|12 Months Ended|
Dec. 31, 2019
20. INCOME TAXES
The following is a summary of U.S. and non-U.S. provisions for current and deferred income taxes (dollars in millions):
The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory rate to our provision for income taxes (dollars in millions):
During 2019 and 2018, the average statutory rate for countries with pre-tax income, primarily our operations in China, Germany, India and Luxembourg, was higher than the average statutory rate for countries with pre-tax losses, resulting in a net expense of $9 million and $27 million, respectively, as compared to the 21% U.S. statutory rate reflected in the reconciliation above. During 2017, the average statutory rate for countries with pre-tax income, primarily our Polyurethanes segment in The Netherlands, China and the U.K., as well as our Advanced Materials segment in Switzerland and our Corporate segment in Luxembourg, was lower than the average statutory rate for countries with pre-tax losses, almost all of which had statutory rates lower than the U.S. of 35%, resulting in net benefits as compared to the U.S. statutory rate of $67 million, reflected in the reconciliation above. In certain non-U.S. tax jurisdictions, our U.S. GAAP functional currency is different than the local tax currency. As a result, foreign exchange gains and losses will impact our effective tax rate. For 2019, 2018 and 2017, this resulted in a $5 million tax benefit, a $10 million tax benefit and a $15 million tax expense, respectively.
In 2019, we recorded $199 million of deferred tax assets in connection with our tax basis in our Venator investment being greater than our book basis, which the deferred tax asset was partially offset by a valuation allowance of $46 million (for a net tax benefit of $153 million), as further discussed below. Effective January 1, 2019, Switzerland reduced certain conditional income tax rates resulting in a decrease in our net deferred tax assets and a corresponding noncash income tax expense of $32 million for the year ended December 31, 2019.
The U.S. Tax Reform Act established new tax laws that affected 2019 and 2018, including, but not limited to, a reduction of the U.S. federal corporate tax rate and the creation of the BEAT and GILTI provisions. Under U.S. GAAP, we have elected to treat the GILTI as a current-period expense when incurred.
The stated purpose of the GILTI rules is to generate additional U.S. tax related to income in non-U.S. jurisdictions which incur less than a blended 13.125% non-U.S. tax rate. Our non-U.S. income is subject to a blended rate greater than 13.125%; however, in practice, the GILTI regulations result in additional tax liability as a result of
expense allocations which limit the ability to utilize foreign tax credits against the GILTI inclusion. For 2019 and 2018 we have incurred $ 7 million and $16 million of tax expense resulting from these expense allocations.
We recorded a net tax benefit of $20 million over 2017 and 2018 related to enactment of the U.S. Tax Reform Act. As a result of the U.S. Tax Reform Act, we recorded a net tax benefit of $135 million due to remeasurement of deferred U.S. tax assets and liabilities (including a provisional tax benefit of $137 million in 2017 offset by a final tax expense of $2 million in 2018), offset by a tax expense of $115 million due to the transition tax on deemed repatriation of deferred foreign income (including a provisional tax expense of $85 million in 2017 and a $30 million remeasurement period adjustment in 2018). We did not make the election to reclassify the income tax effects of the U.S. Tax Reform Act from accumulated other comprehensive income to retained earnings.
The components of income (loss) from continuing operations before income taxes were as follows (dollars in millions):
Components of deferred income tax assets and liabilities were as follows (dollars in millions):
We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. These conclusions require significant judgment. In evaluating the objective evidence that historical results provide, we consider the cyclicality of businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the period limits our ability to consider other subjective evidence such as our projections for the future. Our judgments regarding valuation allowances are also influenced by the costs and risks associated with any tax planning idea associated with utilizing a deferred tax asset.
We have gross net operating losses (“NOLs”) of $1,185 million in various non-U.S. jurisdictions. While the majority of the non-U.S. NOLs have no expiration date, $175 million have a limited life (of which $162 million are subject to a valuation allowance) and $88 million are scheduled to expire in 2020 (of which $87 million are subject to a valuation allowance). We had $111 million and $91 million of NOLs expire unused in 2019 and 2018, respectively, all of which were subject to a valuation allowance.
Included in the $1,185 million of gross non-U.S. NOLs is $581 million attributable to our Luxembourg entities. As of December 31, 2019 due to the uncertainty surrounding the realization of the benefits of these losses, there is a valuation allowance of $92 million against these net tax-effected NOLs of $145 million.
