Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Income before income taxes consisted of the following (in millions):
Year Ended December 31, 2021 2020 2019
United States $ 3,538  $ 3,149  $ 3,249 
International 8,887  6,600  7,537 
Total $ 12,425  $ 9,749  $ 10,786 
Income taxes consisted of the following (in millions):
United States State and Local International Total
2021        
Current $ 243  $ 106  $ 1,378  $ 1,727 
Deferred 229  (10) 675 
1
 894 
2020        
Current $ 296  $ 396  $ 1,307  $ 1,999 
Deferred (220) 21  181  (18)
2019        
Current $ 508  $ 94  $ 1,479  $ 2,081 
Deferred (65) 52  (267) (280)
1 Includes net tax expense of $195 million related to the changes in tax laws in certain foreign jurisdictions.
We made income tax payments of $2,168 million, $1,268 million and $2,126 million in 2021, 2020 and 2019, respectively.
Our effective tax rate reflects the tax benefits of having significant operations outside the United States, which are generally taxed at rates lower than the statutory U.S. rate. As a result of employment actions and capital investments made by the Company, certain tax jurisdictions provide income tax incentive grants, including Brazil, Costa Rica, Singapore and Eswatini. The terms of these grants expire from 2023 to 2036. We anticipate that we will be able to extend or renew the grants in these locations. Tax incentive grants favorably impacted our income tax expense by $381 million, $317 million and $335 million for the years ended December 31, 2021, 2020 and 2019, respectively. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method.
A reconciliation of the statutory U.S. federal tax rate and our effective tax rate is as follows:
Year Ended December 31, 2021 2020 2019
Statutory U.S. federal tax rate 21.0  % 21.0  % 21.0  %
State and local income taxes — net of federal benefit 1.1  1.1  0.9 
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal tax rate 2.3 
1
 0.9 
3
 1.1 
6,7,8
Equity income or loss (2.0) (1.4) (1.6)
Excess tax benefits on stock-based compensation (0.5) (0.8) (0.9)
Other — net (0.8)
2
 (0.5)
4,5
 (3.8)
9
Effective tax rate 21.1  % 20.3  % 16.7  %
1 Includes net tax charges of $375 million (or a 3.0 percent impact on our effective tax rate) related to changes in tax laws in certain foreign jurisdictions, amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other discrete items.
2 Includes a tax benefit of $14 million (or a 1.5 percent impact on our effective tax rate) associated with the $834 million gain recorded upon the acquisition of the remaining ownership interest in BodyArmor. Refer to Note 2.
3 Includes net tax charges of $110 million (or a 1.1 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other agreed-upon audit issues.
4 Includes net tax expense of $431 million (or a 4.4 percent impact on our effective tax rate) primarily related to changes in judgment on specific tax positions due to the Opinion and amounts required to be recorded for changes to other uncertain tax positions, including interest and penalties. Also includes a tax benefit of $107 million (or a 1.1 percent impact on our effective tax rate) related to changes in our assessment of certain valuation allowances and a net tax benefit of $135 million (or a 1.4 percent impact on our effective tax rate) related to domestic return to provision adjustments and other tax items.
5 Includes a tax benefit of $40 million (or a 2.4 percent impact on our effective tax rate) associated with the $902 million gain recorded upon the acquisition of the remaining ownership interest in fairlife. Refer to Note 2.
6 Includes net tax charges of $199 million (or a 1.9 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other agreed-upon audit issues.
7 Includes the impact of pretax charges of $710 million (or a 1.2 percent impact on our effective tax rate) related to the impairment of certain of our equity method investees.
8 Includes a tax benefit of $199 million (or a 1.5 percent impact on our effective tax rate) recorded as a result of CCBA no longer qualifying as a discontinued operation. Refer to Note 2.
9 Includes a net tax benefit of $184 million (or a 1.7 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, a tax benefit of $145 million (or a 1.4 percent impact on our effective tax rate) related to changes in our assessment of certain valuation allowances and a net tax benefit of $89 million (or a 0.8 percent impact on our effective tax rate) related to domestic return to provision adjustments as well as other agreed-upon audit issues.
As of December 31, 2021, we have not recorded incremental income taxes for any additional outside basis differences of approximately $5.1 billion in our investments in foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities is not practicable.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Reform Act require the Company to include in its U.S. income tax return each foreign subsidiary’s earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. An accounting policy election is available to either account for the tax effects of GILTI in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to such taxes. We have elected to account for the tax effects of these provisions in the period that is subject to such tax and the impact is reflected in our full year provision.
The Company and its subsidiaries file income tax returns in all applicable jurisdictions, including the U.S. federal jurisdiction, U.S. state jurisdictions and foreign jurisdictions. U.S. tax authorities have completed their federal income tax examinations for all years prior to 2007. With respect to U.S. state jurisdictions and foreign jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years prior to 2006. For U.S. federal and state tax purposes, the net operating losses and tax credit carryovers acquired in connection with our acquisition of Coca‑Cola Enterprises Inc.’s former North America business that were generated from the years of 1990 through 2010 are subject to adjustments until the year in which they are actually utilized is no longer subject to examination. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, including interest and penalties, have been provided for in accordance with the applicable accounting guidance.
