INCOME TAXES

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

For interim financial statement purposes, U.S. GAAP income tax expense/benefit related to ordinary income is determined by applying an estimated annual effective income tax rate against a company's ordinary income, subject to certain limitations on the benefit of losses. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company's income tax provision requires the use of management forecasts and other estimates, application of statutory income tax rates, and an evaluation of valuation allowances. The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period.

Benefit from income taxes for the three months ended March 31, 2020 was $26 million and included: (i) $21 million of net income tax benefit for discrete items, which includes: (a) $10 million in tax benefits recognized for changes in uncertain tax positions, (b) a $5 million tax benefit related to a deduction for stock compensation and (c) $4 million of net tax benefits associated with filing certain tax returns and (ii) $5 million of income tax benefit for the Company's ordinary loss during the three months ended March 31, 2020.

Benefit from income taxes for the three months ended March 31, 2019 was $74 million and included: (i) $51 million of net income tax expense for discrete items, which includes: (a) $32 million of tax benefit recognized upon a ruling from the Polish tax authorities confirming the deductibility of royalty payments by an affiliate, (b) $15 million of net tax benefits associated with filing certain tax returns and (c) $4 million in tax benefits recognized for changes in uncertain tax positions and (ii) $23 million of income tax benefit for the Company's ordinary loss during the three months ended March 31, 2019.

The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made except that, as a result of the 2018 adoption of guidance regarding intra-entity transfers, any change in valuation allowance surrounding the adoption of the intra-entity transfer resulting from this adoption was recorded within equity. The valuation allowance against deferred tax assets was $2,824 million and $2,831 million as of March 31, 2020 and December 31, 2019, respectively. The decrease was primarily due to income in Canada. The Company will continue to assess the need for a valuation allowance on a go-forward basis.

As of March 31, 2020 and December 31, 2019, the Company had $967 million and $1,002 million of unrecognized tax benefits, which included $46 million and $45 million of interest and penalties, respectively. Of the total unrecognized tax benefits as of March 31, 2020, $321 million would reduce the Company’s effective tax rate, if recognized. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits at March 31, 2020 could decrease by approximately $110 million in the next 12 months as a result of the resolution of certain tax audits and other events.

The Company continues to be under examination by the Canada Revenue Agency. The Company’s position as of March 31, 2020 with regard to proposed audit adjustments has not changed and the proposed adjustments continue to result primarily in a loss of tax attributes that are subject to a full valuation allowance.

The Internal Revenue Service completed its examinations of the Company’s U.S. consolidated federal income tax returns for the years 2013 and 2014. There were no material adjustments to the Company's taxable income as a result of these examinations. The 2014 tax year remains open to the extent of a 2017 capital loss carried back to that year. Additionally, the Internal Revenue Service has selected for examination the Company's annual tax filings for 2015 and 2016 and the Company's short period tax return for the period ended September 8, 2017, which was filed as a result of the Company's internal restructuring efforts during 2017. At this time, the Company does not expect that proposed adjustments, if any, for these periods would be material to the Company's Consolidated Financial Statements.

The Company's U.S. affiliates remain under examination for various state tax audits in the U.S. for years 2012 through 2017.

The Company’s subsidiaries in Germany are under audit for tax years 2014 through 2016. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's Consolidated Financial Statements.

The Company’s subsidiaries in Australia are under audit by the Australian Tax Office for various years beginning in 2010. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's Consolidated Financial Statements.

Certain affiliates of the Company in regions outside of Canada, the U.S., Germany and Australia are currently under examination by relevant taxing authorities, and all necessary accruals have been recorded, including uncertain tax benefits. At this time, the Company does not expect that proposed adjustments, if any, would be material to the Company's Consolidated Financial Statements.