INCOME TAXES - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
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| Income Tax Disclosure [Abstract] | ||||
| INCOME TAXES | INCOME TAXES Our effective tax rate increased to 22.5% in the third quarter of 2020 from 20.7% in the same period of 2019 (23.5% year to date in 2020 compared to 22.3% in the same period of 2019). The recognition in income tax of excess tax benefits related to share-based compensation reduced our effective rate by 0.2% year to date in 2020 compared to 0.1% in the same period of 2019 (there was no significant impact in the third quarter of 2020 or 2019). Our effective tax rate increased in 2020 compared to 2019 primarily due to unfavorable changes in our uncertain tax positions. In addition, as discussed below, during the third quarter of 2019 our effective tax rate decreased due to a valuation allowance release.
As of June 30, 2019, we maintained a valuation allowance against certain deferred tax assets, primarily related to foreign net operating loss carryforwards. As of each reporting date, we consider new evidence, both positive and negative, that could affect the future realization of deferred tax assets. During the third quarter of 2019, we determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets related to certain foreign net operating loss carryforwards will be realized. This conclusion is primarily related to achieving cumulative three-year income and anticipated future earnings within the relevant jurisdiction. Accordingly, we reversed the related valuation allowance and recognized a discrete tax benefit of approximately $62 million during the third quarter of 2019.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, we have recognized liabilities for uncertain tax positions. We reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statutes of limitations, additional regulatory guidance on the Tax Cuts and Jobs Act or other unforeseen circumstances.
As discussed in note 17, we recognized pre-tax transformation strategy costs of $44 million in the third quarter of 2020 compared to $63 million in the same period of 2019 ($201 million year to date in 2020 compared to $207 million in the same period of 2019). As a result, we recorded an additional income tax benefit of $11 million in the third quarter of 2020 compared to $16 million in the same period of 2019 ($50 million year to date in 2020 and 2019). This benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.
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| Transformation cost | $ 44 | $ 63 | $ 201 | $ 207 |