On November 18, 2020, the Tax Court issued the Opinion regarding the Company’s 2015 litigation with the IRS involving transfer pricing tax adjustments in which the court predominantly sided with the IRS. The Company disagrees with the Opinion and intends to vigorously defend its position. Refer to Note 11.
As of December 31, 2021, the gross amount of unrecognized tax benefits was $906 million. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit of $600 million, exclusive of any benefits related to interest and penalties. The remaining $306 million primarily represents tax benefits that would be received in different tax jurisdictions in the event the Company did not prevail on all uncertain tax positions.
A reconciliation of the changes in the gross amount of unrecognized tax benefits is as follows (in millions):
Year Ended December 31, 2021 2020 2019
Balance of unrecognized tax benefits at beginning of year $ 915  $ 392  $ 336 
Increase related to prior period tax positions 9  528 
1
 204 
2
Decrease related to prior period tax positions (50) (1) — 
Increase related to current period tax positions 37  26  29 
Decrease related to settlements with taxing authorities (4) (19) (174)
3
Effect of foreign currency translation (1) (11) (3)
Balance of unrecognized tax benefits at end of year $ 906  $ 915  $ 392 
1 The increase was primarily related to a change in judgment on certain tax positions due to the Opinion. Refer to Note 11.
2 The increase was primarily related to a change in judgment about the Company’s tax positions with several foreign jurisdictions.
3 The decrease was primarily related to a change in judgment about one of the Company’s tax positions that became certain as a result of settlement of a matter in the United States.
The Company recognizes interest and penalties related to unrecognized tax benefits in the line item income taxes on our consolidated statement of income. The Company had $453 million, $391 million and $201 million in interest and penalties related to unrecognized tax benefits accrued as of December 31, 2021, 2020 and 2019, respectively. Of these amounts, expense of $62 million, $190 million and $11 million was recognized in 2021, 2020 and 2019, respectively. If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would be a benefit to the Company’s effective tax rate.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect any changes will have a significant impact on our consolidated statement of income or consolidated balance sheet. These changes may be the result of settlements of ongoing audits, statute of limitations expiring or final settlements in transfer pricing matters that are the subject of litigation. Currently, an estimate of the range of the reasonably possible outcomes cannot be made.
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities consisted of the following (in millions):
December 31, 2021 2020
Deferred tax assets:    
Property, plant and equipment $ 36  $ 44 
Trademarks and other intangible assets 1,910  2,214 
Equity method investments (including net foreign currency translation adjustments) 595  580 
Derivative financial instruments 215  523 
Other liabilities 1,255  1,401 
Benefit plans 670  893 
Net operating/capital loss carryforwards 280  320 
Other 377  391 
Gross deferred tax assets 5,338  6,366 
Valuation allowances (401) (406)
Total deferred tax assets $ 4,937  $ 5,960 
Deferred tax liabilities:    
Property, plant and equipment $ (721) $ (837)
Trademarks and other intangible assets (1,783) (1,661)
Equity method investments (including net foreign currency translation adjustments) (1,619) (1,533)
Derivative financial instruments (500) (435)
Other liabilities (315) (402)
Benefit plans (527) (321)
Other (164) (144)
Total deferred tax liabilities $ (5,629) $ (5,333)
Net deferred tax assets (liabilities) $ (692) $ 627 
As of December 31, 2021 and 2020, we had net deferred tax assets of $0.7 billion and $1.4 billion, respectively, located in countries outside the United States.
As of December 31, 2021, we had $2,313 million of loss carryforwards available to reduce future taxable income. Loss carryforwards of $849 million must be utilized within the next five years, and the remainder can be utilized over a period greater than five years.
An analysis of our deferred tax asset valuation allowances is as follows (in millions):
Year Ended December 31, 2021 2020 2019
Balance at beginning of year $ 406  $ 303  $ 419 
Additions 25  240  148 
Deductions (30) (137) (264)
Balance at end of year $ 401  $ 406  $ 303 
The Company’s deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards and foreign tax credit carryforwards from operations in various jurisdictions and basis differences in certain equity investments. Current evidence does not suggest we will realize sufficient taxable income of the appropriate character within the carryforward period to allow us to realize these deferred tax benefits. If we were to identify and implement tax planning strategies to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets in our consolidated balance sheet.
In 2021, the Company recognized a net decrease of $5 million in its valuation allowances. The decrease was primarily due to net decreases in the deferred tax assets and related valuation allowances on certain equity investments and the changes in net operating losses in the normal course of business.
In 2020, the Company recognized a net increase of $103 million in its valuation allowances. The increase was primarily due to net increases in the deferred tax assets and related valuation allowances on certain equity investments. The increase was also due to the increase of valuation allowances after considering significant negative evidence on the utilization of certain net operating losses and excess foreign tax credits.
In 2019, the Company recognized a net decrease of $116 million in its valuation allowances. This decrease was primarily due to the reversal of a valuation allowance after considering significant positive evidence on the utilization of certain net operating losses. This decrease was also due to the reversal of a valuation allowance in our U.S. operations related to expenses that were previously determined to be nondeductible and the changes in net operating losses in the normal course of business. The decrease was partially offset by an increase in the valuation allowance due to increases in the deferred tax assets and related valuation allowances on certain equity method investments and an increase due to the acquisition of foreign operations.