Income Taxes

12 Months Ended

Dec. 25, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income before income taxes are as follows:

	2021		2020		2019
United States	$	3,740	$	4,070	$	4,123
Foreign	6,081		4,999		5,189
	$	9,821	$	9,069	$	9,312

The provision for income taxes consisted of the following:

	2021		2020		2019
Current:
U.S. Federal	$	702	$	715	$	652
Foreign	955		932		807
State	44		110		196
	1,701		1,757		1,655
Deferred:
U.S. Federal	375		273		325
Foreign	(14)		(167)		(31)
State	80		31		10
	441		137		304
	$	2,142	$	1,894	$	1,959

A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows:

	2021		2020		2019
U.S. Federal statutory tax rate	21.0	%	21.0	%	21.0	%
State income tax, net of U.S. Federal tax benefit	1.0		1.2		1.6
Lower taxes on foreign results	(1.6)		(0.8)		(0.9)
One-time mandatory transition tax - TCJ Act	1.9		—		(0.1)
Other, net	(0.5)		(0.5)		(0.6)
Annual tax rate	21.8	%	20.9	%	21.0	%

Tax Cuts and Jobs Act

In 2021, we recorded $190 million ($0.14 per share) of net tax expense related to the TCJ Act as a result of adjustments related to the final assessment of the 2014 through 2016 IRS audit. There were no tax amounts recognized in 2020 related to the TCJ Act. In 2019, we recognized a net tax benefit totaling $8 million ($0.01 per share) related to the TCJ Act.

As of December 25, 2021, our mandatory transition tax liability was $2.9 billion, which must be paid through 2026 under the provisions of the TCJ Act. We reduced our liability through cash payments and application of tax overpayments by $309 million in 2021, $78 million in 2020 and $663 million in 2019. We currently expect to pay approximately $309 million of this liability in 2022.

The TCJ Act also created a requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary

differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. We elected to treat the tax effect of GILTI as a current-period expense when incurred.

Other Tax Matters

In 2021, we received a final assessment from the IRS audit for the tax years 2014 through 2016. The assessment included both agreed and unagreed issues. On October 29, 2021, we filed a formal written protest of the assessment and requested an appeals conference. As a result of the analysis of the 2014 through 2016 final assessment, we remeasured all applicable reserves for uncertain tax positions for all years open under the statute of limitations, including any correlating adjustments impacting the mandatory transition tax liability under the TCJ Act, resulting in a net non-cash tax expense of $112 million in 2021.

On May 19, 2019, a public referendum held in Switzerland passed the Federal Act on Tax Reform and AHV Financing (TRAF), effective January 1, 2020. The enactment of certain provisions of the TRAF resulted in adjustments to our deferred taxes. During 2021, no income tax adjustments related to the TRAF were recorded. During 2020, we recorded a net tax benefit of $72 million related to the adoption of the TRAF in the Swiss Canton of Bern. During 2019, we recorded a net tax expense of $24 million related to the impact of the TRAF. While the accounting for the impacts of the TRAF are deemed to be complete, further adjustments to our financial statements and related disclosures could be made in future quarters, including in connection with final tax return filings.

Deferred tax liabilities and assets are comprised of the following:

	2021		2020
Deferred tax liabilities
Debt guarantee of wholly-owned subsidiary	$	578	$	578
Property, plant and equipment	2,036		1,851
Recapture of net operating losses	504		504
Pension liabilities	216		—
Right-of-use assets	450		371
Other	254		159
Gross deferred tax liabilities	4,038		3,463
Deferred tax assets
Net carryforwards	4,974		5,008
Intangible assets other than nondeductible goodwill	1,111		1,146
Share-based compensation	98		90
Retiree medical benefits	147		153
Other employee-related benefits	379		373
Pension benefits	—		80
Deductible state tax and interest benefits	149		150
Lease liabilities	450		371
Other	842		866
Gross deferred tax assets	8,150		8,237
Valuation allowances	(4,628)		(4,686)
Deferred tax assets, net	3,522		3,551
Net deferred tax liabilities/(assets)	$	516	$	(88)

A summary of our valuation allowance activity is as follows:

	2021		2020		2019
Balance, beginning of year	$	4,686	$	3,599	$	3,753
Provision	(9)		1,082		(124)
Other (deductions)/additions	(49)		5		(30)
Balance, end of year	$	4,628	$	4,686	$	3,599

Reserves

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions and the related open tax audits are as follows:

Jurisdiction	Years Open to Audit	Years Currently Under Audit
United States	2014-2020	2014-2019
Mexico	2014-2020	2014-2016
United Kingdom	2018-2020	None
Canada (Domestic)	2016-2020	2016-2017
Canada (International)	2010-2020	2010-2017
Russia	2018-2020	None

Our annual tax rate is based on our income, statutory tax rates and tax planning strategies and transactions, including transfer pricing arrangements, available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are subject to challenge and that we likely will not succeed. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances, such as the progress of a tax audit, new tax laws, relevant court cases or tax authority settlements. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution.

As of December 25, 2021, the total gross amount of reserves for income taxes, reported in other liabilities, was $1.9 billion. We accrue interest related to reserves for income taxes in our provision for income taxes and any associated penalties are recorded in selling, general and administrative expenses. The gross amount of interest accrued, reported in other liabilities, was $326 million as of December 25, 2021, of which $3 million of tax benefit was recognized in 2021. The gross amount of interest accrued, reported in other liabilities, was $338 million as of December 26, 2020, of which $93 million of tax expense was recognized in 2020.

A reconciliation of unrecognized tax benefits is as follows:

	2021		2020
Balance, beginning of year	$	1,621	$	1,395
Additions for tax positions related to the current year	222		128
Additions for tax positions from prior years	681		153
Reductions for tax positions from prior years	(558)		(22)
Settlement payments	(25)		(13)
Statutes of limitations expiration	(39)		(23)
Translation and other	(2)		3
Balance, end of year	$	1,900	$	1,621

Carryforwards and Allowances

Operating loss carryforwards totaling $30.0 billion as of December 25, 2021 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.3 billion in 2022, $26.8 billion between 2023 and 2041 and $2.9 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized.

Undistributed International Earnings

As of December 25, 2021, we had approximately $7 billion of undistributed international earnings. We intend to continue to reinvest $7 billion of earnings outside the United States for the foreseeable future and while future distribution of these earnings would not be subject to U.S. federal tax expense, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings.