Income Taxes

12 Months Ended

Jan. 02, 2021

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

INCOME TAXES

The components of income before income taxes and the provision for income taxes were as follows:

(millions)	2020		2019		2018
Income before income taxes
United States	$	1,018	$	938	$	851
Foreign	583		367		478
	1,601		1,305		1,329
Income taxes
Currently payable
Federal	129		345		7
State	26		52		28
Foreign	100		77		99
	255		474		134
Deferred
Federal	56		(124)		109
State	9		(29)		(59)
Foreign	3		—		(3)
	68		(153)		47
Total income taxes	$	323	$	321	$	181

The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:

	2020		2019		2018
U.S. statutory income tax rate	21.0	%	21.0	%	21.0	%
Foreign rates varying from U.S. statutory rate	(2.4)		(2.5)		(3.0)
Excess tax benefits on share-based compensation	—		—		(0.3)
State income taxes, net of federal benefit	1.8		1.3		1.5
Cost (benefit) of remitted and unremitted foreign earnings	1.0		0.8		0.7
Legal entity restructuring, deferred tax impact	—		—		(3.3)
Discretionary pension contributions	—		—		(2.3)
Revaluation of investment in foreign subsidiary	—		2.5		—
Net change in valuation allowance	1.4		(1.6)		2.0
Statutory rate changes, deferred tax impact	0.2		0.3		—
U.S. deemed repatriation tax	(2.0)		—		(1.2)
Divestiture	—		2.9		—
Out-of-period adjustment	—		3.0		—
Other	(0.8)		(3.1)		(1.5)
Effective income tax rate	20.2	%	24.6	%	13.6	%

As presented in the preceding table, the Company’s 2020 consolidated effective tax rate was 20.2%, as compared to 24.6% in 2019 and 13.6% in 2018.

The 2020 effective income tax rate was favorably impacted by the reversal of a liability for uncertain tax positions of $32 million, resulting from the finalization of a tax examination during the third quarter. The reserves were related to

the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

The 2019 effective income tax rate was unfavorably impacted by a permanent basis difference in the assets sold to Ferrero as well as an out-of-period correction. During the fourth quarter of 2019, the Company recorded an out-of-period adjustment to correct an error in the tax rate applied to a deferred tax asset arising from an intangible property transfer in a prior year. The adjustment increased income tax expense and decreased deferred tax assets by $39 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year ended December 28, 2019 and related prior annual and quarterly periods.

The 2018 effective income tax rate benefited from the reduction of the U.S. corporate tax rate as well as a $11 million reduction of income tax expense due to changes in estimates related to the Tax Cuts and Jobs Act, the impact of discretionary pension contributions totaling $250 million in 2018, which were designated as 2017 tax year contributions, and a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring.

Transition tax on foreign earnings: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. As of December 30, 2017, based on accumulated foreign earnings and profits of approximately $2.6 billion, which are primarily in Europe, the Company was able to make a reasonable estimate of the transition tax and recorded a transition tax obligation of $157 million. In the third quarter of 2018, the Company recorded a $16 million reduction to the transition tax liability and tax expense based on updated estimates of E&P. During the fourth quarter of 2018, the Company, as part of completing its accounting under SAB 118, revised its estimate of the transition tax liability to $94 million, and recorded $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations. During the third quarter of 2020, the Company reversed $32 million of the liability previously recorded as a result of the finalization of an IRS tax examination.

Indefinite reinvestment assertion:  Prior to the Tax Act, the Company treated a significant portion of its undistributed foreign earnings as indefinitely reinvested.  In light of the Tax Act, which included a new territorial tax regime, as of the year ended December 30, 2017, Management determined that the Company would analyze its global capital structure and working capital strategy and considered the indefinite reinvestment assertion to be provisional under SAB 118. In the fourth quarter of 2018, we finished analyzing our global capital structure and working capital strategy and determined that $2.4 billion of foreign earnings as of December 30, 2017 were no longer considered to be indefinitely invested.  Accordingly, income tax expense of approximately $5 million was recorded in the fourth quarter of 2018.  The Company completed its assessment and accounting under SAB 118 for its indefinite investment assertion.

