Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

U.S. and foreign income before taxes are set forth below:

	2022		2021		2020
U.S.	$	1,124	$	1,062	$	684
Foreign	538		612		336
	$	1,662	$	1,674	$	1,020

The details of our income tax provision (benefit) are set forth below:

		2022		2021		2020
Current:	Federal	$	139	$	45	$	37
	Foreign	200		214		121
	State	53		40		23
		$	392	$	299	$	181
Deferred:	Federal	$	(31)	$	21	$	(21)
	Foreign	(10)		(227)		(29)
	State	(14)		6		(15)
		$	(55)	$	(200)	$	(65)
		$	337	$	99	$	116

The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:

	2022		2021		2020
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State income tax, net of federal tax	1.9		1.8		1.0
Statutory rate differential attributable to foreign operations	(2.0)		(1.0)		(0.9)
Adjustments to reserves and prior years	1.6		1.1		(1.7)
Excess tax benefits from stock-based awards	(1.4)		(2.7)		(3.4)
Change in valuation allowances	(0.5)		(0.8)		(2.5)
Impact of Russia Exit	4.3		—		—
Intercompany restructuring and Valuations of Intellectual Property	(4.9)		(11.3)		(0.3)
Nondeductible interest	—		1.4		—
Impact of tax law changes	—		(3.8)		(2.5)
Other, net	0.3		0.2		0.7
Effective income tax rate	20.3	%	5.9	%	11.4	%

Statutory rate differential attributable to foreign operations. This item includes local country taxes, withholding taxes, and shareholder-level taxes, net of U.S. foreign tax credits. In 2022, this item was favorably impacted by the ongoing effects of the KFC Europe Reorganization (as described below). In 2021, this item was favorably impacted by the ongoing effects of the KFC Europe Reorganization (as described below) partially offset by the unfavorable impact of recording deferred tax liabilities associated with unremitted foreign earnings.

Adjustments to reserves and prior years. This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. In 2022, this item was unfavorably impacted by $17 million of

adjustments made to current and deferred tax accounts in various jurisdictions to align with balances supported by 2021 and prior tax filings. Additionally, in 2022 this item was unfavorably impacted by $9 million of reserves established associated with prior year filing positions in various jurisdictions. In 2021, this item was unfavorably impacted by a $22 million reserve established due to a challenge of a prior year filing position in a foreign jurisdiction. In 2020, this item was favorably impacted by $11 million of adjustments made to current and deferred tax accounts in various jurisdictions to align with balances supported by 2019 and prior tax filings. Additionally, in 2020 this item was favorably impacted by a $6 million tax benefit associated with a state settlement.

Change in valuation allowances. This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year. In 2022, this item was favorably impacted by $13 million of tax benefit associated with a valuation allowance release in a foreign jurisdiction resulting from a change in management’s judgement as to realizability of deferred tax assets in that jurisdiction. In 2021, this item was favorably impacted by $15 million of tax benefit associated with a valuation allowance release resulting from a change in management’s judgment as to the realizability of foreign tax credit carryforwards in the U.S. In 2020, this item was favorably impacted by $22 million of tax benefit associated with a valuation allowance release in a foreign jurisdiction resulting from a change in management’s judgement as to realizability of indefinite lived tax loss carryforwards in that jurisdiction.

Impact of Russia Exit. Our decision to exit the Russia market resulted in a reduction in the tax basis of KFC IP rights held in Switzerland due to the expected loss of the Russia royalty income associated with such rights going forward. As a result, we remeasured and reassessed the need for a valuation allowance on the associated deferred tax assets. In addition, we 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 a net tax expense of $72 million in 2022.

Intercompany Restructuring and Valuations of Intellectual Property.

In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland (the “KFC Europe Reorganization”). Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC IP rights from subsidiaries in the UK to subsidiaries in Switzerland. With the transfers of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a one-time net deferred tax benefit of $152 million in 2021.

In December 2021, we continued our KFC Europe Reorganization and completed intra-entity transfers of additional European KFC IP rights from subsidiaries in the U.S. to subsidiaries in Switzerland. With the transfers of these additional rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a net one-time tax benefit of $35 million in 2021.

In the quarter ended December 31, 2022, we performed an annual valuation under Swiss laws of these Swiss IP rights, incorporating current assumptions around the expected future cash flows attributable to the IP. This valuation supported an increase to tax basis of Swiss IP rights associated with parts of our business that will continue to use these IP rights due to expected royalty growth assumptions in those parts of the business that largely offset the loss of Russia royalty income described above. Based on the valuation as well as future forecasting of taxable income, we remeasured and reassessed the need for a valuation allowance on the deferred tax assets in Switzerland. As a result, we recorded a net tax benefit of $75 million in the quarter ended December 31, 2022.

