INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Earnings before income taxes and the provision for income taxes are presented in the following table.

	Year Ended December 31,
(in millions)	2023		2022		2021
Earnings (loss) before income taxes:
U.S.1	$	(316)	$	(40)	$	(523)
Non-U.S.1	1,307		953		1,033
Total	$	991	$	913	$	510
Provision for income taxes:
Current:
Federal	$	42	$	49	$	15
State	8		7		5
Foreign	299		233		232
Total current expense	349		289		252
Deferred:
Federal	(85)		(54)		(90)
State	—		(8)		(10)
Foreign	25		(32)		(87)
Total deferred (benefit) expense	(60)		(94)		(187)
Total provision for income taxes	$	289	$	195	$	65

__________________________

1 In 2023, the U.S. loss before income taxes was primarily due to the realized and unrealized loss on debt and equity securities of $174 million that was primarily related to the Company’s investment in Wolfspeed convertible debt securities that was sold during the year. In 2021, the U.S. loss before income taxes was primarily related to the $362 million unrealized loss related to the Company’s investment in Romeo Power, Inc.

The provision for income taxes resulted in an effective tax rate of approximately 29%, 21% and 13% for the years ended December 31, 2023, 2022 and 2021, respectively.

The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final tax expense.

	Year Ended December 31,
(in millions)	2023		2022		2021
Income taxes at U.S. statutory rate of 21%	$	209	$	192	$	107
Increases (decreases) resulting from:
Valuation allowance adjustments, net	186		21		(13)
Net tax on remittance of foreign earnings	45		36		35
Foreign rate differentials	20		57		66
U.S. tax on foreign earnings	18		10		10
State taxes, net of federal benefit	6		(3)		(6)
Other permanent differences	6		5		14
Impact of tax law and rate change	(1)		1		(19)
Affiliates' earnings	(7)		(6)		(9)
Reserve adjustments, settlements and claims	(15)		13		(20)
Changes in accounting methods and filing positions	(18)		(15)		(7)
Tax credits	(21)		(15)		(5)
Foreign derived intangible income deduction	(23)		(23)		(8)
Enhanced research and development deductions	(35)		(33)		(22)
Tax holidays	(35)		(38)		(81)
Deferred tax impact of intra-group transactions	(70)		—		—
Other, net	24		(7)		23
Provision for income taxes, as reported	$	289	$	195	$	65

The Company’s tax rate is affected by the tax laws and rates of the U.S. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance.

The Company’s effective tax rate was impacted beneficially by tax incentives obtained in various non-U.S. countries, primarily those arising in China related to the High and New Technology Enterprise (“HNTE”) status of various subsidiaries ($35 million, $38 million and $81 million for the years ended December 31, 2023, 2022 and 2021, respectively). HNTE status is granted for three-year periods, and the Company seeks to renew such status on a regular basis. In addition, beneficial impacts were recognized related to tax deductions for qualifying research and development expenditures ($35 million, $33 million and $22 million for the years ended December 31, 2023, 2022 and 2021, respectively).

The Company’s effective tax rate is also impacted by net changes to valuation allowances, where the Company has determined that it is more-likely-than-not that certain deferred tax assets would not be realized. For the years ended December 31, 2023 and 2022, the Company recorded net expense related to valuation allowances of $186 million and $21 million, respectively. For the year ended December 31, 2021, the Company recorded a net benefit of $13 million.

In 2023, the Company recognized a discrete tax benefit of approximately $19 million related to the resolution of tax audits and reductions in certain unrecognized tax benefits and accrued interest related to matters for which the statute of limitation had lapsed. In addition, the Company recognized a discrete tax benefit of approximately $50 million in relation to the Spin-Off, a discrete tax benefit of approximately $30 million in relation to various changes in filling positions for prior years, and a discrete tax expense of approximately $79 million in relation to changes in judgment related to the recovery of deferred tax assets, primarily due to the impact of the Spin-Off on the allocation of the Company’s profits across jurisdictions for tax purposes as well as various tax structuring actions and strategies.

In 2022, the Company recognized discrete tax benefits of $23 million, primarily related to a reduction in certain unrecognized tax benefits and accrued interest related to matters for which the statute of limitations had lapsed and favorable provision-to-return adjustments.

In 2021, the Company recognized a $55 million tax benefit related to a reduction in certain unrecognized tax benefits and accrued interest related to matters for which the statute of limitations had lapsed. In addition, the Company recognized a discrete tax benefit of $20 million related to an increase in its deferred tax assets as a result of an increase in the United Kingdom (“U.K.”) tax rate from 19% to 25%. This rate change was enacted in June 2021 and becomes effective April 2023. Further, a net discrete tax benefit of $36 million was recognized, primarily related to changes to certain withholding rates applied to unremitted earnings. In the fourth quarter of 2021, the Company received approval for tax holiday status reducing the statutory tax rate for two of its legal entities, resulting in a reduction in tax expense of $28 million in 2021.