As of January 2, 2021, approximately $900 million of unremitted earnings were considered indefinitely reinvested. The unrecognized deferred tax liability for these earnings is estimated at approximately $23 million. However, this estimate could change based on the manner in which the outside basis difference associated with these earnings reverses.

Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2020 and 2019 were $329 million and $279 million, respectively, with related valuation allowances at year-end 2020 and 2019 of $192 million and $146 million, respectively. Of the total carryforwards at year-end 2020, substantially all will expire after 2024.

The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 2020 and 2019.

	Deferred tax assets				Deferred tax liabilities
(millions)	2020		2019		2020		2019
U.S. state income taxes	$	7	$	—	$	—	$	6
Advertising and promotion-related	13		11		—		—
Wages and payroll taxes	26		15		—		—
Inventory valuation	17		17		—		—
Employee benefits	118		143		—		—
Operating loss, credit and other carryforwards	329		279		—		—
Hedging transactions	49		—		—		18
Depreciation and asset disposals	—		—		234		217
Operating lease right-of-use assets	—		—		141		111
Operating lease liabilities	136		111		—		—
Trademarks and other intangibles	—		—		527		526
Deferred compensation	18		19		—		—
Stock options	32		29		—		—
Other	41		36		—		—
	786		660		902		878
Less valuation allowance	(192)		(146)		—		—
Total deferred taxes	$	594	$	514	$	902	$	878
Net deferred tax asset (liability)	$	(308)	$	(364)
Classified in balance sheet as:
Other assets	$	254	$	231
Other liabilities	(562)		(595)
Net deferred tax asset (liability)	$	(308)	$	(364)

The change in valuation allowance reducing deferred tax assets was:

(millions)	2020		2019		2018
Balance at beginning of year	$	146	$	166	$	153
Additions charged to income tax expense (b)	62		25		29
Reductions credited to income tax expense (a)	(24)		(47)		(1)
Currency translation adjustments	8		2		(15)
Balance at end of year	$	192	$	146	$	166

(a) During 2019, the Company decreased the valuation allowance by $32 million related to the revaluation of its investment in a foreign subsidiary.

(b) During 2020, the Company increased the valuation allowance by $41 million related to the revaluation of its investment in a foreign subsidiary.

Uncertain tax positions

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 2020 provision for U.S. federal income taxes represents approximately 60% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2019. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.

As of January 2, 2021, the Company has classified $19 million of unrecognized tax benefits as a current tax liability. Managements estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $4 million of projected additions during the next twelve months related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended January 2, 2021, December 28, 2019 and December 29, 2018. For the 2020 year, approximately $56 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

(millions)	2020		2019		2018
Balance at beginning of year	$	90	$	97	$	60
Tax positions related to current year:
Additions (a)	5		5		51
Tax positions related to prior years:
Additions	8		4		4
Reductions (b)	(35)		(14)		(13)
Settlements	(2)		(1)		(4)
Lapses in statutes of limitation	(1)		(1)		(1)
Balance at end of year	$	65	$	90	$	97

(a) During the fourth quarter of 2018, the Company recorded, as part of its final estimate under SAB 118, $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.

(b) During the third quarter of 2020, the Company released $32 million of tax reserves as a result of finalization of an IRS tax examination.

During the year ended January 2, 2021, the Company paid tax-related interest totaling $1 million and recognized $3 million of tax related interest, increasing the balance to $13 million at year-end. During the year ended December 28, 2019, the Company settled certain tax matters resulting in an $11 million net reduction of the tax interest accrual, decreasing the balance to $11 million at year-end. For the year ended December 29, 2018, the Company paid tax-related interest totaling $2 million and recognized $3 million of tax-related interest increasing the accrual balance to $22 million at year-end.