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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
For the purposes of the Consolidated Financial Statements, income taxes and related income tax accounts have been calculated using the separate return method as if the Company filed income tax returns on a standalone basis for the entirety of each of the periods presented. Prior to the Kenvue IPO, the Company’s operations were calculated on a carve-out basis and included certain hypothetical foreign tax credit benefits. Following the Kenvue IPO, these hypothetical foreign tax credit benefits are not available for future utilization by the Company and were removed from the tax provision. Furthermore, the Company operated as part of J&J until the completion of the Exchange Offer on August 23, 2023, and therefore the Company will be included in J&J’s U.S. Federal consolidated income tax return until that date. The Company will then file a standalone U.S. Federal consolidated income tax return for the remainder of fiscal year 2023. The Company expects to file income tax returns on a standalone basis in most other jurisdictions in which it operates for fiscal year 2023. Certain current income tax liabilities related to our activities included in J&J’s income tax returns were assumed to be immediately settled with J&J through the Net Parent Investment or Additional Paid-In Capital accounts on the Consolidated Balance Sheets and reflected in the Consolidated Statements of Cash Flows as a financing activity. Following the Exchange Offer, the Company’s operating footprint as well as tax return elections and assertions are expected to be different and therefore, our income taxes, as presented in the consolidated financial statements, may differ in future periods.

Effective in the third quarter of fiscal year 2023, the Company changed its accounting principle for GILTI from the deferred approach to the period cost approach. See Note 1, “Description of the Company and Summary of Significant Accounting Policies”. The tables below reflect this change in accounting principle for all periods presented.

The provision for taxes on income consists of:

Fiscal Twelve Months Ended
(Dollars in Millions)
December 31, 2023January 1, 2023January 2, 2022
Current:
U.S. taxes$266 $75 $8 
International taxes374 318 318 
Total current taxes 640 393 326 
Deferred:
U.S. taxes(39)228 580 
International taxes(75)(48)(59)
Total deferred taxes
(114)180 521 
Provision for taxes $526 $573 $847 
A comparison of income tax expense at the U.S. statutory rate of 21% in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, to the Company’s effective tax rate is as follows:

Fiscal Twelve Months Ended
(Dollars in Millions)
December 31, 2023January 1, 2023January 2, 2022
U.S.$825 $1,238 $1,367 
International1,365 1,399 1,558 
Income before taxes$2,190 $2,637 $2,925 
Tax rates:
U.S. statutory rate21.0 %21.0 %21.0 %
U.S. taxes on international income(1)
(1.5)(2.9)7.8 
International operations(2)
0.8 (1.6)(2.1)
State2.0 3.1 1.7 
Change in valuation allowance2.5 2.2 1.4 
Tax benefits on stock-based compensation
(0.5)(0.2)(0.3)
All other(0.3)0.1 (0.6)
Effective tax rate
24.0 %21.7 %28.9 %
(1) Includes the impact of the tax on GILTI and other foreign income that is taxable under the U.S. tax code as well as implications of repatriating foreign earnings.
(2) International operations reflect the impacts of operations in jurisdictions with statutory tax rates different than the U.S. The Company’s largest international operations are in Canada, China, Japan, Singapore and Switzerland. For all periods presented the Company has subsidiaries operating in Singapore under various tax incentives. The 2023 amount includes $46 million net reduction in uncertain tax benefits.

The worldwide effective income tax rates for the fiscal twelve months ended December 31, 2023 was 24.0% and is higher than the U.S. corporate tax rate primarily due to the following:

•The issuance of debt in the first quarter of 2023 resulted in an increase in annual interest expense and reduced our capacity to utilize foreign tax credits against U.S. foreign source income. This resulted in an increase in the valuation allowance for foreign tax credits related to earnings that are not indefinitely reinvested as well as state and local income taxes. These items are partially offset by reductions in unrecognized tax benefits in certain foreign jurisdictions reflected in international operations within the rate reconciliation as well as the recapture of an overall domestic loss allowing the Company to claim additional U.S. foreign tax credit benefits against the Company's U.S. tax on foreign earnings. The additional U.S. foreign tax credit benefit is reflected in U.S. taxes on international income within the rate reconciliation.

