D.4 MD&A — Results of Operations

As of December 31, 20X1, we had approximately $XX million in net DTAs. These DTAs include approximately $XX million related to NOL carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. Many of these NOL carryforwards will expire if they are not used within certain periods. At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these DTAs. However, it is possible that some or all of these NOL carryforwards could ultimately expire unused, especially if our Component X restructuring initiative is not successful. Therefore, unless we are able to generate sufficient taxable income from our Component Y operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period the allowance is recognized and materially adversely affect our results of operations and statement of financial condition.

We recorded a valuation allowance against all of our DTAs as of both December 31, 20X2, and December 31, 20X1. We intend to continue maintaining a full valuation allowance on our DTAs until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain DTAs and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

Changes in tax laws and rates may affect recorded DTAs and DTLs and our ETR in the future. In January 20X4, Country X made significant changes to its tax laws, including certain changes that were retroactive to our 20X3 tax year. Because a change in tax law is accounted for in the period of enactment, the retroactive effects cannot be recognized in our 20X3 financial results and instead will be reflected in our 20X4 financial results. We estimate that a benefit of approximately $XXX will be accounted for as a discrete item in our tax provision for the first quarter of 20X4. In addition, we expect this tax law change to favorably affect our estimated AETR for 20X4 by approximately X percentage points as compared to 20X3.

On October 8, 2021, the OECD announced that members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the “Inclusive Framework”) agreed to a two-pillar solution to address the tax challenges associated with the digitalization of the economy. On December 20, 2021, the OECD released the Pillar Two model rules, which define the global minimum tax and call for the taxation of large corporations at a minimum rate of 15 percent. The OECD has since issued commentary and additional administrative guidance related to the Inclusive Framework agreement.

Although we are unable to predict when and how the Inclusive Framework agreement will be enacted into law in member countries, it is possible that its implementation, including the global minimum corporate tax rate, could have a material effect on the liability for corporate taxes and consolidated ETR in the United States.