Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income TaxesWe use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax assets and liabilities for future tax consequences of temporary differences between amounts reported in our consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The effects of a tax position on our consolidated financial statements are recognized when we believe it is more likely than not that the position will be sustained. A valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.

The following table presents the components of income tax expense (benefit) for the periods indicated: 

	Years Ended December 31,
(In millions)	2021		2020		2019
Current:
Federal	$	172	$	241	$	157
State	142		122		86
Non-U.S.	326		310		357
Total current expense	640		673		600
Deferred:
Federal	(98)		(168)		(6)
State	(61)		5		33
Non-U.S.	(3)		(31)		(157)
Total deferred expense (benefit)	(162)		(194)		(130)
Total income tax expense (benefit)	$	478	$	479	$	470

The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate based on income before income tax expense for the periods indicated:

	Years Ended December 31,
	2021		2020		2019
U.S. federal income tax rate	21.0	%	21.0	%	21.0	%
Changes from statutory rate:
State taxes, net of federal benefit	2.2		3.8		3.4
Tax-exempt income	(1.1)		(1.3)		(1.5)
Business tax credits(1)	(4.1)		(5.1)		(5.4)
Foreign tax differential	0.1		(0.8)		(0.1)
Foreign legal entity restructuring	—		—		(4.3)
Foreign tax credit (benefits)/ limitations	(1.9)		(0.9)		2.2
Litigation expense	—		—		1.6
Other, net	(1.1)		(0.2)		0.4
Effective tax rate	15.1	%	16.5	%	17.3	%

(1) Business tax credits include low-income housing, production and investment tax credits.

Beginning in 2018, the TCJA subjects a U.S. shareholder to current tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. We have elected to recognize our tax on GILTI as a period expense in the period the tax is incurred. As such, we have included an estimate of this liability in our estimated annual effective tax rate. This adjustment increased our effective tax rate by 0.1%, 0.2% and 0.3% in 2021, 2020 and 2019, respectively, which is reflected in the prior reconciliation table under "Foreign Tax Credit (Benefits)/Limitations".

Undistributed indefinitely reinvested earnings of certain foreign subsidiaries amounted to approximately $5.5 billion at December 31, 2021. As a result, no provision has been recorded for state and local or foreign withholding income taxes. If a distribution were to occur, we would be subject to state, local and to foreign withholding tax. It is

expected that any distribution will be exempt from federal income tax. Although the foreign withholding tax is generally creditable against U.S. federal income tax, certain credit utilization limitations may result in a net cost.

The following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of the dates indicated:

	December 31,
(In millions)	2021		2020
Deferred tax assets:
Other amortizable assets	$	323	$	385
Tax credit carryforwards	526		564
Lease obligations	217		243
Deferred compensation	158		110
Restructuring charges and other reserves	88		114
NOL and other carryforwards	118		101
Pension plan	28		56
Foreign currency translation	16		3
Unrealized losses on investment securities, net	17		—
Total deferred tax assets	1,491		1,576
Valuation allowance for deferred tax assets	(250)		(295)
Deferred tax assets, net of valuation allowance	$	1,241	$	1,281
Deferred tax liabilities:
Fixed and intangible assets	$	601	$	765
Investment basis differences	200		269
Right-of-use Assets	172		187
Unrealized gains on investment securities, net	—		306
Other	58		51
Total deferred tax liabilities	$	1,031	$	1,578

The table below summarizes the deferred tax assets and related valuation allowances recognized as of December 31, 2021:

(In millions)	Deferred Tax Asset		Valuation Allowance		Expiration
Other amortizable assets	$	323	$	(185)	None
Tax credits	526		—		2033-2041
NOLs - Non-U.S.	92		(45)		2028-2041, None
NOLs - U.S.	22		(16)		2022-2040
Other carryforwards	4		(4)		None

Management considers the valuation allowance adequate to reduce the total deferred tax assets to an aggregate amount that will more likely than not be realized. Management has determined that a valuation allowance is not required for the remaining deferred tax assets because it is more likely than not that there will be sufficient taxable income of the appropriate nature within the carryforward periods to realize these assets.

At December 31, 2021, 2020 and 2019, the gross unrecognized tax benefits, excluding interest, were $252 million, $308 million and $149 million, respectively. Of this, the amounts that would reduce the effective tax rate, if recognized, are $243 million,

$294 million and $140 million, respectively. The reduction in the effective tax rate includes the federal benefit for unrecognized state tax benefits.

The following table presents activity related to unrecognized tax benefits as of the dates indicated:

	December 31,
(In millions)	2021		2020		2019
Beginning balance	$	308	$	149	$	108
Decrease related to agreements with tax authorities	(130)		—		(17)
Increase related to tax positions taken during current year	50		47		13
Increase related to tax positions taken during prior years	42		137		49
Decreases related to a lapse of the applicable statute of limitations	(18)		(25)		(4)
Ending balance	$	252	$	308	$	149

It is reasonably possible that of the $252 million of unrecognized tax benefits as of December 31, 2021, up to $71 million could decrease within the next 12 months due to agreements with tax authorities and the expiration of statutes of limitations. Management believes that we have sufficient accrued liabilities as of December 31, 2021 for tax exposures and related interest expense.

Income tax expense included related interest and penalties of approximately $6 million, $6 million and $5 million in 2021, 2020 and 2019, respectively. Total accrued interest and penalties were approximately $9 million, $14 million and $10 million as of December 31, 2021, 2020 and 2019, respectively.