Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 16. Income Taxes

On August 6, 2019, Switzerland published changes to its Federal tax law in the Official Federal Collection of Laws. On September 27, 2019, the Zurich Canton published their decision on the September 1, 2019 Zurich Canton public vote regarding the Cantonal changes associated with the Swiss Federal tax law change. The intent of these tax law changes was to replace certain preferential tax regimes with a new set of internationally accepted measures that are hereafter referred to as “Swiss tax reform”. Based on these Federal/Cantonal events, it is our position that enactment of Swiss tax reform for U.S. GAAP purposes was met as of September 30, 2019, and we recorded the impacts in the third quarter of 2019. The net impact was a benefit of $767 million, which consisted of a $769 million reduction in deferred tax expense from an allowed step-up of intangible assets for tax purposes (recorded net of valuation allowance) and remeasurement of our deferred tax balances, partially offset by a $2 million indirect tax impact in selling, general and administrative expenses. The ongoing impacts of these Swiss tax reform law changes became effective January 1, 2020. With the acquisition of Chipita in January 2022 (refer to Note 2, Acquisitions and Divestitures), we believe there is a reasonable possibility that a significant portion of the valuation allowance recorded against the deferred tax asset for the step-up of intangible assets will no longer be needed. The amount of the valuation allowance to be released in 2022 is dependent on the increase in Switzerland's future taxable income.

Earnings/(losses) from continuing operations before income taxes and the provision for income taxes consisted of:

	For the Years Ended December 31,
	2021		2020		2019
	(in millions)
Earnings/(losses) from continuing operations before income taxes:
United States	$	519	$	514	$	751
Outside United States	3,850		2,869		2,696
	$	4,369	$	3,383	$	3,447
Provision for income taxes:
United States federal:
Current	$	297	$	440	$	145
Deferred	(31)		(82)		97
	266		358		242
State and local:
Current	89		98		29
Deferred	9		(7)		45
	98		91		74
Total United States	364		449		316
Outside United States:
Current	599		756		459
Deferred	227		19		(773)
Total outside United States	826		775		(314)
Total provision for income taxes	$	1,190	$	1,224	$	2

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate as follows:

	For the Years Ended December 31,
	2021	2020	2019
U.S. federal statutory rate	21.0%	21.0%	21.0%
Increase/(decrease) resulting from:
State and local income taxes, net of federal tax benefit	1.1%	1.6%	1.3%
Foreign rate differences	(1.6)%	1.1%	0.2%
Changes in judgment on realizability of deferred tax assets	0.1%	(2.2)%	(0.3)%
Reversal of other tax accruals no longer required	(0.5)%	(0.8)%	(3.0)%
Tax accrual on investment in KDP (including tax impact of    share sales)	4.7%	6.7%	0.8%
Excess tax benefits from equity compensation	(0.7)%	(1.0)%	(1.2)%
Tax legislation (non-Swiss tax reform)	2.3%	1.0%	0.4%
Swiss tax reform	—	—	(22.3)%
Business sales (including tax impact from JDE Peet's transaction)	—	7.4%	—
Foreign tax provisions under TCJA (GILTI, FDII and BEAT) (1)	0.8%	1.1%	2.5%
Other	—	0.3%	0.7%
Effective tax rate	27.2%	36.2%	0.1%

(1) The Tax Cuts and Jobs Act of 2017 (“TCJA”) established the Global Intangible Low-Tax Income (“GILTI”) provision, which taxes U.S. allocated expenses and certain income from foreign operations; the Foreign-Derived Intangible Income (“FDII”) provision, which allows a deduction against certain types of U.S. taxable income resulting in a lower effective U.S. tax rate on such income; and the Base Erosion Anti-abuse Tax (“BEAT”), which is a minimum tax based on cross-border service payments by U.S. entities.

Our 2021 effective tax rate of 27.2% was high due to the $187 million net tax expense incurred in connection with the KDP share sales during the second and third quarters. Excluding this impact, our effective tax rate was 23.0%, which reflects unfavorable provisions from the 2017 U.S. tax reform and taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes), largely offset by favorable impacts from the mix of pre-tax income in various non-U.S. jurisdictions. The 23.0% includes a discrete net tax benefit of $2 million, primarily driven by a $47 million net benefit from the release of liabilities for uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions and a $44 million benefit from two U.S. tax returns amended to reflect new guidance from the U.S. Treasury Department, offset by $100 million net tax expense from the increase of our deferred tax liabilities resulting from enacted tax legislation (mainly in the United Kingdom).

