Income taxes

12 Months Ended

Aug. 31, 2023

Income Tax Disclosure [Abstract]

Income taxes

Income taxesThe components of (Loss) earnings before income tax (benefit) provision were (in millions):

	2023		2022		2021
U.S.	$	(7,553)	$	2,998	$	61
Non–U.S.	2,134		987		1,934
Total	$	(5,419)	$	3,985	$	1,995

The Income tax (benefit) provision consists of the following (in millions):

	2023		2022		2021
Current provision
Federal	$	242	$	39	$	79
State	(13)		37		115
Non–U.S.	283		260		234
	$	512	$	336	$	428
Deferred provision
Federal	$	(1,886)	$	(78)	$	(10)
State	(364)		(20)		(46)
Non–U.S. – tax law change	—		—		344
Non–U.S. – excluding tax law change	(120)		(268)		(49)
	(2,370)		(366)		239
Income tax (benefit) provision	$	(1,858)	$	(30)	$	667

The Company's effective tax rate for fiscal 2023 and 2022 was a benefit of 34.3% and 0.8%, respectively. The increase in the effective tax rate benefit was primarily attributable to a reduction in the valuation allowance, changes to deferred taxes as a result of internal legal entity restructuring, and tax benefits related to a measurement change in prior year tax positions. These benefits were partially offset by the impact of certain nondeductible charges for opioid-related claims and litigation settlements recorded during fiscal 2023. The Company recognized a 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 Cencora and other forecasted capital gains. See Note 6. Equity method investments for further information.

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

	2023		2022		2021
Federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	5.8		0.4		3.5
Foreign income taxed at non-U.S. rates	(3.0)		(3.0)		(4.4)
Non-taxable income	2.5		(2.7)		(5.0)
Non-deductible expenses	(4.9)		3.0		0.3
Tax law changes	—		—		17.3
Change in valuation allowance 1	6.0		(9.0)		(4.7)
Tax benefits from restructuring	1.1		—		(4.2)
Tax expense on non-operating equity earnings	—		—		6.1
Uncertain tax positions	(0.5)		1.3		6.2
Non-controlling interest	(2.9)		1.2		—
Tax credits	2.8		(1.0)		(1.8)
Conversion of equity investment	—		(11.8)		—
Change in outside basis difference	1.9		—		—
Change in measurement of prior year tax positions	3.5		—		—
Other	1.0		(0.2)		(0.9)
Effective income tax rate 2	34.3	%	(0.8)	%	33.4	%

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

2Effective tax rate for fiscal 2023 represents a tax benefit on a pre-tax loss.

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

	August 31, 2023		August 31, 2022
Deferred tax assets:
Compensation and benefits	$	98	$	171
Insurance	131		108
Accrued rent & lease obligations	5,265		5,296
Legal liability 1	1,551		174
Allowance for doubtful accounts	23		53
Tax attributes	7,784		7,825
Stock compensation	74		56
Deferred income	8		120
Equity method investment	76		—
Other 1	143		56
Total deferred tax assets	$	15,153	$	13,859
Less: valuation allowance	7,360		7,521
Total deferred tax assets, net	$	7,793	$	6,338
Deferred tax liabilities:
Accelerated depreciation	$	254	$	634
Inventory	403		441
Intangible assets	1,024		1,134
Equity method investment	—		314
Lease right-of-use asset	4,690		4,763
Outside basis difference 1	1,045		52
Other 1	180		303
Total deferred tax liabilities	7,596		7,641
Net deferred tax assets (liabilities)	$	197	$	(1,303)

1Includes certain reclassifications to conform to current period presentation.

As of August 31, 2023, the Company has recorded deferred tax assets for tax attributes of $7.8 billion, primarily reflecting the benefit of $1.8 billion in U.S. federal, $465 million in state and $28.7 billion in non-U.S. ordinary and capital losses. In addition, these deferred tax assets include $158 million of income tax credits. Of these deferred tax assets, $6.9 billion will expire at various dates from 2024 through 2040. The residual deferred tax assets of $832 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 $7.4 billion against those deferred tax assets as of August 31, 2023.

Income taxes paid, net of refunds were $64 million, $387 million and $336 million for fiscal 2023, 2022 and 2021, 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, 2023 and 2022, unrecognized tax benefits of $703 million and $618 million were reported within Other non-current liabilities, respectively; $413 million and $473 million were reported against deferred taxes, respectively; and $116 million and $116 million were reported against related tax receivables in Other non-current assets, respectively, 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):

	2023		2022		2021
Balance at beginning of year	$	1,110	$	1,098	$	494
Gross increases related to tax positions in a prior period	12		63		229
Gross decreases related to tax positions in a prior period	(19)		(51)		(52)
Gross increases related to tax positions in the current period	12		21		446
Settlements with taxing authorities	(7)		(19)		(13)
Lapse of statute of limitations	(2)		(2)		(6)
Balance at end of year	$	1,106	$	1,110	$	1,098

At August 31, 2023, 2022 and 2021, $588 million, $529 million and $524 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 $257 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, 2023 and 2022, the Company had accrued interest and penalties of $125 million and $97 million, respectively. For the years ended August 31, 2023, 2022 and 2021, the amounts reported in income tax expense related to interest and penalties were $29 million, $13 million and $26 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 2018 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. A reduced tax rate will extend through December 2029. The holidays had a beneficial impact of $9 million, $104 million and $118 million (inclusive of capital GILTI tax cost) during fiscal 2023, 2022 and 2021, 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, 2023, 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.

U.S. tax law changes

On August 16, 2022, the United States government enacted the 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.