Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We are subject to U.S. federal, state, and foreign income taxes. The components of income before provision for income taxes during the three years ended December 31, 2022, consisted of the following:

	2022		2021		2020
	(in millions)
United States	$	3,257.0	$	2,030.7	$	2,885.4
Foreign	975.4		699.7		231.5
Income before provision for income taxes	$	4,232.4	$	2,730.4	$	3,116.9

The components of our provision for income taxes during the three years ended December 31, 2022, consisted of the following:

	2022		2021		2020
	(in millions)
Current taxes:
Federal	$	779.0	$	374.9	$	71.4
State	34.9		26.5		18.9
Foreign	372.4		141.5		37.6
Total current taxes	1,186.3		542.9		127.9
Deferred taxes:
Federal	(404.0)		(36.9)		510.2
State	(11.0)		(19.3)		6.7
Foreign	139.1		(98.4)		(239.6)
Total deferred taxes	(275.9)		(154.6)		277.3
Provision for income taxes	$	910.4	$	388.3	$	405.2

Unremitted Earnings

As of December 31, 2022, we are treating all our foreign subsidiaries earnings to be indefinitely reinvested. Upon repatriation of the indefinitely reinvested earnings, in the form of dividends or otherwise, we could be subject to U.S. federal withholding taxes payable to various foreign countries and income taxes in certain states. We do not provide for deferred taxes on the excess of financial statement reporting over the tax basis of our investments in our foreign subsidiaries as they are deemed to be essentially permanent in duration. These permanently reinvested basis differences could reverse if we sell our foreign subsidiaries or various other events occur, none of which were considered probable as of December 31, 2022. The tax liabilities described above would not be material to our consolidated financial statements.

Effective Tax Rate Reconciliation

A reconciliation between the U.S. federal statutory rate of 21% and our effective tax rate is as follows:

	2022		2021		2020
Federal statutory tax rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal benefit	0.6	%	0.8	%	0.6	%
Foreign income tax rate differential	(0.3)	%	(0.3)	%	0.2	%
U.S. tax on foreign earnings, net of credits	1.9	%	0.7	%	2.7	%
Foreign derived intangible income deduction	(1.4)	%	(0.8)	%	(0.2)	%
Tax credits	(2.2)	%	(6.4)	%	(1.8)	%
Tax rate change	0.0	%	(3.5)	%	(1.2)	%
Stock compensation (benefit), shortfalls and cancellations	(0.8)	%	0.0	%	(2.3)	%
Long-term intercompany receivable write-off	—	%	—	%	(1.7)	%
Uncertain tax positions	2.7	%	2.0	%	1.3	%
Intra-entity transfer of intellectual property rights	—	%	—	%	(6.7)	%
Other	0.0	%	0.7	%	1.1	%
Effective tax rate	21.5	%	14.2	%	13.0	%

Our 21.5% effective tax rate for 2022 was higher than the U.S. statutory rate primarily due to an increase in our unrecognized tax benefit liabilities associated with intercompany transfer pricing matters offset by excess tax benefits related to stock-based compensation, tax credits and changes in our estimated to prior-year tax liabilities.

Our 14.2% effective tax rate for 2021 was lower than the U.S. statutory rate primarily due to discrete tax benefits of (i) $94.8 million associated with an increase in the United Kingdom’s (the “U.K.”) corporate tax rate from 19% to 25%, which was enacted in June 2021 and will become effective in April 2023, and (ii) $44.1 million resulting from an R&D tax credit study that we completed in 2021.

Our 13.0% effective tax rate for 2020 was lower than the U.S. statutory rate primarily due to (i) a discrete tax benefit of $209.0 million associated with an intra-entity transfer of intellectual property rights to our U.K. entity, (ii) a discrete tax benefit associated with the write-off of a long-term intercompany receivable, (iii) a discrete tax benefit associated with an increase in the U.K.’s corporate tax rate from 17% to 19%, which was enacted and became effective in July 2020, and (iv) excess tax benefits related to stock-based compensation. The impact of these items was partially offset by U.S. income tax on foreign earnings.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes were as follows:

