Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

Note 6—Income Taxes

The components of income from continuing operations before income taxes and the provision for income taxes are as follows:

	Year Ended December 31,
	2022		2021		2020
Income from continuing operations before income taxes:
United States	$	442.3	$	407.3	$	310.3
Foreign		2,025.1		1,581.9		1,216.3
	$	2,467.4	$	1,989.2	$	1,526.6
Current tax provision (benefit):
United States	$	97.7	$	86.8	$	(5.7)
Foreign		457.6		351.9		288.2
		555.3		438.7		282.5
Deferred tax provision (benefit):
United States		(31.5)		(35.4)		43.0
Foreign		26.8		5.8		(12.2)
		(4.7)		(29.6)		30.8
Total provision for income taxes	$	550.6	$	409.1	$	313.3

The United States federal government enacted the Tax Cuts and Jobs Act (“Tax Act”) in December 2017. As a result, in 2017, the Company recorded a transition tax (“Transition Tax”) related to the deemed repatriation of the accumulated unremitted earnings and profits of the Company’s foreign subsidiaries. In the second quarter of 2022, the Company paid its fifth annual installment of the Transition Tax, net of applicable tax credits and deductions. The Company will pay the balance of the Transition Tax, net of applicable tax credits and deductions, over the remainder of the eight-year period ending 2025, as permitted under the Tax Act. The current and long-term portions of the Transition Tax are recorded in Accrued income taxes and Other long-term liabilities, respectively, on the Consolidated Balance Sheets as of December 31, 2022 and 2021. In addition, as a result of the Tax Act, the Company also recorded a tax charge, in 2017, related to changes in the Company’s permanent reinvestment assertion, due to our intention to repatriate prior accumulated unremitted earnings from certain foreign subsidiaries over time. We will pay such taxes when those respective earnings are repatriated.

At December 31, 2022, the Company had $132.7 of foreign tax loss carryforwards, $82.5 of U.S. state tax loss carryforwards and $11.1 of U.S. federal tax loss carryforwards, of which $59.5, $82.5 and $11.1, respectively, will either expire or be refunded at various dates through 2042 and the balance can be carried forward indefinitely.  At December 31, 2022, the Company had $0.3 of foreign tax credit carryforwards, $17.8 of U.S. state tax credit carryforwards, and $1.6 of U.S. federal tax credit carryforwards, of which $0.3, $11.9, and $1.6, respectively, will either expire or be refunded at various dates through 2042 and the balance can be carried forward indefinitely.

A valuation allowance of $42.2 and $44.9 at December 31, 2022 and 2021, respectively, has been recorded which relates primarily to the U.S. state and foreign net operating loss carryforwards and U.S. state tax credits. The valuation allowance for deferred tax assets decreased by $2.7 in 2022, which was primarily driven by foreign currency exchange. The valuation allowance for deferred tax assets increased by $4.8 in 2021, which was primarily driven by U.S. state and foreign net operating loss carryforwards.

Differences between the U.S. statutory federal tax rate and the Company’s effective income tax rate are analyzed below:

	Year Ended December 31,
	2022		2021		2020
U.S. statutory federal tax rate	21.0	%	21.0	%	21.0	%
State and local taxes, net	0.6		0.8		0.8
Foreign earnings and dividends taxed at different rates	2.3		1.8		2.1
U.S. tax on foreign income	0.5		0.6		0.8
Excess tax benefits related to stock-based compensation	(2.3)		(3.2)		(2.8)
Settlements of uncertain tax positions in foreign jurisdictions including refund claims and related deferred taxes	—		(0.7)		(1.3)
Other, net	0.2		0.3		(0.1)
Effective tax rate	22.3	%	20.6	%	20.5	%

The components of the Company’s deferred tax assets and liabilities are comprised of the following:

	December 31,
	2022		2021
Deferred tax assets relating to:
Accrued liabilities and reserves	$	72.4	$	60.0
Operating lease liabilities		66.6		56.4
Operating loss and tax credit carryforwards		57.4		62.6
Pensions		15.0		20.3
Inventories		77.8		60.2
Employee benefits		42.9		37.9
Total deferred tax assets		332.1		297.4
Valuation allowance		(42.2)		(44.9)
Total deferred tax assets, net of valuation allowances		289.9		252.5
Deferred tax liabilities relating to:
Goodwill		251.7		234.2
Depreciation and amortization		140.3		176.0
Operating lease right-of-use assets		66.6		56.4
Unremitted foreign earnings		154.2		119.1
Total deferred tax liabilities		612.8		585.7
Net deferred tax liability	$	322.9	$	333.2
Classification of deferred tax assets and liabilities, as reflected on the Consolidated Balance Sheets:
Other long-term assets	$	86.9	$	91.0
Deferred income taxes		409.8		424.2
Net deferred tax liability, long-term	$	322.9	$	333.2

A tabular reconciliation of the gross amounts of unrecognized tax benefits excluding interest and penalties at the beginning and end of the year for 2022, 2021 and 2020 is shown below.

	2022		2021		2020
Unrecognized tax benefits as of January 1	$	147.7	$	135.3	$	159.1
Gross increases for tax positions in prior periods		12.8		6.5		5.4
Gross increases for tax positions in current period		4.9		8.2		16.4
Settlements		(0.4)		—		(38.8)
Lapse of statutes of limitations		(0.9)		(2.3)		(6.8)
Unrecognized tax benefits as of December 31	$	164.1	$	147.7	$	135.3

The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2022, 2021 and 2020, the provision for income taxes included a net expense (benefit) of $0.8, ($4.6) and $2.8, respectively, in estimated interest and penalties. As of December 31, 2022, 2021 and 2020, the liability for unrecognized tax benefits included $35.8, $34.5 and $39.2, respectively, for tax-related interest and penalties.

The Company operates in the U.S. and numerous foreign taxable jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2017 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities and may not be fully sustained, despite the Company’s belief that the underlying tax positions are fully supportable. As of December 31, 2022 and 2021, the amount of unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $194.4 and $177.6, respectively. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, management anticipates that over the next twelve-month period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of approximately $18.5.

Inflation Reduction Act of 2022

On August 16, 2022, the President of the United States signed into law the Inflation Reduction Act of 2022 (the “IRA”), a tax and spending package that introduces several tax-related provisions, including a 15% corporate alternative minimum tax (“CAMT”) on certain large corporations and a 1% excise tax on certain corporate stock repurchases. Companies will be required to reassess their valuation allowances for certain affected deferred tax assets in the period of enactment but will not need to remeasure deferred tax balances for the related tax accounting implications of the CAMT. The impact of these provisions, which became effective for Amphenol beginning on January 1, 2023, is dependent on several factors, including interpretive regulatory guidance, which has not yet been released. The Company has reviewed and assessed the provisions of the IRA, including several other non-tax related provisions, and the Company does not currently believe that the IRA will have a material impact on its financial condition, results of operations, liquidity and cash flows.