Income Taxes

9 Months Ended

Oct. 02, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income taxes

The consolidated effective tax rate for the quarters ended October 2, 2021 and September 26, 2020 was 24% and 16%, respectively. The consolidated effective tax rate for the year-to-date periods ended October 2, 2021 and September 26, 2020 was 25% and 20%, respectively.

The effective tax rate for the quarter ended October 2, 2021, was unfavorably impacted by the establishment of a full valuation allowance of $20 million related to certain foreign deferred tax assets. During the current quarter, the Company determined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a full valuation allowance was recorded on a discrete period basis. For the year-to-date period ended October 2, 2021, the effective tax rate was unfavorably impacted by the aforementioned valuation allowance as well as tax legislation in the United Kingdom (UK). During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred tax balances related to the UK business to reflect the increased tax rate.

The effective tax rate for the quarter and year-to-date periods ended September 26, 2020, were favorably impacted by the reversal of a liability for uncertain tax positions of $32 million, resulting from the finalization of a tax examination. The reserves were related to the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

As of October 2, 2021, the Company classified $13 million of unrecognized tax benefits as a net current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $3 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.

The Company’s total gross unrecognized tax benefits as of October 2, 2021 was $60 million. Of this balance, $51 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

The accrual balance for tax-related interest was approximately $14 million at October 2, 2021.