	As of December 31,
	2022		2021
	(in millions)
Deferred tax assets:
Net operating loss	$	77.4	$	106.6
Tax credit carryforwards	223.0		202.4
Intangible assets	738.5		802.8
Stock-based compensation	124.4		94.6
Finance lease liabilities	94.9		103.4
Operating lease assets	79.6		81.1
R&D capitalization	438.3		—
Other	69.2		90.3
Gross deferred tax assets	1,845.3		1,481.2
Valuation allowance	(237.8)		(220.4)
Total deferred tax assets	1,607.5		1,260.8
Deferred tax liabilities:
Property and equipment	(139.8)		(118.2)
Acquired intangibles	(130.5)		(87.0)
Operating lease liabilities	(63.1)		(64.8)
Other	(27.2)		(56.3)
Total deferred tax liabilities	(360.6)		(326.3)
Net deferred tax assets	$	1,246.9	$	934.5

On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of our deferred tax assets. As of December 31, 2022, we maintained a valuation allowance of $237.8 million related primarily to U.S. state tax attributes.

In addition to deferred tax assets and liabilities, we have recorded deferred charges related to intra-entity sales of inventory. As of December 31, 2022 and 2021, the total deferred charges were $195.1 million and $225.4 million, respectively.

As of December 31, 2022, we had net operating loss (“NOL”) carryforwards of $65.3 million, which are subject to annual utilization limitations for U.S. federal income tax purposes. In 2027, our definite lived U.S. federal NOLs of $19.8 million will begin to expire, while the remaining portion may be carried forward indefinitely. For U.S. state income tax purposes, we had NOL carryforwards of $553.8 million and tax credit carryforwards of $273.5 million. The state NOL and tax credit carryforwards begin to expire in 2023. For foreign income tax purposes, we had NOL carryforwards of $151.4 million and tax credit carryforwards of $21.5 million. The foreign NOL carryforwards may be carried forward indefinitely, with the exception of $70.0 million that will expire in 2041. The foreign tax credit carryforwards will begin to expire in 2026.

Unrecognized Tax Benefits

Unrecognized tax benefits during the three years ended December 31, 2022 were as follows:

	2022		2021		2020
	(in millions)
Balance at beginning of the period	$	147.2	$	86.6	$	33.9
Increases related to current period tax positions	128.3		42.0		26.7
Increases related to prior period tax positions	205.3		19.9		26.7
Decreases related to prior period tax positions	(14.4)		—		—
Statute of limitations expiration	(4.5)		(1.3)		(0.7)
Foreign currency translation adjustment	(2.3)		—		—
Balance at end of period	$	459.6	$	147.2	$	86.6

During 2022, we increased our gross unrecognized tax benefits by $312.4 million, primarily associated with intercompany transfer pricing matters. This unrecognized tax benefit was recorded as a $29.7 million reduction to our gross deferred tax assets and a $282.7 million gross tax liability.

As of December 31, 2022, we have classified $44.1 million and $415.5 million of our unrecognized tax benefits as credits to “Deferred tax assets” and “Other long-term liabilities,” respectively, on our consolidated balance sheet.

Included in our unrecognized tax benefits as of December 31, 2022, 2021 and 2020, we had $208.5 million, $129.5 million and $75.8 million (net of the federal benefit on state issues), respectively, of unrecognized tax benefits, which would affect our effective income tax rate if recognized.

We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes. In 2022, we recognized total interest and penalty expenses of $36.6 million. As of December 31, 2022, our accrual for interest and penalties was $39.2 million. Our total interest and penalty expenses in 2021 and 2020 and our accrual for interest and penalties as of December 31, 2021 were not material to our consolidated financial statements.

The U.S. Internal Revenue Service and other local and foreign tax authorities routinely examine our tax returns, including intercompany transfer pricing, and it is reasonably possible that we will adjust the value of our uncertain tax positions related these matters and other issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.

As a result of various audit closures, settlements and statutes of limitations, we estimate that it is reasonably possible that our gross unrecognized tax benefits could decrease by up to $9.1 million in the next 12 months due to statute of limitations expirations.

We file U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. We have various income tax audits ongoing at any time throughout the world. Except for jurisdictions where we have NOLs or tax credit carryforwards, we are no longer subject to any tax assessment from tax authorities for years prior to 2014 in jurisdictions that have a material impact on our consolidated financial statements.