Axalta Coating Systems Ltd
For the period ended Dec 31, 2023. Filed Feb 15, 2024.
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FY2023 · Filed Feb 15, 2024
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(1) INCOME TAXES
(10)INCOME TAXES
The Company's operations in Switzerland are subject to reduced tax rates through December 31, 2026, as long as certain conditions are met. The tax benefit attributable to this tax holiday was $4.1 million, $1.9 million, and $2.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. The tax effect of the holiday on diluted net income per common was $0.01 for the years ended December 31, 2023, 2022, and 2021.
Domestic and Foreign Components of Income Before Income Taxes
| Year Ended December 31, | |||
|---|---|---|---|
| 2023 | 2022 | 2021 | |
| Domestic | $149.8 | $137.9 | $173.3 |
| Foreign | 204.9 | 119.4 | 167.2 |
| Total | $354.7 | $257.3 | $340.5 |
Provision (Benefit) for Income Taxes
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |
| U.S. federal | $33.9 | $(9.5) | $24.4 | $20.9 | $1.2 | $22.1 | $14.6 | $18.1 | $32.7 |
| U.S. state and local | 8.6 | (1.6) | 7.0 | 7.0 | (0.7) | 6.3 | 4.3 | 1.4 | 5.7 |
| Foreign | 52.1 | 2.7 | 54.8 | 40.6 | (3.9) | 36.7 | 42.2 | (4.5) | 37.7 |
| Total | $94.6 | $(8.4) | $86.2 | $68.5 | $(3.4) | $65.1 | $61.1 | $15.0 | $76.1 |
Reconciliation to U.S. Statutory Rate
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 · 2022 · 2021 | ||||||
| Statutory U.S. federal income tax rate (1) | $74.5 | 21.0% | $54.0 | 21.0% | $71.5 | 21.0% |
| Foreign income taxed at rates other than U.S. statutory rate | (29.1) | (8.2) | (22.4) | (8.7) | (16.9) | (5.0) |
| Changes in valuation allowances | 37.9 | 10.7 | 1.6 | 0.6 | 18.1 | 5.3 |
| Foreign exchange gains and losses | 0.6 | 0.2 | (5.4) | (2.1) | 2.2 | 0.6 |
| Unrecognized tax benefits | (6.0) | (1.7) | 6.2 | 2.4 | (4.9) | (1.4) |
| Foreign taxes | 9.0 | 2.5 | 6.9 | 2.7 | 8.7 | 2.5 |
| Non-deductible expenses | 6.6 | 1.9 | 5.7 | 2.2 | 5.7 | 1.7 |
| Tax credits | (8.8) | (2.5) | (8.7) | (3.4) | (6.7) | (2.0) |
| U.S. state and local taxes, net | 5.4 | 1.5 | 4.8 | 1.9 | 5.0 | 1.5 |
| Other, net (2) | (3.9) | (1.1) | 22.4 | 8.7 | (6.6) | (1.9) |
| Total income tax provision / effective tax rate | $86.2 | 24.3% | $65.1 | 25.3% | $76.1 | 22.3% |
(1)The U.S. statutory rate has been used as management believes it is more meaningful to the Company.
(2)In 2022, the Company recorded a tax expense of $23.0 million in the Netherlands related to a historical impairment charge, which is fully offset by a tax benefit of $23.0 million for the decrease to the valuation allowance.
Deferred Tax Balances
| Year Ended December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| Deferred tax asset | ||
| Tax loss, credit and interest carryforwards | $326.9 | $263.9 |
| Compensation and employee benefits | 82.3 | 58.1 |
| Accruals and other reserves | 28.9 | 41.9 |
| Research and development capitalization | 49.8 | 28.8 |
| Equity investment and other securities | — | 0.5 |
| Leases | 40.7 | 41.7 |
| Other | 1.8 | 7.8 |
| Total deferred tax assets | 530.4 | 442.7 |
| Less: valuation allowance | (233.5) | (194.0) |
| Total deferred tax assets, net of valuation allowance | 296.9 | 248.7 |
| Deferred tax liabilities | ||
| Goodwill and intangibles | (107.2) | (75.7) |
| Property, plant and equipment | (153.4) | (142.0) |
| Unremitted earnings | (12.9) | (10.8) |
| Accounts receivable and other assets | (11.1) | (17.1) |
| Equity investment and other securities | (4.1) | — |
| Total deferred tax liabilities | (288.7) | (245.6) |
| Net deferred tax asset | $8.2 | $3.1 |
| Non-current assets | $170.5 | $165.2 |
| Non-current liability | (162.3) | (162.1) |
| Net deferred tax asset | $8.2 | $3.1 |
At December 31, 2023 and 2022, deferred income taxes of approximately $12.9 million and $10.8 million, respectively, have been provided on unremitted earnings of all subsidiaries and related companies to the extent that such earnings are not deemed to be permanently reinvested and cannot be repatriated in a tax-free manner. At December 31, 2023, and 2022, we have not recorded a deferred tax liability related to withholding taxes of approximately $38.1 million and $177.5 million, respectively, on unremitted earnings of subsidiaries that are permanently invested.