The worldwide effective income tax rates for the fiscal twelve months ended January 1, 2023 was 21.7% and is higher than the U.S. corporate tax rate primarily due to the following:

•The overall domestic loss from the fiscal twelve months ended January 2, 2022 is being recaptured in the United States in the fiscal twelve months ended January 1, 2023 allowing the Company to claim additional U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The additional U.S. foreign tax credit benefit is reflected in U.S. taxes on international income within the rate reconciliation. This benefit is offset by state taxes on current U.S. income and valuation allowances on state NOL carryforwards.

The worldwide effective income tax rates for the fiscal twelve months ended January 2, 2022 was 28.9% and is higher than the U.S. corporate tax rate primarily due to the following:

•As a result of Talc settlement payments, there is a taxable loss in the U.S. preventing the Company from claiming a Section 250 deduction and utilizing U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The incremental U.S. tax on foreign earnings is reflected in U.S. taxes on international income within the rate reconciliation.

The increase in the worldwide effective income tax rate for the fiscal twelve months ended December 31, 2023 as compared to the fiscal twelve months ended January 1, 2023 was primarily the result of higher U.S. taxes on foreign income. With the
issuance of debt in the first quarter of 2023, the resulting increase in annual interest expense reduced the Company’s capacity to utilize foreign tax credits against U.S. foreign source income. As a result, the Company recorded a $52 million valuation allowance against a deferred tax asset related to anticipated foreign tax credit benefits. Furthermore, the recapture of an overall domestic loss allowing the Company to claim additional U.S. foreign tax credit benefits against the Company's U.S. tax on foreign earnings only existed through the Kenvue IPO date during the fiscal twelve months ended December 31, 2023 in comparison to the entire fiscal twelve months ended January 1, 2023. The tax rate is further increased by international operations as result of earnings mix changes, tax leakage on repatriation of foreign earnings from lower tier subsidiaries, and return to provision adjustments offset by reductions in unrecognized tax benefits.

The decrease of the worldwide effective income tax rate for the fiscal twelve months ended January 1, 2023 as compared to the fiscal twelve months ended January 2, 2022 was primarily the result of U.S. incremental taxes on foreign earnings. As a result of Talc settlement payments, there is a taxable loss in the United States preventing the Company from claiming a Section 250 deduction and utilizing U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The incremental U.S. tax on foreign earnings is reflected in U.S. taxes on international income within the rate reconciliation.

Temporary differences and carryforwards as of December 31, 2023 and January 1, 2023 were as follows:

Fiscal Twelve Months Ended
December 31, 2023January 1, 2023
(Dollars in Millions)
Asset
Liability
Asset
Liability
Employee related obligations$29 $— $20 $— 
Stock-based compensation
57 — 75 — 
Depreciation of property, plant and equipment— (44)— (38)
Goodwill and intangibles— (2,752)— (2,652)
Reserves & liabilities114 — 120 — 
Net operating loss (“NOL”) & tax credit carryforward
86 — 261 — 
Undistributed foreign earnings
49 (117)99 (89)
Miscellaneous international
123 — 28 — 
R&D capitalized for tax
52 — 55 — 
Miscellaneous U.S.
15 — 39 — 
Subtotal
525 (2,913)697 (2,779)
Valuation allowance
(75)— (250)— 
Total deferred income taxes$450 $(2,913)$447 $(2,779)

The Company has wholly owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will generate future taxable income sufficient to utilize these deferred tax assets. However, in certain jurisdictions, valuation allowances have been recorded against deferred tax assets for loss carryforwards that are not more likely than not to be realized.

The Company has recognized $49 million and $110 million of deferred tax assets related to U.S. state and foreign NOL carryforwards and $37 million and $151 million of deferred tax assets related to U.S. federal and state, and foreign credit carryforwards as of December 31, 2023 and January 1, 2023 respectively. Foreign NOLs expire over various years based on local laws; however, if unused, the majority of foreign NOL carryforwards will expire between 2024 through 2033. Existing Federal tax credit carryforwards will expire in 2033. U.S. state NOLs generally expire between 2032 and 2041. Tax credit carryforwards of our Puerto Rico subsidiary do not expire. The Company assessed NOLs, credit carryforwards and other deferred tax assets for realizability and, based upon all available evidence, recorded valuation allowances against deferred tax assets on a “more-likely than not” standard. As of December 31, 2023, January 1, 2023, and January 2, 2022, valuation allowances of $75 million, $250 million, and $186 million have been recorded against certain NOLs and foreign tax credit carryforwards respectively. The Company recognized a net change in valuation allowance of $(175) million, $64 million, and $42 million in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 respectively. On December 31, 2023, the net change was primarily related to a reduction in U.S. State and foreign tax credit carryforwards and related valuation allowances to reflect the Company’s separation from J&J recorded through the net parent investment at the time of the Kenvue IPO.
The Company has recorded deferred tax liabilities on all undistributed earnings of its international subsidiaries through the fiscal twelve months ended December 31, 2017 and certain undistributed earnings arising after the fiscal twelve months ended December 31, 2017. For all other undistributed earnings from our subsidiaries organized outside the United States, the Company has not recorded deferred taxes where the earnings are indefinitely reinvested. The Company intends to continue to reinvest these earnings in those international operations. If the Company decides at a later date to repatriate these earnings to the United States, the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the tax effect of this repatriation would be approximately $87 million under currently enacted tax laws and regulations and at current currency exchange rates.

The following table summarizes the activity related to unrecognized tax benefits:

Fiscal Twelve Months Ended
(Dollars in Millions)
December 31, 2023January 1, 2023January 2, 2022
Beginning of year$437 $469 $519 
Increases related to current year tax positions26 32 31 
Increases related to prior period tax positions3 7 2 
Decreases related to prior period tax positions(19)(49)(40)
Settlements— (5)(15)
Lapse of statute of limitations(42)(17)(28)
Net decreases related to the Separation
$(220)$— $— 
End of year$185 $437 $469 

The unrecognized tax benefits of $185 million at December 31, 2023, if recognized, $169 million would affect the Company’s annual effective tax rate. Pursuant to the Tax Matters Agreement between J&J and the Company, certain liabilities for unrecognized tax benefits have been reduced to reflect the fact that the liabilities are retained by J&J, including with respect to the US. federal income tax, or have been reclassified as indemnification payables to J&J where the liabilities relate to the Company for periods prior to the Kenvue IPO. The Company conducts business and files tax returns in numerous countries. The Company and J&J currently have tax audits in progress in several jurisdictions, which remain open from 2008 and forward. With respect to the United States, per the Tax Matters Agreement between J&J and the Company, J&J remains liable for all liabilities related to the final settlement of any U.S. federal income tax audits in which the Company is part of J&J’s federal consolidated tax return. The Company has therefore reduced its unrecognized tax benefits for U.S. federal uncertain tax positions as reflected in the table above under Net decreases related to the Separation. In other major jurisdictions where the Company conducts business, the years that remain open to tax audits range from 2015 and forward. The Company believes it is possible that certain tax audits in major jurisdictions where the Company conducts business outside of the United States may be completed over the next 12 months by their respective taxing authorities. However, the Company is not able to provide a reasonably reliable estimate of the timing of any future tax payments or the amount of possible changes to the total unrecognized tax benefits associated with any audit closures or other events.

The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities on the Consolidated Balance Sheets. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense on the Company’s Consolidated Statements of Operations. The Company recognized after tax interest expense (benefit) of $(8) million, $13 million and $16 million in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. The total amount of accrued interest was $19 million and $147 million as of December 31, 2023 and January 1, 2023, respectively.

On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, introduced a 15% minimum tax based on adjusted financial statement income of certain large corporations with a three-year average adjusted financial statement income in excess of $1 billion, an excise tax on corporate stock buybacks, and several tax incentives to promote clean energy. Based on the Company’s current analysis for the fiscal twelve months ended December 31, 2023, the IRA is not expected to have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to evaluate the impact of this law as additional guidance and clarification becomes available.

On December 15, 2022, the EU Member States formally adopted the European Union’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organisation for Economic Co-operation and Development (“OECD”) Pillar Two Framework that was supported by over 130 countries worldwide. The EU effective dates
are January 1, 2024 and January 1, 2025 for different aspects of the directive. On July 17, 2023, the OECD published Administrative Guidance proposing certain safe harbor rules that effectively extend certain effective dates to January 1, 2027. The OECD continues to release additional guidance, including guidance on safe harbors for which we may qualify, and many countries have already implemented legislation consistent with the OECD Pillar Two Framework. Due to these new rules, our income tax expense could be unfavorably impacted as the legislation becomes effective in countries in which we conduct business. However, based on the Company’s current analysis for currently enacted laws, we do not expect a material impact to the Consolidated Financial Statements. We are continuing to evaluate the Model Global Anti-Base Erosion (“GloBE”) Rules for Pillar Two and related legislation, and their potential impact on future periods.