Otis Worldwide CorpOTIS

Otis Worldwide Corp Income Taxes Disclosure

10-KFiled Feb 5, 20267 min read
Income Taxes
Income Before Income Taxes. The sources of income from operations before income taxes are:

(dollars in millions)202520242023
United States$631 $505 $565 
Foreign1,303 1,534 1,466 
Net income before income taxes$1,934 $2,039 $2,031 

As a result of the TCJA the Company determined it no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, Otis recorded the international taxes associated with the future remittance of these earnings as part of the Separation from UTC. For the remainder of the Company's undistributed international earnings, unless tax effective to repatriate, Otis will continue to permanently reinvest these earnings. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts.
On July 4, 2025, the One Big Beautiful Bill Act was enacted, which includes a broad range of tax reform provisions affecting businesses, including extending and modifying certain key Tax Cuts & Jobs Act provisions (both domestic and international). The tax impacts of this legislation do not have a material impact on our Consolidated Financial Statements.

Provision for Income Taxes. The income tax expense (benefit) for 2025, 2024 and 2023 consisted of the following components:

(dollars in millions)
202520242023
Current:
United States:
Federal$128 $74 $82 
State56 45 50 
Foreign399 217 462 
583 336 594 
Future:
United States:
Federal(59)(11)(24)
State(16)(1)(5)
Foreign(29)(19)(32)
(104)(31)(61)
Income tax expense$479 $305 $533 
Attributable to items (charged) credited to (deficit) equity$(15)$(6)$16 
Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows:

202520242023
(dollars in millions)
AmountPercentAmountPercentAmountPercent
U.S. Federal Statutory Tax Rate$406 21.0 %$428 21.0 %$427 21.0 %
State and Local Income Taxes, Net of Federal Income Tax Effect (1)
31 1.6 %35 1.7 %36 1.8 %
Foreign Tax Effects:
France:
Distributable reserve deferred adjustment— — %(37)(1.8)%— — %
Other13 0.7 %14 0.7 %10 0.5 %
Germany:
Statutory tax rate difference between Germany and United States8 0.4 %25 1.2 %7 0.4 %
Tax litigation settlement1 0.1 %(247)(12.1)%— — %
Other(1)— %— — %2 0.1 %
Ireland:
Nontaxable interest income(25)(1.3)%(29)(1.4)%(23)(1.1)%
Other— — %3 0.2 %8 0.4 %
Luxembourg:
Nondeductible interest expense49 2.4 %53 2.6 %47 2.3 %
Other— — %(4)(0.2)%(5)(0.2)%
Other foreign jurisdictions53 2.6 %94 4.6 %73 3.4 %
Effect of Changes in Tax Laws or Rates Enacted in the Current Period— — %— — %— — %
Effect of Cross-Border Tax Laws:
Foreign-derived intangible income(49)(2.5)%(35)(1.7)%(23)(1.1)%
Foreign withholding tax reclassification(49)(2.5)%(43)(2.1)%(31)(1.5)%
Other13 0.7 %8 0.4 %10 0.5 %
Tax Credits:
Other(2)(0.1)%(1)(0.1)%(2)(0.1)%
Changes in Valuation Allowance1 0.1 %1 0.1 %(3)(0.2)%
Nontaxable or Nondeductible Items:
Net Indemnity Payable/(Receivable) to/(from) former parent15 0.8 %37 1.8 %— — %
Other11 0.6 %6 0.3 %7 0.3 %
Changes in Unrecognized Tax Benefits2 0.1 %— — %(4)(0.2)%
Other Adjustments2 0.1 %(3)(0.2)%(3)(0.1)%
Effective income tax rate$479 24.8 %$305 15.0 %$533 26.2 %

(1) State taxes in California and New York contributed to the majority of the tax effect in this category.
The 2025 effective tax rate is higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate. The 2025 effective tax rate is higher than the 2024 effective tax rate primarily due to the absence of estimated tax benefits arising from the resolution of the German tax litigation and the absence of the reduction in a deferred tax liability related to the mitigation of future repatriation costs, both recorded in 2024, and the tax effect of the increase in our estimated nondeductible TMA indemnity obligation payable to RTX recorded in 2025. These impacts were partially offset by an incremental benefit related to foreign-derived intangible income and foreign valuation allowance releases recorded in 2025.

