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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
U.S. and foreign income before taxes are set forth below:

 202120202019
U.S.$1,062 $684 $466 
Foreign612 336 907 
 $1,674 $1,020 $1,373 
The details of our income tax provision (benefit) are set forth below:

  202120202019
Current:Federal$45 $37 $129 
 Foreign214 121 166 
 State40 23 16 
  $299 $181 $311 
Deferred:Federal$21 $(21)$(16)
 Foreign(227)(29)(213)
 State6 (15)(3)
  $(200)$(65)$(232)
  $99 $116 $79 

The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:

 202120202019
U.S. federal statutory rate21.0 %21.0 %21.0 %
State income tax, net of federal tax1.8 1.0 0.9 
Statutory rate differential attributable to foreign operations(1.0)(0.9)0.9 
Adjustments to reserves and prior years1.1 (1.7)2.3 
Excess tax benefits from stock-based awards(2.7)(3.4)(3.6)
Change in valuation allowances(0.8)(2.5)(0.6)
Intercompany restructuring(11.3)(0.3)(16.6)
Nondeductible interest1.4 — — 
Impact of tax law changes(3.8)(2.5)— 
Other, net0.2 0.7 1.4 
Effective income tax rate5.9 %11.4 %5.7 %

Statutory rate differential attributable to foreign operations.  This item includes local country taxes, withholding taxes, and shareholder-level taxes, net of U.S. foreign tax credits. In 2021, this item was favorably impacted by the ongoing effects of the KFC Europe Reorganization (as described below). This was partially offset by the unfavorable impact of recording deferred tax liabilities associated with unremitted foreign earnings. In 2021 and 2020, this item was favorably impacted by the ongoing effects of the 2019 Intercompany Restructuring (as described below).

Adjustments to reserves and prior years.  This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. In 2021, this item was unfavorably impacted by a $22 million reserve established due to a challenge of a prior year filing position in a foreign jurisdiction. In 2020, this item was favorably impacted by $11 million of adjustments made to current and deferred tax accounts in various jurisdictions to align with balances supported by 2019 and prior tax filings. Additionally, in 2020 this item was favorably impacted by a $6 million tax benefit associated with a state settlement. In 2019, this item was unfavorably impacted by $34 million in reserves related to taxes recorded associated with a prior year divestiture and $18 million of tax expense related to the establishment of reserves associated with the inclusion of stock based compensation in cost sharing arrangements as well as other matters. This unfavorable impact was partially offset by the reversal of a $20 million reserve established in 2018 due to the favorable resolution of an income tax rate dispute in a foreign jurisdiction.

Excess tax benefits from stock-based awards. 2021, 2020 and 2019 includes $46 million, $35 million and $49 million, respectively, of excess federal tax benefit related to share-based compensation.
Change in valuation allowances.  This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year. In 2021, this item was favorably impacted by $15 million of tax benefit associated with a valuation allowance release resulting from a change in management’s judgment as to the realizability of foreign tax credit carryforwards in the U.S. In 2020, this item was favorably impacted by $22 million of tax benefit associated with a valuation allowance release in a foreign jurisdiction resulting from a change in management’s judgement as to realizability of indefinite lived tax loss carryforwards in that jurisdiction.

Intercompany Restructuring.

KFC Europe Reorganization - In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland. Concurrent with this change in management responsibility, we have completed intra-entity transfers of certain KFC IP rights from subsidiaries in the UK to subsidiaries in Switzerland. With the transfers of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a one-time net deferred tax benefit of $152 million.

In December 2021, we continued our KFC Europe Reorganization and completed intra-entity transfers of additional European KFC IP rights from subsidiaries in the U.S. to subsidiaries in Switzerland. With the transfers of these additional rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law. As a result of this transfer, we recorded a net one-time tax benefit of $35 million.

2019 Intercompany Restructuring - In December 2019, the Company completed an intercompany restructuring that resulted in the transfer of certain IP rights held by wholly owned foreign subsidiaries primarily to the U.S. and the UK. The IP rights transferred to the UK resulted in a step up in the tax basis for UK tax purposes resulting in a deferred tax asset of $586 million. The deferred tax asset was analyzed for realizability and a valuation allowance of $366 million was established representing the portion of the deferred tax asset not likely to be realized. The recognized tax benefit of $220 million is amortizable for UK tax purposes over a twenty-year period. The transfer of certain IP rights to other non-UK jurisdictions in 2019 resulted in the recording of deferred tax assets of $13 million and related valuation allowances of $7 million for deferred tax assets that are not likely to be realized, for a net tax benefit of $6 million.

Nondeductible Interest. As a result of the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) on December 22, 2017, deductibility of U.S. interest expense was limited to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization in 2021. In 2021, the Company recorded $23 million of tax expense associated with disallowed U.S. interest expense. Although the disallowed interest can be carried forward, in management’s judgment it is not expected to be realizable in the future. Due to legislative relief provisions applicable to the 2019 and 2020 tax years contained within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Company was not impacted by the interest expense limitation in 2019 or 2020. Beginning in 2022, deductibility of U.S. interest expense will be limited to 30% of U.S. Earnings Before Interest and Taxes, which will unfavorably impact our effective tax rate.

Impact of Tax Law Changes.

UK Tax Rate Change – On June 10, 2021, the UK Finance Act 2021 was enacted resulting in an increase in the UK corporate tax rate from 19% to 25%. As such, the Company recognized a $64 million tax benefit in the quarter ended June 30, 2021 associated with remeasuring its deferred tax assets in the UK from 19% to 25%. These deferred tax assets were primarily related to the step-up in tax basis associated with the 2019 Intercompany Restructuring.

On July 22, 2020, the UK Finance Act 2020 was enacted resulting in an increase in the UK corporate tax rate from 17% to 19%. As such, the Company recognized a $25 million tax benefit in 2020 associated with remeasuring its deferred tax assets in the UK from 17% to 19%. These deferred tax assets were primarily related to the step-up in tax basis associated with the 2019 Intercompany Restructuring.

Other.  This item primarily includes the net impact of permanent differences related to current year earnings, U.S. tax credits, and other individually insignificant items impacting income tax expense.

Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost.
The details of 2021 and 2020 deferred tax assets (liabilities) are set forth below:
 20212020
Operating losses and interest deduction carryforwards$186 $181 
Capital losses72 3 
Tax credit carryforwards194 226 
Employee benefits68 82 
Share-based compensation51 58 
Lease-related liabilities236 199 
Accrued liabilities and other52 47 
Derivative instruments— 50 
Intangible assets560 678 
Property, plant and equipment35 31 
Deferred income87 81 
Gross deferred tax assets1,541 1,636 
Deferred tax asset valuation allowances(462)(789)
Net deferred tax assets$1,079 $847 
Intangible assets, including goodwill$(3)$(1)
Property, plant and equipment(85)(75)
Operating lease right-of-use assets(200)(161)
Employee benefits(24)(15)
Other(51)(42)
Gross deferred tax liabilities$(363)$(294)
Net deferred tax assets (liabilities)$716 $553 

The details of the 2021 valuation allowance activity are set forth below:

 20212020
Beginning of Year$(789)$(787)
Increases(31)(64)
Decreases355 45 
Other Adjustments3 17 
End of Year$(462)$(789)

Reported in Consolidated Balance Sheets as:
 20212020
Deferred income taxes$724 $553 
Other liabilities and deferred credits(8)— 
$716 $553 

As of December 31, 2021, we had approximately $3.6 billion of unremitted foreign retained earnings. The Tax Act imposed U.S. federal tax on all post-1986 foreign Earnings and Profits accumulated through December 31, 2017. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. federal tax. Undistributed foreign earnings may still be subject to certain state and foreign income and withholding taxes upon repatriation. Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings outside the U.S. Thus, we have provided taxes, including any U.S. federal and state income, foreign income, or foreign withholding taxes on the majority of our unremitted earnings. In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions. We believe any such taxes would be immaterial.
Details of tax loss, credit carryforwards, and expiration dates along with valuation allowances as of December 31, 2021, are as follows:
 Gross AmountDeferred Tax AssetValuation AllowanceExpiration
Federal net operating losses$18 $4 $— 2036-2037
Federal net operating losses - Indefinite61 13 — None
Foreign net operating losses59 12 (11)2022-2037
Foreign net operating losses - Indefinite229 59 (35)None
State net operating losses1,408 59 (43)2022-2040
Foreign capital loss carryforward - Indefinite289 72 (72)None
Foreign tax credits187 187 (172)2026-2030
State tax credits7 7 (5)2023
Federal interest deduction carryforward - Indefinite81 17 (8)None
State interest deduction carryforward - Indefinite487 22 (21)None
$2,826 $452 $(367)

We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

At December 31, 2021, the Company had $116 million of gross unrecognized tax benefits, $75 million of which would impact the effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:
 20212020
Beginning of Year$175 $188 
     Additions on tax positions - current year13 5 
     Additions for tax positions - prior years41 34 
     Reductions for tax positions - prior years(110)(22)
     Reductions for settlements(3)(30)
     Reductions due to statute expiration— — 
     Foreign currency translation adjustment— — 
End of Year$116 $175 

The Company believes it is reasonably possible that its unrecognized tax benefits as of December 31, 2021, may decrease by approximately $3 million in the next 12 months due to settlements or statute of limitations expirations.

During 2021, 2020, and 2019 the Company recognized $4 million, $2 million and $13 million of net expense, respectively, for interest and penalties in our Consolidated Statements of Income as components of its Income tax provision.

At December 31, 2021 and 2020, the Company has recorded $3 million and $1 million of net tax receivables, respectively, associated with interest and penalties.

The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions.

The Company has settled audits with the IRS through fiscal year 2012 and is currently under IRS examination for 2013-2018. Our operations in certain foreign jurisdictions remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities. See Note 20 for discussion of an Internal Revenue Service Proposed Adjustment.