Income taxes

12 Months Ended

Aug. 31, 2022

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

U.S. tax law changes

On August 16, 2022, the United States government enacted the Inflation Reduction Act of 2022 (“IRA”). The IRA establishes a new corporate alternative minimum tax based on financial statement income adjusted for certain items. The new minimum tax is effective for tax years beginning after December 31, 2022 (fiscal 2024). The enactment of the IRA did not have a material impact to the Company’s financial statements.

During 2019, the U.S. Treasury Department issued regulations to apply retroactively covering certain components of the Tax Cuts and Jobs Act of 2017. Certain guidance included in these regulations is inconsistent with the Company’s interpretation that led to the recognition of $247 million of tax benefits in prior periods. The tax benefits relate to the Company’s one-time transition tax on certain un-repatriated earnings of foreign subsidiaries, which was enacted as part of the 2017 U.S. tax law changes. Despite this guidance, the Company remains confident in its interpretation of the U.S. tax law changes and intends to defend this position through litigation, if necessary. However, if the Company is ultimately unsuccessful in defending its position, it may be required to reverse all or a portion of the benefits previously recorded.

UK tax law changes

On June 10, 2021, the UK Finance Act 2021 was enacted increasing the UK tax rate from 19% to 25% effective April 1, 2023. The Company recorded tax expense of $344 million from re-measuring the net UK deferred tax liability in fiscal 2021. On July 22, 2020, the UK Finance Bill 2020 was enacted increasing the UK tax rate from 17% to 19% effective April 1, 2020. The Company recorded tax expense of $139 million from re-measuring the net UK deferred tax liability in fiscal 2020.

The components of earnings from continuing operations before income tax provision were (in millions):

	2022		2021		2020
U.S.	$	2,998	$	61	$	759
Non–U.S.	987		1,934		(313)
Total	$	3,985	$	1,995	$	446

The provision for income taxes from continuing operations consists of the following (in millions):

	2022		2021		2020
Current provision
Federal	$	39	$	79	$	184
State	37		115		49
Non–U.S.	260		234		135
	$	336	$	428	$	368
Deferred provision
Federal	$	(78)	$	(10)	$	(83)
State	(20)		(46)		2
Non–U.S. – tax law change	—		344		139
Non–U.S. – excluding tax law change	(268)		(49)		(87)
	(366)		239		(29)
Income tax (benefit) provision	$	(30)	$	667	$	339

The Company's effective tax rate for fiscal 2022 and 2021 was a 0.8% benefit and 33.4%, respectively. The net decrease in the effective tax rate was primarily attributable to pre-tax gains from the consolidation of the Company’s investments in VillageMD and Shields, for which a majority of these gains were not subject to tax. Additionally, the Company recognized tax benefit due to the reduction of a valuation allowance previously recorded against deferred tax assets related to capital loss carryforwards. The reduction is primarily due to capital loss carryforwards utilized in the current year against capital gains recognized on the sale of shares in AmerisourceBergen and Option Care, capital gains recognized from internal restructuring, and based on forecasted capital gains. See Note 3. Acquisitions and other investments and Note 6. Equity method investments for further information.

The difference between the statutory federal income tax rate and the effective tax rate from continuing operations is as follows:

	2022		2021		2020
Federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	0.4		3.5		8.8
Foreign income taxed at non-U.S. rates	(3.0)		(4.4)		(17.0)
Non-taxable income	(2.7)		(5.0)		(47.5)
Non-deductible expenses	3.0		0.3		9.0
Tax law changes	—		17.3		31.3
Change in valuation allowance 1	(9.0)		(4.7)		4.1
Tax benefits from restructuring	—		(4.2)		—
Tax expense on non-operating equity earnings	—		6.1		—
Uncertain tax positions	1.3		6.2		7.5
Non-controlling interest	1.2		—		—
Goodwill impairment	—		—		72.5
Tax credits	(1.0)		(1.8)		(10.3)
Conversion of equity investment	(11.8)		—		—
Other	(0.2)		(0.9)		(3.4)
Effective income tax rate	(0.8)	%	33.4	%	76.0	%

1Net of changes in related tax attributes and tax benefits from capital losses generated and utilized in fiscal 2021.

