Xylem Inc.XYL

Xylem Inc. Income Taxes Disclosure

10-KFiled Feb 25, 20267 min read
Income Taxes
The source of pre-tax income and the components of income tax expense are as follows:
Year Ended December 31,
(in millions)202520242023
Income components:
Domestic$695 $471 $123 
Foreign486 616 512 
Total pre-tax income$1,181 $1,087 $635 
Income tax expense (income) components:
Current:
Domestic – federal$122 $108 $(4)
Domestic – state and local36 35 23 
Foreign108 90 86 
Total Current$266 $233 $105 
Deferred:
Domestic – federal$(30)$(38)$(49)
Domestic – state and local(7)(11)(8)
Foreign2 13 (22)
Total Deferred(35)(36)(79)
Total income tax provision$(231)$(197)$(26)
Effective income tax rate19.5 %18.1 %4.1 %
Reconciliations between taxes at the U.S. federal statutory tax rate and taxes at our effective income tax rate on earnings before income taxes are as follows:
Year Ended December 31,
(in millions)2025
U.S. federal statutory tax rate$248 21.0 %
State & local income tax, net of federal benefit (NOFB)21 1.8 %(a)
Foreign tax effects
Switzerland
Statutory tax rate difference between Switzerland and U.S.(28)(2.4)%
Effect of cantonal and communal income taxes9 0.7 %
Other adjustments(3)(0.3)%
Luxembourg
Changes in valuation allowances17 1.5 %
Tax effect of internal reorganization
(18)(1.5)%
Other adjustments3 0.3 %
Malta
Notional interest deduction(19)(1.6)%
Notional interest carryforward
(36)(3.1)%
Changes in valuation allowances
36 3.1 %
Other adjustments3 0.2 %
Other foreign jurisdictions26 2.2 %
Effect of cross-border tax laws
Foreign exchange on repatriations
13 1.1 %
Other adjustments(5)(0.4)%
Tax credits(10)(0.9)%
Changes in valuation allowances2 0.2 %
Nontaxable or nondeductible items4 0.3 %
Changes in unrecognized tax benefits4 0.3 %
Other adjustments
Deferred tax effects of internal reorganization
(42)(3.6)%
(b)
Other adjustments6 0.6 %
Effective income tax rate$231 19.5 %
(a)    State and local taxes in California, Florida, Texas, Minnesota, New York, and Pennsylvania made up the majority (greater than 50 percent) of the tax effect in this category
(b)    $42 million benefit reflects a one-time deferred tax benefit recorded in connection with an internal reorganization executed during the year.
Year Ended December 31,
20242023
Tax provision at U.S. statutory rate21.0 %21.0 %
Increase (decrease) in tax rate resulting from:
State income taxes1.8 1.7 
Uncertain tax positions— (9.9)
U.S. tax on foreign earnings1.2 2.5 
Tax incentives(1.3)(2.6)
Valuation allowance1.7 (5.8)
Gain on remeasurement of previously held equity interest(3.0)— 
Rate change(0.6)(2.0)
Federal R&D tax credit(0.6)(0.5)
Stock compensation(0.7)(0.6)
U.S. foreign derived intangible income tax benefit(0.6)(0.7)
Tax on distribution of foreign earnings1.0 — 
Non-deductible compensation0.4 1.2 
Other tax credits(0.2)(1.8)
Other – net(2.0)1.6 
Effective income tax rate18.1 %4.1 %

Income taxes paid (net of refunds) for the years ended December 31 are as follows:
(in millions)Year Ended December 31,
Jurisdiction202520242023
Federal$135 $79 $114 
State & Local37 32 29 
Foreign
Netherlands— (a)14 — (a)
Switzerland 142411
United Kingdom— (a)12— (a)
All other foreign jurisdictions81 58 57 
Total Taxes Paid$267 $219 $211 
(a)    Amounts for these jurisdictions in 2025 and 2023 fall below the 5% threshold and are not required to be disclosed under ASU 2023-09.
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the Consolidated Balance Sheets:
December 31,
(in millions)20252024
Deferred tax assets:
Employee benefits$58 $77 
Accrued expenses49 52 
Loss and other tax credit carryforwards333 236 
R&D capitalization68 57 
Inventory4 3 
Lease Liabilities95 73 
Hedging instruments77 2 
Other31 11 
Total deferred tax assets715 511 
Valuation allowance(290)(189)
Net deferred tax asset$425 $322 
Deferred tax liabilities:
Intangibles$482 $501 
Investment in foreign subsidiaries10 6 
Property, plant and equipment103 105 
Lease right-of-use assets91 70 
Hedging Instruments1 7 
Other2 5 
Total deferred tax liabilities$689 $694 
Management assesses all available positive and negative evidence, including prudent and feasible tax planning strategies, and estimates if sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2025, a valuation allowance of $290 million has been established to reduce the deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards.
A reconciliation of the change in valuation allowance on deferred tax assets is as follows:
(in millions)202520242023
Valuation allowance — January 1$189 $179 $204 
Change in assessment (a)(4)— (47)
Current year operations57 22 12 
Other comprehensive income3 1 1 
Foreign currency and other (b)45 (12)5 
Acquisitions— (1)4 
Valuation allowance — December 31$290 $189 $179 
(a)    Decrease in valuation allowance in 2025 and 2023 is primarily attributable to changes in realization on deferred tax assets in various foreign jurisdictions.
(b)    Increase in 2025 and decrease in 2024 in valuation allowance is primarily attributed to foreign exchange movement impacting foreign balances.
Deferred taxes are classified in the Consolidated Balance Sheets as follows:
December 31,
(in millions)20252024
Non-current assets$141 $125 
Non-current liabilities(405)(497)
Total net deferred tax liabilities$(264)$(372)
Tax attributes available to reduce future taxable income begin to expire as follows:
(in millions)December 31, 2025First Year of Expiration
U.S. net operating loss$2 December 31, 2026
U.S. tax credits7 December 31, 2032
State net operating loss99 December 31, 2026
State excess interest expense26 Indefinite
Foreign net operating loss1,359 December 31, 2026
Foreign tax credits5 December 31, 2030
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or upon the completion of the litigation process, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)202520242023
Unrecognized tax benefits — January 1$37 $35 $102 
Gross Increases - Current year tax positions6 3 2 
Gross Increases - Prior year tax positions6 1 4 
Gross Decreases - Prior year tax positions(1)(1)(75)
Acquisitions— 4 2 
Settlements— (2)— 
Lapse of Statute of Limitations— (3)— 
Currency Translation Adjustment1 — — 
Unrecognized tax benefits — December 31$49 $37 $35 
The amount of unrecognized tax benefits at December 31, 2025, which, if ultimately recognized, will reduce our effective tax rate, is $49 million. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our unrecognized tax benefits. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax controversies in one or more jurisdictions. These assessments or settlements could result in changes to our unrecognized tax benefits related to positions on prior years’ tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.
We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as a component of income tax expense in our Consolidated Income Statements. The amount of accrued interest relating to unrecognized tax benefits as of December 31, 2025 and 2024 was $9 million and $7 million, respectively.
During 2019, Xylem’s Swedish subsidiary received a tax assessment from the Swedish Tax Agency (the "STA") for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. Xylem filed an appeal with the Administrative Court of Växjö, which rendered a decision adverse to Xylem in June 2022 for SEK837 million (approximately $91 million USD), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal, and on May 15, 2024, that court rendered a decision in favor of Xylem and also remanded an issue to the trial court for resolution. In December 2025, the trial court issued a ruling on the remanded issue in Xylem's favor. The STA has appealed this ruling to the Administrative Court of Appeal. Management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the proposed assessment and will continue to vigorously defend our position through this litigation. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of December 31, 2025, we have not recorded any unrecognized tax benefits related to this uncertain tax position.
The following table summarizes our earliest open tax years by major jurisdiction:
JurisdictionEarliest Open Year
Italy2020
Luxembourg2021
Sweden2013
Germany2016
United Kingdom2021
United States2017
Switzerland2019
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Historical Timeline

Fiscal YearFiled
2025Feb 25, 2026Showing above
2024Mar 3, 2025
2023Feb 28, 2024
2022Feb 24, 2023
2021Feb 25, 2022
2020Feb 26, 2021
2019Feb 28, 2020
2018Feb 22, 2019
2017Feb 23, 2018
2016Feb 23, 2017
2015Feb 26, 2016

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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