During 2019, based on our expectation that our remaining interest in Venator will be sold on or before December 31, 2023, we recorded $153 million of deferred tax benefit relating to the portion of the $199 million tax basis greater than book basis in our Venator investment. We expect to be able to utilize such future capital losses on our Venator investment against capital gains anticipated on the sale of our Chemical Intermediates Businesses. We established a valuation allowance of $46 million on the excess unrealizable built-in capital loss deferred tax asset. We also realized $18 million of tax benefit relating to realized tax losses on our investment in Venator. During 2019, we also
established $11 million of valuation allowances on the remaining Australia NOLs that are no longer more-likely-than-not realizable following the sale of the Australia portion of the Chemical Intermediates Businesses.
During 2018, we released valuation allowances of $132 million. We released significant valuation allowances on certain net deferred tax assets in Switzerland based upon the increased and sustained profitability in our Advanced Materials and Textile Effects businesses. Given Switzerland’s limited seven-year carryover of NOLs, we expect that some of our NOLs will expire unused. Therefore, we recorded a partial release of the valuation allowance of $80 million in the second quarter of 2018. In addition, based upon the separation of Venator from our U.K. combined group and the increased and sustained profitability in our Polyurethanes business in the U.K., we released significant valuation allowances on certain net deferred tax assets in the U.K. Because the U.K. places limitations on the utilization of certain NOLs and limitations on other deferred tax assets, we recorded a partial valuation allowance release of $15 million in the second quarter of 2018. We also released $24 million of significant valuation allowances on certain net deferred tax assets in Luxembourg in the third quarter of 2018 as a result of changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased income in Luxembourg, our primary treasury center outside of the U.S. We also had miscellaneous non-significant valuation allowance releases totaling $13 million in 2018.
During 2017, we released valuation allowances of $22 million. In Italy, we released valuation allowances of $7 million on certain net deferred assets of our Polyurethanes business. On March 1, 2017 and April 1, 2017, we de-merged the Italian legal entities containing our Polyurethanes business from our combined Italian tax group. The historical and expected continued profitability of those Polyurethanes businesses resulted in the release of the associated valuation allowance. In Luxembourg, we released valuation allowances of $15 million as a result of changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased income in Luxembourg, our primary treasury center outside of the U.S.
Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions and result in additional valuation allowances in future periods, or, in the case of unexpected pre-tax earnings, the release of valuation allowances in future periods.
The following is a summary of changes in the valuation allowance (dollars in millions):
The following is a reconciliation of our unrecognized tax benefits (dollars in millions):
As of December 31, 2019 and 2018, the amount of unrecognized tax benefits (not including interest and penalty expense) which, if recognized, would affect the effective tax rate is $15 million and $23 million, respectively.
During 2019, we concluded and settled tax examinations in the U.S. (federal and various states). During 2018, we concluded and settled tax examinations in various jurisdictions including but not limited to, Egypt and the U.S. (federal and various states). During 2017, we concluded and settled tax examinations in various jurisdictions, including, but not limited to, China and the U.S. (various states).
During 2019 for unrecognized tax benefits that impact tax expense, we recorded a net decrease in unrecognized tax benefits with a corresponding income tax benefit (not including interest and penalty expense) of $10 million. During 2018 and 2017, for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expenses (not including interest and penalty expense) of $5 million and $9 million, respectively.
In accordance with our accounting policy, we continue to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.
We conduct business globally and, as a result, we file income tax returns in U.S. federal, various U.S. state and various non-U.S. jurisdictions. The following table summarizes the tax years that remain subject to examination by major tax jurisdictions:
Certain of our U.S. and non-U.S. income tax returns are currently under various stages of audit by applicable tax authorities and the amounts ultimately agreed upon in resolution of the issues raised may differ materially from the amounts accrued.
We estimate that it is reasonably possible that certain of our non-U.S. unrecognized tax benefits could change within 12 months of the reporting date with a resulting decrease in the unrecognized tax benefits within a reasonably possible range of $12 million to $14 million. For the 12-month period from the reporting date, we would expect that a substantial portion of the decrease in our unrecognized tax benefits would not result in a corresponding benefit to our income tax expense.
The U.S. Tax Reform Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. For subsidiaries with local withholding taxes, we intend to continue to invest most of these earnings indefinitely within the local country and do not expect to incur any significant, additional taxes related to such amounts.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef