Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

In August 2022, the U.S. Government enacted legislation commonly referred to as the Inflation Reduction Act that became effective January 1, 2023. The main provisions of the Inflation Reduction Act that impact us are: (i) a 15% corporate alternative minimum tax (“Corporate AMT”) and (ii) a 1% excise tax on share repurchases, which is recorded in equity on our consolidated statements of stockholders’ equity (deficit).

We are considered an “applicable corporation” for purposes of Corporate AMT. We expect our regular federal income tax liability will generally exceed our Corporate AMT liability; however, certain unique circumstances may result in our Corporate AMT liability exceeding our regular federal income tax liability, including when tax losses are reported in a different year than book losses.

Earnings before income taxes, provision for income taxes and income tax rates consisted of the following:

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
(in millions)	2023			2022			2023			2022
Earnings before income taxes	$	8,193		$	4,685		$	2,908		$	407
Provision for income taxes	2,123			1,611			742			183
Income tax rate	25.9		%	34.4		%	25.5		%	45.0		%

Our income tax rate for the nine months ended September 30, 2023 differs from the U.S. federal statutory rate of 21%, due primarily to state tax expense and a valuation allowance recorded against a deferred tax asset related to the disposition of our former investment in JUUL. Our income tax rate for the three months ended September 30, 2023 differs from the U.S. federal statutory rate of 21%, due primarily to state tax expense.

Our income tax rates for the nine and three months ended September 30, 2022 differ from the U.S. federal statutory rate of 21%, due primarily to state tax expense, including the state tax treatment of the impairment charge on our equity investment in ABI, and a valuation allowance recorded against a deferred tax asset related to the decrease in the estimated fair value of our former investment in JUUL, partially offset by the release of a valuation allowance related to our Cronos warrant and tax accruals no longer required.

We are subject to income taxation in many jurisdictions. Unrecognized tax benefits reflect the differences between tax positions we have taken or expect to take on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within our control.

For the year ending December 31, 2023, we expect to recognize an approximate $6.5 billion ordinary loss for cash tax purposes with respect to a portion of our tax basis associated with our former investment in JUUL. For financial statement purposes, we expect to fully reserve for the tax benefit associated with this ordinary loss by recording an unrecognized tax benefit of approximately $1.6 billion in 2023 on a pro-rata basis, pending the IRS’s review of our tax position. For the nine months ended September 30, 2023, we recognized a pro-rata portion of this ordinary loss, which resulted in a tax benefit of $1,141 million and a reduction to our current income taxes payable. For the nine months ended September 30, 2023, we also recognized a $1,173 million increase in a long-term liability for unrecognized tax benefits related to this tax position, partially offset by a $32 million deferred federal benefit for state taxes. There was no impact to our condensed consolidated statement of earnings for the nine and three months ended September 30, 2023. For further discussion of our former investment in JUUL, see Note 5. Investments in Equity Securities.

At September 30, 2023, our total unrecognized tax benefits were $1,233 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2023, was $35 million, along with $1,198 million affecting deferred taxes. The amount of unrecognized tax benefit that, if recognized, would impact the effective tax rate at December 31, 2022, was $44 million, along with $25 million affecting deferred taxes. Unrecognized tax benefits increased by $1,164 million from December 31, 2022 due primarily to the tax position established with respect to the character of losses from our former investment in JUUL as discussed above.

As a result of the recognition of the approximate $6.5 billion ordinary loss for cash tax purposes discussed above, we expect to be subject to Corporate AMT in 2023.

The following chart provides a reconciliation of the beginning and ending valuation allowances for the nine months ended September 30, 2023:

(in millions)
Balance at beginning of year	$	2,800
Additions to valuation allowance charged to income tax expense	76
Releases to valuation allowance credited to income tax benefit	(6)
Foreign currency translation	(2)
Additions to valuation allowance due to NJOY Transaction (no impact to earnings)	12
Reductions to valuation allowance offset to deferred tax asset (no impact to earnings)	(663)
Balance at end of period	$	2,217

We determine deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We determine the realizability of deferred tax assets based on the weight of all available positive and negative evidence. In reaching this determination, we consider the character of the assets and the possible sources of taxable income of the appropriate character within the available carryback and carryforward periods available under the tax law.

For the nine months ended September 30, 2023, we reduced the deferred tax asset and corresponding valuation allowance for the portion of our JUUL capital losses that is now part of our tax basis in the shares of a foreign subsidiary. This outside basis difference of the foreign subsidiary is not recognized as a deferred tax asset since we do not expect the temporary difference to reverse in the foreseeable future. The cumulative valuation allowance at September 30, 2023 was primarily attributable to

deferred tax assets recorded in connection with the portion of our JUUL capital losses that is now included in our tax basis in the shares of a domestic subsidiary and our investment in Cronos.