Income Taxes

9 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

During the three months ended December 31, 2021 and 2020, the Company recorded income tax expense of $238 million and an income tax benefit of $1.2 billion, respectively. During the nine months ended December 31, 2021 and 2020, the Company recorded income tax expense of $396 million and an income tax benefit of $1.0 billion, respectively. The Company’s reported income tax expense rate was 85.9% and an income tax benefit rate of 16.1% for the three months ended December 31, 2021 and 2020, respectively, and an income tax expense rate of 30.9% and an income tax benefit rate of 16.7% for the nine months ended December 31, 2021 and 2020, respectively. Fluctuations in the Company’s reported income tax rates are primarily due to non-cash charges related to remeasuring the value of its E.U. and U.K disposal groups held for sale to the lower of its carrying value or fair value less costs to sell, changes in the mix of earnings between various taxing jurisdictions, and discrete items recognized in the quarters.

During the nine months ended December 31, 2021, the Company recorded non-cash pre-tax charges of $517 million primarily to remeasure the E.U. disposal group to the lower of its carrying value or fair value less costs to sell, and, during the three and nine months ended December 31, 2021, the Company recorded non-cash pre-tax charges of $853 million to remeasure the U.K. disposal group and the Austrian business to the lower of carrying value or fair value less costs to sell, as described in Financial Note 2, “Held for Sale.” The Company’s reported income tax rates for the three and nine months ended December 31, 2021 were unfavorably impacted by the non-deductible nature of the majority of these charges for income tax purposes.

The Company’s reported income tax rates for the nine months ended December 31, 2021 and 2020 were impacted by the charges for opioid-related claims of $193 million ($160 million after-tax) and $8.1 billion ($6.7 billion after-tax), respectively, as described further in Financial Note 12, “Commitments and Contingent Liabilities.”

During the third quarter of 2022, the Company recognized a net discrete tax benefit of $42 million primarily related to a decrease in the income recognized pursuant to the global intangible low-tax income (“GILTI”) regime in its 2021 U.S. Federal income tax return and the statute of limitation expirations in various taxing jurisdictions.

During the nine months ended December 31, 2020, the Company sold intellectual property between wholly-owned legal entities within McKesson that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets which was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. The acquiring entity of the intellectual property is entitled to amortize the purchase price of the assets for tax purposes. In accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” a discrete tax benefit of $105 million was recognized with a corresponding increase to a deferred tax asset for the temporary difference arising from the buyer’s excess tax basis.

As of December 31, 2021, the Company had $1.6 billion of unrecognized tax benefits, of which $1.3 billion would reduce income tax expense and the effective tax rate if recognized. During the nine months ended December 31, 2021, the Company recognized a net discrete tax benefit of $115 million related to statute of limitation expirations in various taxing jurisdictions. During the next twelve months, the Company does not anticipate any material reduction in its unrecognized tax benefits. However, this may change as the Company continues to have ongoing negotiations with various taxing authorities throughout the year. The unrecognized tax benefit may also increase or decrease due to future developments in opioid-related litigation and claims, as discussed in Financial Note 12, “Commitments and Contingent Liabilities.”

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently examining the Company’s U.S. corporation income tax returns for 2018 and 2019. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2013 through the current fiscal year.