The deferred tax assets and liabilities included in the Consolidated Balance Sheets consist of the following (in millions):

	August 31, 2022		August 31, 2021
Deferred tax assets:
Compensation and benefits	$	171	$	175
Insurance	108		103
Accrued rent & lease obligations	5,296		5,372
Allowance for doubtful accounts	53		34
Tax attributes	7,825		7,467
Stock compensation	56		88
Deferred income	120		34
Other 1	230		189
	$	13,859	$	13,462
Less: valuation allowance	7,521		7,239
Total deferred tax assets	$	6,338	$	6,223
Deferred tax liabilities:
Accelerated depreciation	$	634	$	896
Inventory	441		377
Intangible assets	1,134		1,465
Equity method investment	314		236
Lease right-of-use asset	4,763		4,792
Other 1	355		219
Total deferred tax liabilities	7,641		7,985
Net deferred tax liabilities	$	1,303	$	1,762

1Includes certain reclassifications to conform to current period presentation.

As of August 31, 2022, the Company has recorded deferred tax assets for tax attributes of $7.8 billion, primarily reflecting the benefit of $1.6 billion in U.S. federal, $153 million in state and $28.8 billion in non-U.S. ordinary and capital losses. In addition, these deferred tax assets include $91 million of income tax credits. Of these deferred tax assets, $7.3 billion will expire at various dates from 2023 through 2039. The residual deferred tax assets of $483 million have no expiration date.

The Company believes it is more likely than not that the benefit from certain deferred tax assets will not be realized. The assessment of realization of deferred tax assets is performed based on the weight of the positive and negative evidence available to indicate whether the asset is recoverable, including tax planning strategies that are prudent and feasible. In recognition of this risk, the Company has recorded a valuation allowance of $7.5 billion against those deferred tax assets as of August 31, 2022.

Income taxes paid, net of refunds were $387 million, $336 million and $626 million for fiscal 2022, 2021 and 2020, respectively.

ASC Topic 740, Income Taxes, provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statement of tax positions taken or expected to be taken on a tax return, including the decision whether to file in a particular jurisdiction. As of August 31, 2022 and 2021, unrecognized tax benefits of $618 million and $594 million were reported as long-term liabilities; $473 million and $475 million were reported against deferred taxes; and $116 million and $114 million were reported against related tax receivables in Other non-current assets on the Consolidated Balance Sheets. These amounts include interest and penalties, when applicable.

The following table provides a reconciliation of the total amounts of unrecognized tax benefits (in millions):

	2022		2021		2020
Balance at beginning of year	$	1,098	$	494	$	455
Gross increases related to tax positions in a prior period	63		229		60
Gross decreases related to tax positions in a prior period	(51)		(52)		(23)
Gross increases related to tax positions in the current period	21		446		9
Settlements with taxing authorities	(19)		(13)		(4)
Lapse of statute of limitations	(2)		(6)		(3)
Balance at end of year	$	1,110	$	1,098	$	494

At August 31, 2022, 2021 and 2020, $529 million, $524 million and $353 million, respectively, of unrecognized tax benefits would favorably impact the effective tax rate if recognized. During the next twelve months, based on current knowledge, it is reasonably possible the amount of unrecognized tax benefits could decrease by up to $136 million due to anticipated federal and state tax audit settlements and the expirations of statutes of limitations associated with tax positions related to multiple state tax jurisdictions.

The Company recognizes interest and penalties in the income tax provision in its Consolidated Statements of Earnings. At August 31, 2022 and 2021, the Company had accrued interest and penalties of $97 million and $84 million, respectively. For the years ended August 31, 2022, 2021 and 2020, the amounts reported in income tax expense related to interest and penalties were $13 million, $26 million and $11 million, respectively.

The Company files a consolidated U.S. federal income tax return as well as income tax returns in various states and multiple foreign jurisdictions. It is generally no longer under audit examinations for U.S. federal income tax purposes for any years prior to fiscal 2014. With few exceptions, it is no longer subject to state and local income tax examinations by tax authorities for years before fiscal 2008. In foreign tax jurisdictions, the Company is generally no longer subject to examination by the tax authorities in the UK prior to 2015, Luxembourg prior to 2017 and in Germany prior to 2014.

The Company has received tax holidays from Swiss cantonal income taxes relative to certain of its Swiss operations. The income tax holidays expired in September 2022. Upon expiration, a reduced tax rate will extend through December 2029. The holidays had a beneficial impact of $104 million, $118 million and $124 million (inclusive of capital GILTI tax cost) during fiscal 2022, 2021 and 2020, respectively. This benefit is primarily included as part of the foreign income taxed at non-U.S. rates line in the effective tax rate reconciliation table above.

At August 31, 2022, it is not practicable for the Company to determine the amount of the unrecognized deferred tax liability it has with respect to temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration.