Taxes Based on Income

9 Months Ended

Sep. 26, 2020

Taxes Based on Income

Taxes Based on Income

Note 8. Taxes Based on Income

The following table summarizes our income before taxes, provision for (benefit from) income taxes, and effective tax rate:

	Three Months Ended						Nine Months Ended
(Dollars in millions)	September 26, 2020			September 28, 2019			September 26, 2020			September 28, 2019
Income before taxes	$	197.8		$	179.9		$	482.0		$	84.2
Provision for (benefit from) income taxes		46.3			34.6			114.8			(58.9)
Effective tax rate		23.4	%		19.2	%		23.8	%		(70.0)	%

Our provision for (benefit from) income taxes for the three and nine months ended September 26, 2020 included $4.5 million and $15 million, respectively, of net tax charge related to the tax on global intangible low-taxed income (“GILTI”) of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”).  Our provision for (benefit from) income taxes for the three and nine months ended September 26, 2020 also reflected a net discrete tax benefit resulting from adjustments for changes in our estimates upon the completion of the 2019 U.S. federal tax return.  Our provision for (benefit from) income taxes for the nine months ended September 26, 2020 also reflected the following discrete items: (i) $13.9 million of net tax benefit primarily from decreases in certain tax reserves, including associated interest and penalties, as a result of closing tax years and effective settlements of certain foreign tax audits, partially offset by additional interest and penalty accruals and (ii) tax benefit related to excess tax benefits associated with stock-based payments.

Our provision for (benefit from) income taxes for the three and nine months ended September 26, 2020 was not materially affected by COVID-19.  Moreover, our ability to generate sufficient taxable income was not adversely affected in certain jurisdictions where a significant portion of our net deferred tax assets is concentrated.  Our provision for (benefit from) income taxes for the three and nine months ended September 26, 2020 was not materially impacted by the stimulus packages and subsequent interpretations enacted in the U.S. and other countries to provide economic relief to businesses in response to COVID-19.

Our provision for (benefit from) income taxes for the three and nine months ended September 28, 2019 included $4.6 million and $15 million, respectively, of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII.  Effective in 2019, we implemented certain structural changes to better align with our operational strategies, one benefit of which was to reduce our base erosion payments below the U.S. statutory minimum threshold.  As a result, our provision for (benefit from) income taxes for the three and nine months ended September 28, 2019 did not include tax charges related to Base Erosion Anti-Abuse Tax. Our provision for (benefit from) income taxes for the three and nine months ended September 28, 2019 reflected $8.4 million of tax benefit due to the effective settlement of certain German tax audits for tax years 2011-2014. Our provision for (benefit from) income taxes for the nine months ended September 28, 2019 also primarily reflected the following discrete items: (i) $8 million of tax benefit related to excess tax benefits associated with stock-based payments and (ii) approximately $179 million of tax benefit related to the effective settlement of the ADPP, $102 million of which was the related tax effect on the pretax charge of $446.9 million and $77 million of which was related to the release of stranded tax effects in

“Accumulated other comprehensive income” through the unaudited Condensed Consolidated Statements of Income. The tax effects were stranded primarily as a result of the U.S. federal tax rate change under the U.S. Tax Cuts and Jobs Act. Refer to Note 5, “Pension and Other Postretirement Benefits,” to the unaudited Condensed Consolidated Financial Statements for more information on the termination of the ADPP.

The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world.  Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time.  We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters.  However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate.  The final determination of tax audits and any related legal proceedings could materially differ from the amounts currently reflected in our tax provision and the related liabilities.  To date, we and our U.S. subsidiaries have completed the IRS’ Compliance Assurance Process Program through 2017. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.

During the third quarter of 2020, we completed an analysis related to a foreign withholding tax regime that could be interpreted to subject us to withholding tax compliance requirements on certain cross-border intellectual property transactions for years remaining open under the applicable statutes of limitations.  Our interpretation concluded that the application of the withholding tax regime would not have a material impact on our financial position, results of operations or cash flows.

On July 20, 2020, the U.S. Department of Treasury released final regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions.  These regulations apply beginning with our 2021 tax year with an option to retroactively apply them to our 2018 through 2020 tax years.  During the third quarter of 2020, we did not reflect any impacts of this provision as we have not yet made our determination on whether to make the election for each of the applicable tax years.  We continue to evaluate the impact of these regulations and currently anticipate that the benefits from electing these exclusions on our original or amended returns may be significant for certain years.  We will reflect the impacts on our provision for (benefit from) income taxes upon the completion of our evaluation within the time allowed under applicable regulations.

Subsequent to the end of the third quarter of 2020, we met with tax authorities in a foreign jurisdiction on an audit for tax years 2016-2019 to discuss the application of incentive tax rates to our activities in the jurisdiction for those years.  The response received during the meeting and in subsequent correspondence may lead to a change in our judgment with regard to our uncertain tax positions, which may have a significant adverse effect on our provision for (benefit from) income taxes in 2020.  

It is reasonably possible that, during the next 12 months, we may realize a net decrease in our uncertain tax positions, including interest and penalties, of approximately $3 million, primarily as a result of audit settlements, changes in our judgment, including the foreign audit matter described above, and closing tax years.