INCOME TAXES

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company uses a full year estimated annual effective tax rate to calculate total income tax expense on interim quarters. In addition, the Company discretely recognizes certain other items in the period in which they occur. The estimated annual effective tax rate is calculated as the ratio of projected total income tax expense divided by projected earnings before income taxes for the year. The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the year.

The Company’s consolidated effective income tax rate on pretax earnings was (44.7)% and 20.2% for the three-month periods and 1.6% and 19.7% for the nine-month periods ended September 30, 2022 and 2021, respectively. This combined effective tax rate differs from the U.S. statutory rate primarily due to the impact of the tax accounting method change discussed below, as well as solar, historic and foreign tax credits.

Aflac Japan holds certain U.S. dollar-denominated assets in a Delaware Statutory Trust (DST). These assets are mostly comprised of various U.S. dollar-denominated commercial mortgage loans. The functional currency of the DST for U.S. tax purposes was historically the Japanese yen. In the third quarter of 2022, the Company requested a change in tax accounting method through the Internal Revenue Service's automatic consent procedures to change its functional currency on the DST for U.S. tax purposes to the U.S. dollar. As a result, foreign currency translation gains or losses on assets held in the DST will no longer be recognized for U.S. tax purposes. The Company historically recorded a deferred tax liability for foreign currency translation gains on the DST assets, which was released in the third quarter of 2022 as a result of the functional currency change. The release of the deferred tax liability resulted in the Company recognizing an income tax benefit of $695 million ($1.10 per basic and diluted share, respectively) in the third quarter of 2022. The Company has determined that the change in tax accounting method will impact its combined effective tax rate in future periods as a function of changes in the foreign exchange rate between the Japanese yen and U.S. dollar.

In August 2022, the Inflation Reduction Act of 2022 (IRA) was signed into U.S. law. Effective January 1, 2023, the law will impose a 15% alternative minimum corporate tax rate and imposes a 1% excise tax on the Company’s repurchases of its common stock. The Company does not anticipate any impacts from the new corporate minimum tax rate since its current tax rate is above the 15% minimum rate. Further, the Company expects the charges associated with the excise tax to be recognized in equity consistent with other costs related to treasury stock.