Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

	Quarter ended						Year to date
	2022			2021			2022			2021
Income tax (benefit) provision	$	116		$	(77)		$	281		$	22
Effective tax rate	25.8		%	(17.0)		%	22.7		%	1.8		%

Our third quarter effective tax rate was higher than the prior year primarily due to the following:

•Lapping a $152 million tax benefit recorded in the quarter ended September 30, 2021, resulting from a KFC Europe reorganization in which we concentrated management responsibility for European (excluding the United Kingdom ("UK")) KFC franchise development, support operation and management oversight in Switzerland. Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC intellectual property rights from subsidiaries in the UK to subsidiaries in Switzerland. With the transfer of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law which resulted in the recording of the one-time tax benefit to record the deferred tax asset.

•Lower excess tax benefits on share-based compensation than those recognized in the quarter ended September 30, 2021.

•Higher tax expense recognized in the quarter ended September 30, 2022, associated with adjustments related to prior year taxes.

Our year-to-date effective tax rate was also higher than the prior year due to the items discussed above, as well as the following:

•Our decision to exit the Russia market is anticipated to result in a reduction in the tax basis of intellectual property rights held in Switzerland due to the expected loss of the Russian royalty income associated with such rights going forward. As a result, we have remeasured and reassessed the need for a valuation allowance on those deferred tax assets. In addition, we have reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the existing basis difference will now reverse by way of sale. Primarily as a result of these items, we recorded $69 million of net tax expense in the year to date ended September 30, 2022 associated with our decision to exit the Russia market.

•Lapping a $64 million tax benefit that was recorded in the quarter ended June 30, 2021, to remeasure deferred taxes necessitated by the enactment of the UK Finance Act 2021. The UK Finance Act increased the UK corporate income tax rate from 19% to 25%, beginning April 1, 2023.

•The items above were partially offset by $82 million of tax benefit discretely recorded in the quarter ended March 31, 2022, from the release of a valuation allowance on foreign tax credit carryforwards. In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year. These regulations make foreign taxes paid to certain countries no longer creditable in the U.S. Accordingly, we reversed a valuation allowance associated with existing foreign tax credit carryforwards that we now believe will be used to offset these now non-creditable taxes in 2022 and future years.