Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income taxes Income Taxes
Income tax expense consisted of the following:
Years ended December 31,
(in millions) 2020 2019 2018
Current:
U.S. federal $ 187  141  239 
State and local 55  37  37 
Foreign jurisdictions 104  93  84 
Total 346  271  360 
Deferred:
U.S. federal (15) (11) (27)
State and local 21  3  (2)
Foreign jurisdictions (15) (1) 3 
Total (9) (9) (26)
Total income tax expense $ 337  262  334 
Pre-tax income was as follows:
Years ended December 31,
(in millions) 2020 2019 2018
QxH $ 931  843  1,062 
QVC-International 316  236  200 
Consolidated QVC $ 1,247  1,079  1,262 
Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 21% in 2020, 2019 and 2018, as a result of the following:
Years ended December 31,
2020 2019 2018
Provision at statutory rate 21.0  % 21.0  % 21.0  %
State income taxes, net of federal benefit 4.2  2.9  2.2 
Foreign taxes 2.0  1.0  0.8 
Write-off of investment and notes of foreign subsidiary —  (3.1) — 
Valuation allowance 0.4  3.2  2.6 
Permanent differences (0.5) (0.2) (0.2)
Corporate restructuring 0.9  —  — 
Investment in subsidiary —  0.9  0.6 
Impact of foreign currency tax regulation —  (0.7) (0.6)
Other, net (1.0) (0.7) 0.1 
Total income tax expense 27.0  % 24.3  % 26.5  %
During December of 2020, the Company effected a corporate restructuring transaction whereby a wholly-owned U.S. subsidiary, which owns the Company's foreign business units, became a wholly-owned foreign subsidiary. The corporate restructuring changed the manner in which the income of the foreign business units is subjected to tax in the U.S. As a result of the corporate restructuring, income tax expense of $11 million was recognized during the year ended December 31, 2020.
The tax effects of temporary differences that gave rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:
December 31,
(in millions) 2020 2019
Deferred tax assets:
Accounts receivable, principally due to the allowance for credit losses and related reserves for the uncollectible accounts $ 28  31 
Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986
 37  38 
Allowance for sales returns
 28  30 
Deferred revenue
 5  6 
Deferred compensation
 32  38 
Unrecognized federal and state tax benefits
 14  13 
Net operating loss carryforwards
 116  57 
Foreign tax credits carryforward
 48  43 
Lease obligations
 69  68 
Cumulative translation of foreign currencies
 7  — 
Accrued liabilities
 8  15 
Other
 14  8 
Subtotal
 406  347 
Valuation allowance
 (166) (99)
Total deferred tax assets
 240  248 
Deferred tax liabilities:
Depreciation and amortization
 (853) (823)
Lease assets
 (64) (66)
Cumulative translation of foreign currencies
 —  (22)
Investment in subsidiary
—  (26)
Total deferred tax liabilities
 (917) (937)
Net deferred tax liability
 $ (677) (689)

In the above table, valuation allowances exist due to the uncertainty of whether or not the benefit of certain U.S. federal and foreign tax credits and losses will ultimately be utilized for income tax purposes. The 2020 net deferred tax liability above includes deferred tax assets of $34 million relating to foreign jurisdictions which are included within other noncurrent assets in the consolidated balance sheet and deferred tax liabilities of $711 million in domestic jurisdictions which are included within deferred income taxes in the consolidated balance sheet. The 2019 net deferred tax liability above includes deferred tax assets of $35 million relating to foreign jurisdictions which are included within other noncurrent assets in the consolidated balance sheet and deferred tax liabilities of $724 million in domestic jurisdictions which are included within deferred income taxes in the consolidated balance sheet.
The Company is party to a Tax Liability Allocation and Indemnification Agreement (the "Tax Agreement") with Qurate Retail. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Qurate Retail for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Qurate Retail an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Qurate Retail, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution. These differences are related primarily to foreign tax credits recognized by QVC that are creditable under the Tax Agreement when and if utilized in Qurate Retail’s consolidated tax return. The differences recorded during the years ended December 31, 2020 and 2018 were capital contributions of $1 million and $2 million, respectively, which were primarily related to foreign tax credit carryovers being utilized in Qurate's consolidated tax return in excess of those recognized by QVC during the respective tax year. The difference recorded during the year ended December 31, 2019 was $11 million in dividends which were primarily related to foreign tax credits recognized by QVC and not utilized in Qurate Retail’s tax returns during the 2019 tax year. The amounts of the tax-related payable (receivable) balance due to (from) Qurate Retail as of December 31, 2020 and 2019 were $47 million and $(7) million, respectively, and are included in accrued liabilities in the consolidated balance sheets.
A reconciliation of the 2019 and 2020 beginning and ending amount of the liability for unrecognized tax benefits is as follows:
(in millions)
Balance at January 1, 2019 $ 54 
Increases related to prior year tax positions 9 
Decreases related to prior year tax positions (7)
Decreases related to settlements with taxing authorities (4)
Increases related to current year tax positions 8 
Balance at December 31, 2019 60 
Increases related to prior year tax positions 5 
Decreases related to prior year tax positions (6)
Decreases related to settlements with taxing authorities — 
Increases related to current year tax positions 8 
Balance at December 31, 2020 $ 67 
Included in the balance of unrecognized tax benefits as of December 31, 2020 and 2019 are potential benefits of $53 million (net of a $14 million federal tax effect) and $48 million (net of a $12 million federal tax effect), respectively, that if recognized, would be reflected in income tax expense and affect the effective rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in interest expense in the consolidated statements of operations. The Company did not have a material amount of interest or tax penalties accrued related to unrecognized tax benefits for the years ended December 31, 2020, 2019 or 2018.
The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2021. These consist of nonfederal transfer pricing and other tax issues. The amount of unrecognized tax benefits related to these issues could have an impact of $3 million in 2021 as a result of potential settlements, lapsing of statute of limitations and revisions of settlement estimates.
The Company participates in a consolidated federal return filing with Qurate Retail. As of December 31, 2020, the Company's tax years through 2016 are closed for federal income tax purposes, and the Internal Revenue Service ("IRS") has completed its examination of the Company's 2017 and 2018 tax years. The Company's 2019 and 2020 tax years are being examined currently as part of the Qurate Retail consolidated return under the IRS's Compliance Assurance Process program. The Company files income tax returns in various states and foreign jurisdictions. As of December 31, 2020, the Company was under examination in the states of Pennsylvania and California, in New York City, and in the U.K.