A roll forward of the Company’s total gross unrecognized tax benefits is presented below:

(in millions)	2023		2022		2021
Balance, January 1	$	172	$	181	$	198
Additions based on tax positions related to current year	15		19		21
Reductions for tax positions of prior years	(11)		(7)		—
Reductions for lapse in statute of limitations	(10)		—		(36)
Reductions for closure of tax audits and settlements	(5)		(9)		—
Translation adjustment	—		(12)		(2)
Balance, December 31	$	161	$	172	$	181

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense and accrued approximately $65 million and $55 million for the payment of interest and penalties at December 31, 2023 and 2022, respectively. For the years ended December 31, 2023, 2022 and 2021, the Company recognized expense related to interest and penalties of $10 million, $6 million and $16 million, respectively.

During the year ended December 31, 2021, the Company also recorded a reduction in tax expense of $34 million for previously recorded interest related to matters for which the statute of limitations lapsed.

As of December 31, 2023, approximately $198 million represents the amount that, if recognized, would affect the Company's effective income tax rate in future periods. This amount includes a decrease in U.S. federal income taxes that would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein.

The Company estimates that it is reasonably possible there could be a decrease of approximately $108 million in unrecognized tax benefits and interest in the next 12 months related to the closure of an audit and the lapse in statute of limitations subsequent to the reporting period from certain taxing jurisdictions.

The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:

Tax jurisdiction	Years no longer subject to audit	Tax jurisdiction	Years no longer subject to audit
U.S. Federal	2015 and prior	Japan	2018 and prior
Barbados	2016 and prior	Luxembourg	2019 and prior
China	2015 and prior	Mexico	2015 and prior
France	2015 and prior	Poland	2016 and prior
Germany	2015 and prior	South Korea	2016 and prior
Hungary	2017 and prior	United Kingdom	2018 and prior

In the U.S., certain tax attributes created in years prior to 2017 were subsequently utilized. Even though the U.S. federal statute of limitations may have expired for years prior to 2017, the years in which these tax attributes were created could still be subject to examination, limited to only the examination of the creation of the tax attribute.

The components of deferred tax assets and liabilities consist of the following:

	December 31,
(in millions)	2023		2022
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	359	$	256
Research and development capitalization	211		143
Employee compensation	43		41
State tax credits	23		29
Unrecognized tax benefits	21		24
Warranty	20		20
Pension and other postemployment benefits	4		10
Other comprehensive loss	3		—
Unrealized loss on equity securities	—		8
Foreign tax credits	—		6
Other	103		97
Total deferred tax assets	$	787	$	634
Valuation allowance	(310)		(136)
Net deferred tax asset	$	477	$	498
Deferred tax liabilities:
Goodwill and intangible assets	(135)		(194)
Fixed assets	(121)		(113)
Unremitted foreign earnings	(115)		(125)
Unrealized gain on equity securities	(2)		—
Other comprehensive income	—		(14)
Other	(7)		(16)
Total deferred tax liabilities	$	(380)	$	(462)
Net deferred taxes	$	97	$	36

As of December 31, 2023, the Company had gross deferred tax assets for certain non-U.S. net operating loss (“NOL”) carryforwards of $277 million, $43 million of which expire at various dates from 2024 through 2043 and $234 million of which have an indefinite life. The Company has a valuation allowance recorded of $213 million with regards to these deferred tax assets.

As of December 31, 2023, certain U.S. subsidiaries had gross deferred tax assets of approximately $39 million for federal and state NOL carryforwards, $21 million of which expire at various dates from 2024 through 2043 and $18 million of which have an indefinite life. The Company has recorded a valuation allowance of $17 million with regards to these deferred tax assets. In addition, certain U.S. subsidiaries also have state tax credit carryforwards of $23 million, which are offset by a valuation allowance of $23 million.

On a quarterly basis, the Company reviews the likelihood that the benefit of its deferred tax assets will be realized and, therefore, the need for valuation allowances. The Company assesses existing deferred tax assets, net operating loss carryforwards and tax credit carryforwards by jurisdiction and expectations of its ability to utilize these tax attributes through a review of past, current, and estimated future taxable income and tax planning strategies. If, based upon the weight of available evidence, it is more-likely-than-not the deferred tax assets will not be realized, a valuation allowance is recorded. Due to recent restructurings, the Company concluded that the weight of the negative evidence outweighs the positive evidence in certain foreign jurisdictions. As a result, the Company believes it is more-likely-than-not that the net deferred tax assets in certain foreign jurisdictions that include entities in Barbados, Hungary, France, Spain, Ireland and the U.K. will not be realized in the future.

As of December 31, 2023, the Company recorded deferred tax liabilities of $115 million with respect to foreign unremitted earnings. The Company did not provide deferred tax liabilities with respect to certain book versus tax basis differences not represented by undistributed earnings of approximately $449 million as of December 31, 2023, because the Company continues to assert indefinite reinvestment of these basis differences. These basis differences would become taxable upon the sale or liquidation of the foreign subsidiaries. The Company’s best estimate of the unrecognized deferred tax liability on these basis differences is approximately $18 million as of December 31, 2023.