Nondeductible Interest. As a result of the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) on December 22, 2017, deductibility of U.S. interest expense was limited to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization. Beginning in 2022, deductibility of U.S. interest expense is limited to 30% of U.S. Earnings Before Interest and Taxes. Although the disallowed interest can be carried forward indefinitely, in management’s judgment interest carried forward will not be realizable in the future. In 2021, the Company recorded $23 million of tax expense while in 2020 and 2022, the Company did not record any tax expense associated with disallowed U.S. interest expense.

Impact of Tax Law Changes.

UK Tax Rate Change – On June 10, 2021, the UK Finance Act 2021 was enacted resulting in an increase in the UK corporate tax rate from 19% to 25%. As such, the Company recognized a $64 million tax benefit in the quarter ended June 30, 2021, associated with remeasuring its deferred tax assets in the UK from 19% to 25%.

On July 22, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%. As such, the Company recognized a $25 million tax benefit in 2020 associated with remeasuring its deferred tax assets in the UK from 17% to 19%.

Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost.

The details of 2022 and 2021 deferred tax assets (liabilities) are set forth below:

	2022		2021
Operating losses and interest deduction carryforwards	$	183	$	186
Capital losses	70		72
Tax credit carryforwards	206		194
Employee benefits	74		68
Share-based compensation	55		51
Lease-related liabilities	240		236
Accrued liabilities and other	40		52
Intangible assets	520		560
Property, plant and equipment	32		35
Deferred income	103		87
Capitalized Research & Development Costs	35		—
Gross deferred tax assets	1,558		1,541
Deferred tax asset valuation allowances	(458)		(462)
Net deferred tax assets	$	1,100	$	1,079
Property, plant and equipment	$	(79)	$	(85)
Operating lease right-of-use assets	(203)		(200)
Employee benefits	(7)		(24)
Derivative Instruments	(27)		(5)
Other	(35)		(49)
Gross deferred tax liabilities	$	(351)	$	(363)
Net deferred tax assets (liabilities)	$	749	$	716

The details of the 2022 and 2021 valuation allowance activity are set forth below:

	2022		2021
Beginning of Year	$	(462)	$	(789)
Increases	(22)		(31)
Decreases	21		355
Other Adjustments	5		3
End of Year	$	(458)	$	(462)

Reported in Consolidated Balance Sheets as:

	2022		2021
Deferred income taxes	$	750	$	724
Other liabilities and deferred credits	(1)		(8)
	$	749	$	716

As of December 31, 2022, we had approximately $4.3 billion of unremitted foreign retained earnings. The Tax Act imposed U.S. federal tax on all post-1986 foreign Earnings and Profits accumulated through December 31, 2017. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. federal tax. Undistributed foreign earnings may still

be subject to certain state and foreign income and withholding taxes upon repatriation. Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings outside the U.S. Thus, we have provided taxes, including any U.S. federal and state income, foreign income, or foreign withholding taxes on the majority of our unremitted earnings. In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions. We believe any such taxes would be immaterial.

Details of tax loss, credit carryforwards, and expiration dates along with valuation allowances as of December 31, 2022, are as follows:

	Gross Amount		Deferred Tax Asset		Valuation Allowance		Expiration
Federal net operating losses	$	9	$	2	$	—	2036-2037
Federal net operating losses - Indefinite	61		13		—		None
Foreign net operating losses	173		25		(4)		2023-2042
Foreign net operating losses - Indefinite	221		50		(32)		None
State net operating losses	1,315		56		(36)		2023-2041
Foreign capital loss carryforward - Indefinite	281		70		(70)		None
Foreign tax credits	200		200		(182)		2026-2032
State tax credits	6		6		(6)		2023
Federal interest deduction carryforward - Indefinite	30		6		—		None
State interest deduction carryforward - Indefinite	622		31		(30)		None
	$	2,918	$	459	$	(360)

We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

At December 31, 2022, the Company had $128 million of gross unrecognized tax benefits, $82 million of which would impact the effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:

	2022		2021
Beginning of Year	$	116	$	175
Additions on tax positions - current year	4		13
Additions for tax positions - prior years	8		41
Reductions for tax positions - prior years	—		(110)
Reductions for settlements	—		(3)
End of Year	$	128	$	116

The Company believes it is reasonably possible that its unrecognized tax benefits as of December 31, 2022, may decrease by approximately $1 million in the next 12 months due to settlements or statute of limitations expirations.

During 2022, 2021, and 2020 the Company recognized less than $1 million, $4 million, and $2 million of net expense, respectively, for interest and penalties in our Consolidated Statements of Income as components of its Income tax provision.

At both December 31, 2022, and 2021, the Company has recorded $3 million of net tax receivables, associated with interest and penalties.

The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions.

The Company has settled audits with the IRS through fiscal year 2012 and is currently under IRS examination for 2013-2018. Our operations in certain foreign jurisdictions are currently under audit and remain subject to examination for tax years as far back as 1999. See Note 20 for discussion of an Internal Revenue Service Proposed Adjustment.