Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Income before income taxes consisted of the following (in millions):
Year Ended December 31, 2022 2021 2020
United States $ 3,452  $ 3,538  $ 3,149 
International 8,234  8,887  6,600 
Total $ 11,686  $ 12,425  $ 9,749 
Income taxes consisted of the following (in millions):
United States State and Local International Total
2022        
Current $ 468  $ 118  $ 1,651  $ 2,237 
Deferred (121) (4) 3  (122)
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)
1 Includes net tax expense of $195 million related to changes in tax laws in certain foreign jurisdictions.
We made income tax payments of $2,403 million, $2,168 million and $1,268 million in 2022, 2021 and 2020, 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. federal tax 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 2025 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 $406 million, $381 million and $317 million for the years ended December 31, 2022, 2021 and 2020, 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, 2022 2021 2020
Statutory U.S. federal tax rate 21.0  % 21.0  % 21.0  %
State and local income taxes — net of federal benefit 1.4  1.1  1.1 
Earnings in jurisdictions taxed at rates different from the statutory U.S.
   federal tax rate		 (0.6) 2.3 
1
 0.9 
3
Equity income or loss (2.7) (2.0) (1.4)
Excess tax benefits on stock-based compensation (0.7) (0.5) (0.8)
Other — net (0.3) (0.8)
2
 (0.5)
4,5
Effective tax rate 18.1  % 21.1  % 20.3  %
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.
As of December 31, 2022, we have not recorded incremental income taxes for additional outside basis differences of $6.8 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 2007. For U.S. federal and state tax purposes, the net operating losses and tax credit carryovers that were acquired in connection with our acquisition of Coca‑Cola Enterprises Inc.’s former North America business and that were generated from 1990 through 2010 are subject to adjustments until the year in which they are 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, 2022, the gross amount of unrecognized tax benefits was $926 million. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit of $617 million, exclusive of any benefits related to interest and penalties. The remaining $309 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, 2022 2021 2020
Balance of unrecognized tax benefits at beginning of year $ 906  $ 915  $ 392 
Increase related to prior period tax positions 6  9  528 
1
Decrease related to prior period tax positions —  (50) (1)
Increase related to current period tax positions 38  37  26 
Decrease related to settlements with taxing authorities (2) (4) (19)
Effect of foreign currency translation (22) (1) (11)
Balance of unrecognized tax benefits at end of year $ 926  $ 906  $ 915 
1 The increase was primarily related to a change in judgment on certain tax positions due to the Opinion. Refer to Note 11.
The Company recognizes interest and penalties related to unrecognized tax benefits in the line item income taxes in our consolidated statement of income. The Company had $496 million, $453 million and $391 million in interest and penalties related to unrecognized tax benefits accrued as of December 31, 2022, 2021 and 2020, respectively. Of these amounts, expense of $43 million, $62 million and $190 million was recognized in 2022, 2021 and 2020, 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, 2022 2021
Deferred tax assets:    
Property, plant and equipment $ 40  $ 36 
Trademarks and other intangible assets 1,617  1,910 
Equity method investments (including net foreign currency translation adjustments) 366  595 
Derivative financial instruments 207  215 
Other liabilities 1,503  1,255 
Benefit plans 522  670 
Net operating loss carryforwards 248  280 
Other 530  377 
Gross deferred tax assets 5,033  5,338 
Valuation allowances (424) (401)
Total deferred tax assets $ 4,609  $ 4,937 
Deferred tax liabilities:    
Property, plant and equipment $ (741) $ (721)
Trademarks and other intangible assets (1,843) (1,783)
Equity method investments (including net foreign currency translation adjustments) (1,632) (1,619)
Derivative financial instruments (488) (500)
Other liabilities (372) (315)
Benefit plans (490) (527)
Other (211) (164)
Total deferred tax liabilities $ (5,777) $ (5,629)
Net deferred tax assets (liabilities) $ (1,168) $ (692)
As of December 31, 2022 and 2021, we had net deferred tax assets of $398 million and $657 million, respectively, located in countries outside the United States.
As of December 31, 2022, we had $1,605 million of loss carryforwards available to reduce future taxable income. Loss carryforwards of $322 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, 2022 2021 2020
Balance at beginning of year $ 401  $ 406  $ 303 
Additions 47  25  240 
Deductions (24) (30) (137)
Balance at end of year $ 424  $ 401  $ 406 
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 that 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 2022, the Company recognized a net increase of $23 million in its valuation allowances. The increase was primarily due to significant negative evidence on the utilization of excess foreign tax credits generated in the current year. The increase was also due to net increases 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 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.