Income taxes

9 Months Ended

May 31, 2024

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

The effective tax rate for the three months ended May 31, 2024 was an expense of 8.0% primarily due to tax benefits related to valuation allowance releases in foreign jurisdictions. The effective tax rate for the three months ended May 31, 2023 was a benefit of 86.3%, primarily due to tax benefits from changes to deferred taxes as a result of internal legal entity restructuring related to previous business acquisitions, and additional tax benefits claimed upon filing the Company's prior year tax returns.

The effective tax rate for the nine months ended May 31, 2024 was a benefit of 6.3% due to the impact of the goodwill impairment, which is primarily not deductible for tax purposes, and U.S tax on non-U.S. earnings, partially offset by tax benefits related to the initial recognition of tax basis in assets in foreign jurisdictions, net of valuation allowance. The effective tax rate for the nine months ended May 31, 2023 was a benefit of 33.8%, primarily due to tax benefits on the reduction in the valuation allowance previously recorded against deferred tax assets related to capital loss carryforwards. The reduction was primarily due to capital loss carryforwards utilized against capital gains recognized on the sale of shares in Cencora and based on forecasted capital gains. This benefit was partially offset by the impact of certain nondeductible opioid-related claims recorded in the nine months ended May 31, 2023.

Income taxes paid for the nine months ended May 31, 2024 and May 31, 2023 were $238 million and $170 million, respectively.

The Company is subject to income taxes and tax audits in many jurisdictions and is regularly audited by the Internal Revenue Service (the “IRS”). During the three months ended February 29, 2024, the IRS issued the Company a Revenue Agent’s Report (the “RAR”) for tax years 2014 through 2017. The Company disagrees with the RAR and has appealed certain issues. The primary disputed issue relates to the valuation of the call option exercised to acquire Alliance Boots GmbH (“Alliance Boots”), described in more detail below.

On August 2, 2012, the Company acquired a 45% equity interest in Alliance Boots along with a call option to acquire the remaining 55% equity interest in Alliance Boots, initially valued at $866 million. During the fiscal year ended August 31, 2014 (“fiscal 2014”), the Company entered into an amendment to the Purchase and Option Agreement which accelerated the option period. Upon the amendment, the Company was required to fair value the amended option, which was estimated to be zero as a result of the option being out of the money at that time. As a result, the Company recognized a non-cash loss on the exercise of the call option of $866 million in its fiscal 2014 financial statements. Subsequently, the rights and obligations from the exercised option were transferred to a foreign subsidiary of the Company during the fiscal year ended August 31, 2015 as part of the Company's reorganization in connection with the acquisition of the remaining 55% equity interest in Alliance Boots. As the fair value of the transferred rights and obligations from the exercised option was estimated to be zero at the time, no income was recognized for U.S. tax purposes. The IRS disagrees with the Company’s conclusion and is seeking an additional tax of $2.7 billion plus penalties and interest. The Company intends to vigorously defend its position on the transfer pricing matter through the IRS’s administrative appeals office and, if necessary, judicial proceedings and is confident in its ability to prevail on the merits.

As of May 31, 2024, we believe our reserves for uncertain tax positions are appropriate based on the technical merits of the Company’s tax positions. However, the ultimate outcome of a settlement or litigation is uncertain and final resolution of these matters may have a material adverse impact on the Company’s consolidated financial statements. We do not expect a final resolution of these matters in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.