PHINIA INC.PHIN
PHINIA INC. Income Taxes Disclosure
INCOME TAXES
Earnings before income taxes and the provision for income taxes are presented in the following table.
| Year Ended December 31, | |||||||||||||||||
| (in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Earnings before income taxes: | |||||||||||||||||
| U.S. | $ | (99) | $ | 5 | $ | (18) | |||||||||||
| Non-U.S. | 297 | 182 | 224 | ||||||||||||||
| Total | $ | 198 | $ | 187 | $ | 206 | |||||||||||
| Provision for income taxes: | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (1) | $ | 13 | $ | 22 | |||||||||||
| State | 2 | — | 2 | ||||||||||||||
| Foreign | 86 | 83 | 48 | ||||||||||||||
| Total current expense | 87 | 96 | 72 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (9) | (9) | (14) | ||||||||||||||
| State | (2) | (1) | (2) | ||||||||||||||
| Foreign | (8) | 22 | 48 | ||||||||||||||
| Total deferred (benefit) expense | (19) | 12 | 32 | ||||||||||||||
| Total provision for income taxes | $ | 68 | $ | 108 | $ | 104 | |||||||||||
The provision for income taxes resulted in an effective tax rate of approximately 34%, 58% and 50% for the years ended December 31, 2025, 2024 and 2023, respectively.
The Company’s tax rate is affected by the tax laws and rates of the U.S. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance.
The Company’s effective tax rate was impacted beneficially by certain entities in China with the High and New Technology Enterprise (HNTE) status. The income tax benefit for HNTE status was approximately $6 million, $5 million and $6 million for the years ended December 31, 2025, 2024 and 2023, respectively. HNTE status is granted for three-year periods, and the Company seeks to renew such status on a regular basis.
The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final tax expense for the year ended December 31, 2025.
| Year Ended December 31, 2025 | |||||||||||
| (in millions) | Total | % | |||||||||
| US federal statutory income tax rate | $ | 42 | 21.0 | % | |||||||
| Foreign tax effects | |||||||||||
| Brazil | |||||||||||
| Other | 6 | 2.7 | % | ||||||||
| China | |||||||||||
| Net tax on remittance of foreign earnings | 11 | 5.7 | % | ||||||||
| Tax holiday | (6) | (2.9) | % | ||||||||
| Enhanced research and development deductions | (5) | (2.3) | % | ||||||||
| Other | 4 | 1.8 | % | ||||||||
| India | |||||||||||
| Net tax on remittance of foreign earnings | (11) | (5.7) | % | ||||||||
| Other | 2 | 1.3 | % | ||||||||
| Luxembourg | |||||||||||
| Changes in valuation allowances | (235) | (118.6) | % | ||||||||
| Foreign currency remeasurement | (17) | (8.6) | % | ||||||||
| Reversal of impairment in subsidiaries | 165 | 83.1 | % | ||||||||
| Change to pre-Spin-Off periods and filing positions | 90 | 45.5 | % | ||||||||
| Other | (3) | (1.7) | % | ||||||||
| Mexico | |||||||||||
| Foreign currency remeasurement | (7) | (3.4) | % | ||||||||
| Other | (2) | (0.9) | % | ||||||||
| Romania | |||||||||||
| Other | 6 | 2.9 | % | ||||||||
| United Kingdom | |||||||||||
| Change to pre-Spin-Off periods and filing positions | (11) | (5.4) | % | ||||||||
| Other | — | (0.1) | % | ||||||||
| Other foreign jurisdictions | 1 | 0.7 | % | ||||||||
| Effects of cross-border tax laws | (8) | (4.0) | % | ||||||||
| Changes in valuation allowances | 13 | 6.6 | % | ||||||||
| Nontaxable or nondeductible items | (2) | (1.1) | % | ||||||||
| Nondeductible separation-related costs | 9 | 4.5 | % | ||||||||
| Changes in uncertain tax positions | 26 | 13.2 | % | ||||||||
| Total provision for income taxes | $ | 68 | 34.3 | % | |||||||
The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final tax expense for the years ended December 31, 2024 and 2023.
| Year Ended December 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Income taxes at U.S. statutory rate of 21% | $ | 39 | $ | 43 | |||||||
| Increases (decreases) resulting from: | |||||||||||
| Valuation allowance adjustments, net | 82 | 63 | |||||||||
| Net tax on remittance of foreign earnings | 13 | 29 | |||||||||
| U.S. tax on foreign earnings | 7 | 12 | |||||||||
| Foreign rate differentials | 5 | (2) | |||||||||
| Non-deductible fines | 5 | — | |||||||||
| Reserve adjustments, settlements and claims | 3 | (7) | |||||||||
| Tax credits | (3) | (1) | |||||||||
| Tax holidays | (5) | (6) | |||||||||
| Foreign currency remeasurement | (7) | 1 | |||||||||
| Changes in accounting methods and filing positions | (9) | (2) | |||||||||
| Enhanced research and development deductions | (9) | (8) | |||||||||
| Non-taxable income | (17) | (30) | |||||||||
| Non-deductible transaction costs | — | 10 | |||||||||
| Other, net | 4 | 2 | |||||||||
| Provision for income taxes, as reported | $ | 108 | $ | 104 | |||||||
In 2025, the Company recognized discrete tax benefits of $11 million related to unremitted earnings as a result of a favorable change in withholding tax rates and favorable provision to return adjustments of $21 million in various jurisdictions, partially offset by an increase in pre-Spin-Off and post-Spin-off uncertain tax positions of $21 million and $5 million, respectively.
In 2024, the Company recognized discrete tax expense of $21 million related to the establishment of a valuation allowance on its Polish operations as a result of the changes in judgment related to the recovery of its deferred tax assets. This expense was fully offset by a discrete tax benefit related to unremitted earnings as a result of change in structure and favorable provision to return adjustments in various jurisdictions.
In 2023, the Company recognized discrete tax benefits of $7 million, primarily due to certain unrecognized tax benefits and accrued interest related to a matter for which the statute of limitations had lapsed.
The Company recognizes taxes due under the Global Intangible Low-Taxed Income (GILTI) provision as a current period expense.
A roll forward of the Company’s total gross unrecognized tax benefits is presented below:
| (in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Balance, January 1 | $ | 10 | $ | 11 | $ | 35 | |||||||||||
| Additions based on tax positions related to current year | — | — | 1 | ||||||||||||||
| Additions for tax positions of prior years | 19 | 2 | 1 | ||||||||||||||
| Reductions for lapse in statute of limitations | (1) | (1) | — | ||||||||||||||
| Reductions for closure of tax audits and settlements | — | (2) | (2) | ||||||||||||||
| Reductions for tax positions of prior years | — | — | (11) | ||||||||||||||
| (Distributions) Acquisitions | — | — | (14) | ||||||||||||||
| Translation adjustment | 1 | — | 1 | ||||||||||||||
| Balance, December 31 | $ | 29 | $ | 10 | $ | 11 | |||||||||||
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and accrued approximately $14 million, $6 million and $4 million for the payment of interest and penalties at December 31, 2025, 2024 and 2023, respectively. The Company recognized expense related to interest and penalties of $8 million, $2 million and $1 million for the years ended December 31, 2025, 2024 and 2023, respectively.
As of December 31, 2025, approximately $43 million represents the amount that, if recognized, would affect the Company's effective income tax rate in future periods.
The Company and/or one of its subsidiaries file income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The PHINIA U.S. group filed its first U.S. federal return for the tax year 2023 in 2024; therefore, tax years 2023 and 2024 are the only open periods subject to Internal Revenue Service (IRS) audit. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:
| Tax jurisdiction | Years no longer subject to audit | Tax jurisdiction | Years no longer subject to audit | |||||||||||||||||
| United Kingdom | 2021 and prior | Turkey | 2019 and prior | |||||||||||||||||
| Mexico | 2017 and prior | Luxembourg | 2020 and prior | |||||||||||||||||
| China | 2018 and prior | Poland | 2020 and prior | |||||||||||||||||
| France | 2020 and prior | Romania | 2019 and prior | |||||||||||||||||
The components of deferred tax assets and liabilities consist of the following:
| December 31, | |||||||||||
| (in millions) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Interest limitation carryforwards | $ | 214 | $ | 188 | |||||||
| Net operating loss and capital loss carryforwards | 167 | 357 | |||||||||
| Pension | 47 | 29 | |||||||||
| Accrued expenses | 34 | 21 | |||||||||
| Employee compensation | 19 | 15 | |||||||||
| Warranty | 12 | 9 | |||||||||
| Other | 57 | 45 | |||||||||
| Total deferred tax assets | 550 | 664 | |||||||||
| Valuation allowances | (401) | (552) | |||||||||
| Net deferred tax asset | $ | 149 | $ | 112 | |||||||
| Deferred tax liabilities: | |||||||||||
| Unremitted foreign earnings | $ | (46) | $ | (51) | |||||||
| Goodwill and intangible assets | (40) | (34) | |||||||||
| Fixed assets | (30) | (28) | |||||||||
| Other | (24) | (10) | |||||||||
| Total deferred tax liabilities | (140) | (123) | |||||||||
| Net deferred taxes | $ | 9 | $ | (11) | |||||||
As of December 31, 2025, certain non-U.S. operations had net operating loss carryforwards totaling $652 million, available to offset future taxable income. These carryforwards are subject to expiration at various dates from 2026 through 2044. The Company has a valuation allowance against $641 million of these non-U.S. net operating loss carryforwards.
The Company reviews the likelihood that the benefit of its deferred tax assets will be realized and, therefore, the need for valuation allowances on a quarterly basis. The Company assesses existing deferred tax assets, net operating loss carryforwards, and tax credit carryforwards by jurisdiction and expectations of its ability to utilize these tax attributes through a review of past, current, and estimated future taxable income and tax planning strategies. If, based upon the weight of available evidence, it is more-likely-than-not the deferred tax assets will not be realized, a valuation allowance is recorded. Due to recent restructurings, the Company concluded that the weight of the negative evidence outweighs the positive evidence in certain foreign jurisdictions. As a result, the Company believes it is more-likely-than-not that the net deferred tax assets in certain foreign jurisdictions that include entities in Luxembourg, Poland, and certain deferred tax assets in the United Kingdom will not be realized in the future.
The following table represents a summary of the valuation allowances against deferred tax assets as of and for the three years December 31, 2025, 2024, and 2023:
| (in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Beginning balance, January 1 | $ | 552 | $ | 413 | $ | 478 | |||||||||||
Establishment of new allowances1 | 13 | 22 | 3 | ||||||||||||||
Net change to existing allowances2 | 10 | 60 | 60 | ||||||||||||||
Opening balance sheet equity/other3 | — | — | (110) | ||||||||||||||
| Foreign currency translation | 69 | (29) | (18) | ||||||||||||||
Changes in accounting methods and filing positions4 | (243) | 86 | — | ||||||||||||||
| Ending balance, December 31 | $ | 401 | $ | 552 | $ | 413 | |||||||||||
_____________________________
1 Reflects valuation allowances initially established as a result of a change in management’s judgment regarding the realizability of deferred tax assets.
2 Reflects movements in previously established valuation allowances, which increase or decrease as the related deferred tax assets increase or decrease. Such movements occur as a result of a change in management’s judgment regarding previously established valuation allowances, remeasurement due to a tax rate change and changes in the underlying attributes of the deferred tax assets, including expiration of the attribute and reversal of the temporary difference that gave rise to the deferred tax asset.
3 Reflects movements in previously established valuation allowances primarily recorded to equity as result of the Spin-off from the Former Parent in 2023.
4 Reflects movements that have a disclosure-only impact as they are offset by corresponding movements in deferred tax assets.
As of December 31, 2025, the Company recorded deferred tax liabilities of $46 million with respect to foreign unremitted earnings. The Company did not provide deferred tax liabilities with respect to certain book versus tax basis differences not represented by undistributed earnings of approximately $430 million as of December 31, 2025, because the Company continues to assert indefinite reinvestment of these basis differences. These basis differences would become taxable upon the sale or liquidation of the foreign subsidiaries. Based on the Company's structure, it is impracticable to determine the unrecognized deferred tax liability on these earnings. Actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale, or liquidation occurs.
The following is a summary of cash paid for taxes during the year ended December 31, 2025.
| (in millions) | 2025 | ||||
| Federal income tax | $ | (8) | |||
| State income tax | 1 | ||||
| Foreign Income tax | |||||
| China | 13 | ||||
| United Kingdom | 10 | ||||
| Poland | 7 | ||||
| France | 7 | ||||
| Romania | 7 | ||||
| India | 6 | ||||
| Mexico | 6 | ||||
| Turkey | 5 | ||||
| Brazil | 3 | ||||
| Other Foreign Jurisdictions | 4 | ||||
| Total income taxes paid, net | $ | 61 | |||
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.