Our 2020 effective tax rate of 36.2% was high due to the $452 million net tax expense incurred in connection with the JDE Peet's transaction and four KDP share sales that occurred during 2020 (the related gains were reported as gains on equity method investments). Excluding these impacts, our effective tax rate was 22.8%, which reflects unfavorable provisions from U.S. tax reform and taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes), largely offset by favorable impacts from the mix of pre-tax income in various non-U.S. jurisdictions and discrete net tax benefits of $119 million. The discrete net benefits were primarily driven by the $70 million net benefit from the release of the China valuation allowance and a $50 million net benefit from the release of liabilities for uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions.

Our 2019 effective tax rate of 0.1% was significantly impacted by the $769 million net deferred tax benefit related to Swiss tax reform in the third quarter of 2019. Excluding this impact, our 2019 effective tax rate was 22.4%, which reflects unfavorable provisions from U.S. tax reform and taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes), largely offset by favorable impacts from the mix of pre-tax income in various non-U.S. jurisdictions and discrete net tax benefits of $176 million. The discrete net tax benefits were primarily driven by a $128 million net benefit from the release of liabilities for uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions.

Tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of:

	As of December 31,
	2021		2020
	(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	114	$	137
Accrued pension costs	23		251
Other employee benefits	150		151
Accrued expenses	454		420
Loss carryforwards	685		648
Tax credit carryforwards	786		790
Other	468		535
Total deferred income tax assets	2,680		2,932
Valuation allowance	(1,280)		(1,277)
Net deferred income tax assets	$	1,400	$	1,655
Deferred income tax liabilities:
Intangible assets, including impact from Swiss tax reform	$	(3,214)	$	(2,951)
Property, plant and equipment	(638)		(747)
Other	(451)		(513)
Total deferred income tax liabilities	(4,303)		(4,211)
Net deferred income tax liabilities	$	(2,903)	$	(2,556)

Our significant valuation allowances are in the U.S. and Switzerland. The U.S. valuation allowance mainly relates to excess foreign tax credits generated by the deemed repatriation under U.S. tax reform while the Swiss valuation allowance brings the allowed step-up of intangible assets recorded under Swiss tax reform to the amount more likely than not to be realized.

At December 31, 2021, the Company has pre-tax loss carryforwards of $2,935 million, of which $171 million will expire at various dates between 2022 and 2041 and the remaining $2,764 million can be carried forward indefinitely.

The unremitted earnings as of December 31, 2021 in those subsidiaries where we continue to be indefinitely reinvested is approximately $1.7 billion. We currently have not recognized approximately $121 million of deferred tax liabilities related to those unremitted earnings. Future tax law changes or changes in the needs of our non-U.S. subsidiaries could require us to recognize deferred tax liabilities on a portion, or all, of our accumulated earnings that are currently indefinitely reinvested.

The changes in our unrecognized tax benefits were:

	For the Years Ended December 31,
	2021		2020		2019
	(in millions)
January 1	$	442	$	426	$	516
Increases from positions taken during prior periods	31		35		27
Decreases from positions taken during prior periods	(21)		(17)		(35)
Increases from positions taken during the current period	47		48		50
Decreases relating to settlements with taxing authorities	(13)		(27)		(64)
Reductions resulting from the lapse of the applicable    statute of limitations	(26)		(29)		(64)
Currency/other	(14)		6		(4)
December 31	$	446	$	442	$	426

As of January 1, 2021, our unrecognized tax benefits were $442 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $369 million. Our unrecognized tax benefits were $446 million at December 31, 2021, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $372 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $35 million due to unfavorable audit developments or decrease by approximately $65 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $170 million as of January 1, 2021 and $173 million as of December 31, 2021. Our 2021 provision for income taxes included $11 million expense for interest and penalties.

In connection with the 2017 enacted U.S. tax reform, we recorded a $1.3 billion transition tax liability that is payable in installments through 2026. As of December 31, 2021, the remaining liability was approximately $720 million.

Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. U.S. federal, state and non-U.S. jurisdictions have statutes of limitations generally ranging from three to five years; however, these statutes are often extended by mutual agreement with the tax authorities. The earliest year still open to examination by U.S. federal and state tax authorities is 2016 and years still open to examination by non-U.S. tax authorities in major jurisdictions include (earliest open tax year in parentheses): China (2011), France (2015), India (2005), the United Kingdom (2015) and Switzerland (2016).