Allowance for credit losses	$	97	$	90
Tax carryforwards	93		83
Revenue timing differences	20		38
Other, net	28		33
	238		244
Deferred income tax liabilities:
Capital assets, including lease basis differences	(461)		(501)
Deferred income tax on translation adjustment	(219)		(189)
	(680)		(690)
Valuation allowance for deferred income tax assets	(53)		(39)
Deferred income taxes, net	$	(495)	$	(485)

As of December 31, 2022, approximately $73 million of U.S. state tax net operating losses (NOL) were available. These carryforwards primarily expire over the next eighteen years. The total deferred income tax asset associated with these NOL carryforwards is $5 million as of December 31, 2022, 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.

As of December 31, 2022, NOL carryforwards in various non-U.S. taxing jurisdictions were approximately $363 million. Of these, $41 million expire between 2023 and 2033. The remaining carryforwards do not expire.

As of December 31, 2022, valuation allowances of $51 million and $1 million have been recorded at certain non-U.S. subsidiaries and U.S. subsidiaries, respectively, that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred income tax assets.

As a result of improving profit before tax in one of our non-U.S. entities, we believe there is a reasonable possibility that a significant portion of the $23 million valuation allowance at December 31, 2022 recorded against the entity’s deferred tax assets may no longer be needed in 2023. Due to the uncertainty of inflation impacts on taxable income for one of our non-U.S. entities, we believe there is a reasonable possibility that we will need to record a valuation allowance in 2023 against some or all of the $36 million deferred tax asset at December 31, 2022. The potential amounts of the valuation allowance changes are dependent on each entity’s future taxable income.

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)
	2022		2021		2020
Reconciliation of unrecognized income tax benefits(1):
Balance at beginning of year	$	131	$	119	$	119
Additions for income tax positions related to current year	—		2		—
Additions for income tax positions related to prior year	—		10		—
Reductions for income tax positions related to settlements	(4)		—		—
Balance at end of year	$	127	$	131	$	119
Amount that, if recognized, would impact the effective tax rate	$	127	$	131	$	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, 2022, 2021 and 2020, we recognized a benefit of less than $1 million, an expense of $1 million and a benefit of less than $1 million in interest and penalties, respectively. As of December 31, 2022 and 2021, the total amount of accrued interest and penalties was $2 million and $1 million, respectively.

We are subject to the continuous examination of our U.S. federal income tax returns by the IRS, and tax years 2017 to 2019 are currently under examination. 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.