The 2024 effective tax rate is lower than the 2023 effective tax rate and the statutory U.S. rate primarily due to recognition of estimated tax benefits arising from the resolution of the German tax litigation and the reduction of a deferred tax liability related to the mitigation of future repatriation costs.

The 2023 effective tax rate is higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate.

Deferred Tax Assets and Liabilities. Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and obligations within the same tax paying component of a particular jurisdiction are offset for presentation in the Consolidated Balance Sheets.

The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and obligations as of December 31, 2025 and 2024 are as follows:

(dollars in millions)
20252024
Future income tax benefits:
Insurance and employee benefits$90 $109 
Other asset basis differences119 113 
Other liability basis differences453 349 
Tax loss carryforwards226 201 
Tax credit carryforwards55 54 
Valuation allowances(256)(250)
Total future income tax benefits$687 $576 
Future income tax obligations:
Intangible assets$148 $143 
Other assets basis differences221 203 
Total future income tax obligations$369 $346 

Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain foreign temporary differences to reduce the future income tax benefits to expected realizable amounts.
Tax Credit and Loss Carryforwards. As of December 31, 2025, tax credit carryforwards, principally federal and state, and tax loss carryforwards, principally foreign, were as follows:

(dollars in millions)
Tax Credit CarryforwardsTax Loss Carryforwards
Expiration period:
2026-2030$11 $52 
2031-203512 22 
2036-20452 111 
Indefinite30 789 
Total$55 $974 

Unrecognized Tax Benefits. As of December 31, 2025, the Company had gross tax-effected unrecognized tax benefits of $152 million, all of which, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for 2025, 2024 and 2023 is as follows:

(dollars in millions)
202520242023
Balance at January 1$149 $394 $386 
Additions for tax positions related to the current year11 12 10 
Additions for tax positions of prior years10 — 7 
Reductions for tax positions of prior years(18)(12)(8)
Settlements— (245)(1)
Balance at December 31$152 $149 $394 
Gross interest expense (income) related to unrecognized tax benefits$(22)$(146)$6 
Total accrued interest balance at December 31$64 $84 $148 

The decrease in unrecognized tax benefits and associated interest in 2024 is primarily due to the resolution of the German tax litigation. See Note 20, "Contingent Liabilities" for discussion regarding the German tax litigation.

Otis conducts business globally and, as a result, Otis or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.

In the ordinary course of business, Otis could be subject to examination by taxing authorities throughout the world, including such major jurisdictions as Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Portugal, South Korea, Spain, Switzerland, the United Kingdom and the U.S. With a few exceptions, Otis is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2016.

A subsidiary of Otis lost a tax litigation case in Belgium in 2023 and decided not to appeal. Otis may receive the assessment for tax and interest within the next 12 months. The associated tax and interest have been fully reserved.
Income Taxes Paid. The income taxes paid, net of refunds, for 2025, 2024 and 2023 are as follows:

(dollars in millions)
202520242023
Income taxes paid, net of refunds
Federal$116 $55 $85 
State62 52 43 
Foreign:
China72 91 90 
France43 52 28 
Germany(102)33 32 
Japan39 41 40 
Spain47 41 39 
Foreign Other194 221 189 
Total income taxes paid, net of refunds$471 $586 $546 

Historical Timeline

Fiscal YearFiled
2025Feb 5, 2026Showing above
2024Feb 4, 2025
2023Feb 2, 2024
2022Feb 3, 2023
2021Feb 4, 2022
2020Feb 5, 2021

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

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