| Tax loss, tax credit and interest carryforwards | Year Ended December 31, | |
|---|---|---|
| 2023 | 2022 | |
| Tax loss carryforwards (tax effected) (1) | ||
| Expire within 10 years | $21.7 | $18.7 |
| Expire after 10 years or indefinite carryforward | 187.7 | 168.6 |
| Tax credit carryforwards | ||
| Expire within 10 years | 0.8 | 0.5 |
| Expire after 10 years or indefinite carryforward | 1.6 | 1.7 |
| Interest carryforwards | ||
| Expire within 10 years | 1.9 | 2.7 |
| Expire after 10 years or indefinite carryforward | 113.2 | 71.7 |
| Total tax loss, tax credit and interest carryforwards | $326.9 | $263.9 |
(1)Net of unrecognized tax benefits
Utilization of our tax loss, tax credit and interest carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Such annual limitations could result in the expiration of the tax loss, tax credit and interest carryforwards before their utilization.
Valuation allowance
| Year Ended December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| Non-U.S. | $228.9 | $190.0 |
| U.S. | 4.6 | 4.0 |
| Total valuation allowance | $233.5 | $194.0 |
Valuation allowances relate primarily to the tax loss, tax credit and interest carryforwards, as well as equity investment in foreign jurisdictions, where the Company does not believe the associated net deferred tax assets will be realized, due to expiration, limitation or insufficient future taxable income. The non-U.S. valuation allowance primarily relates to tax loss carryforwards and interest carryforwards from operations in Luxembourg, the Netherlands, and the United Kingdom, of $219.6 million and $181.3 million at December 31, 2023 and 2022, respectively. The U.S. valuation allowance primarily relates to state net deferred tax assets.
Total Gross Unrecognized Tax Benefits
| Year Ended December 31, | |||
|---|---|---|---|
| 2023 | 2022 | 2021 | |
| Total gross unrecognized tax benefits at January 1 | $98.2 | $91.4 | $99.6 |
| Increases related to acquisitions | — | — | 1.8 |
| Increases related to positions taken on items from prior years | 1.8 | 2.7 | 2.3 |
| Decreases related to positions taken on items from prior years | (5.4) | (2.5) | (16.5) |
| Increases related to positions taken in the current year | 12.0 | 9.6 | 3.9 |
| Settlement of uncertain tax positions with tax authorities | (1.0) | (1.4) | 0.4 |
| Decrease due to expiration of statues of limitations | (10.0) | (1.6) | (0.1) |
| Total gross unrecognized tax benefits at December 31 | 95.6 | 98.2 | 91.4 |
| Total accrual for interest and penalties associated with unrecognized tax benefits (1) | 5.6 | 6.3 | 8.7 |
| Total gross unrecognized tax benefits at December 31, including interest and penalties | $101.2 | $104.5 | $100.1 |
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $42.0 | $46.0 | $44.5 |
| Interest and penalties included as components of the Provision for income taxes | $(0.9) | $(1.8) | $(3.4) |
(1)Accrued interest and penalties are included within Other accrued liabilities and Other liabilities in the consolidated balance sheets.
The Company is subject to income tax in approximately 46 jurisdictions outside the U.S. The Company's significant operations outside the U.S. are located in Brazil, China, Germany, Mexico, Switzerland and the United Kingdom. The statute of limitations varies by jurisdiction with 2013 being the oldest tax year still open in significant jurisdictions. Certain of our German subsidiaries are under tax examination for calendar years 2014 to 2020. The review by the German tax authorities (“GTA”) encompasses various tax aspects, including but not limited to intercompany transactions and the establishment of our European headquarters in Basel, Switzerland in 2016. We expect the GTA will issue proposed adjustments that, when resolved, could have a material impact. We believe our income tax reserves at December 31, 2023 are adequate and do not expect a final resolution to these issues in the next 12 months. The Company is also under audit in other jurisdictions outside of Germany. The result of all open examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods.
The Company anticipates that it is reasonably possible its unrecognized benefits will decrease by $46.6 million, exclusive of interest and penalties, of its current unrecognized tax benefits within 2024 mainly due to the expiration of statute of limitations in various countries and the expected final assessment from the 2010-2013 German income tax audit which concluded in 2021. During 2023, the Company recorded a decrease in unrecognized tax benefits of $5.2 million, exclusive of interest and penalties, due to the conclusion of an income tax audit.
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