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Income Taxes | 12 Months Ended
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Dec. 31, 2024
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes U.S. and foreign income before taxes are set forth below:
|  | 2024 |  | 2023 |  | 2022
U.S. |  | $ | 1,131 |  |  | $ | 1,246 |  |  | $ | 1,124 |
Foreign |  | 769 |  |  | 572 |  |  | 538 |
|  | $ | 1,900 |  |  | $ | 1,818 |  |  | $ | 1,662 |
The details of our income tax provision (benefit) are set forth below:
|  |  |  | 2024 |  | 2023 |  | 2022
Current: |  | Federal |  | $ | 170 |  |  | $ | 221 |  |  | $ | 139 |
|  | Foreign |  | 226 |  |  | 222 |  |  | 200 |
|  | State |  | 48 |  |  | 68 |  |  | 53 |
|  |  |  | $ | 444 |  |  | $ | 511 |  |  | $ | 392 |
Deferred: |  | Federal |  | $ | (40) |  |  | $ | (121) |  |  | $ | (31) |
|  | Foreign |  | 15 |  |  | (153) |  |  | (10) |
|  | State |  | (5) |  |  | (16) |  |  | (14) |
|  |  |  | $ | (30) |  |  | $ | (290) |  |  | $ | (55) |
|  |  |  | $ | 414 |  |  | $ | 221 |  |  | $ | 337 |
The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:
|  | 2024 |  | 2023 |  | 2022
U.S. federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
State income tax, net of federal tax |  | 1.8 |  |  | 2.3 |  |  | 1.9 |
Statutory rate differential attributable to foreign operations |  | 1.3 |  |  | (1.7) |  |  | (2.0) |
Adjustments to reserves and prior years |  | 0.5 |  |  | 1.3 |  |  | 1.6 |
Excess tax benefits from stock-based awards |  | (1.6) |  |  | (1.1) |  |  | (1.4) |
Change in valuation allowances |  | 0.3 |  |  | — |  |  | (0.5) |
Impact of Russia Exit |  | — |  |  | (0.5) |  |  | 4.3 |
Intercompany restructuring and Valuations of Intellectual Property |  | (1.5) |  |  | (9.1) |  |  | (4.9) |
Other, net |  | — |  |  | (0.1) |  |  | 0.3 |
Effective income tax rate |  | 21.8 | % |  | 12.1 | % |  | 20.3 | %
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. The unfavorability in 2024 as compared to prior years was largely driven by shifts in income to higher-rate jurisdictions and increased rates in certain, existing foreign jurisdictions. 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 2023, this item was unfavorably impacted by $41 million of newly established reserves associated with a correction in the timing of capital loss utilization related to historical refranchising gains to tax years with a lower statutory tax rate. Impact of Russia Exit. Our decision to exit the Russia market resulted in a $7 million tax benefit recorded in 2023 to account for the global tax ramification of current and future payments required to be made to the Russia IP rights holder in Switzerland. In 2022, this item was unfavorably impacted by $72 million of tax expense primarily associated with a reduction in the tax basis of KFC IP rights held in Switzerland due to the expected loss of the Russia royalty income associated with such rights going forward. As a result, we remeasured and reassessed the need for a valuation allowance on the associated deferred tax assets. In addition, we reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the basis difference would reverse by way of sale. Intercompany Restructuring and Valuations of Intellectual Property. In 2021, we concentrated management responsibility for European (excluding the U.K.) KFC franchise development, support operations and management oversight in Switzerland (the “KFC Europe Reorganization”). Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC IP rights from subsidiaries in the U.K. and the U.S. to subsidiaries in Switzerland. With the transfers of these rights, we received a step-up in amortizable tax basis of those IP rights to current fair value under applicable Swiss tax law. In the year ended December 31, 2022, we performed an annual valuation under Swiss laws of these Swiss IP rights, incorporating current assumptions around the expected future cash flows attributable to the IP. This valuation supported an increase to tax basis of Swiss IP rights associated with parts of our business that will continue to use these IP rights due to expected royalty growth assumptions in those parts of the business that largely offset the loss of Russia royalty income described above. Based on the valuation as well as future forecasting of taxable income, we remeasured and reassessed the need for a valuation allowance on the deferred tax assets in Switzerland. As a result, we recorded a net tax benefit of $75 million in 2022. Consistent with the objectives of the IP restructuring transactions discussed above, in December 2023, we completed intra-entity transfers of certain Asia region IP rights to Singapore. In addition, certain remaining Asia region IP rights were transferred to the U.S. As a result of these transfers, we recorded a net tax benefit of $30 million comprised of $14 million of current tax expense and a one-time deferred tax benefit of $44 million primarily associated with establishing deferred tax assets on amortizable tax basis in the U.S. Also in 2023, we agreed to receive a tax credit in exchange for an increase in our prospective statutory tax rate in Switzerland. Based on the agreement, we were granted a $38 million tax credit expiring in 2031 and our statutory tax rate was increased to approximately 15% from the previous rate of approximately 10%. As a result of the tax rate increase, we were also required to remeasure our deferred tax assets associated with previously transferred IP rights in Switzerland, which resulted in a one-time deferred tax benefit of $99 million. We also recorded a $29 million deferred tax benefit associated with tax credit which represents the portion of the $38 million tax credit that we anticipate utilizing against income tax before expiration. In December 2024, to facilitate business needs and centralize digital and technology assets in the U.S., we filed tax elections which resulted in the deemed liquidation of certain foreign subsidiaries in Australia and Israel. In addition, we completed the intra-entity transfer of software from these subsidiaries to subsidiaries in the U.S. As a result of these transactions, we recorded a net tax benefit of $28 million comprised of $15 million of current tax benefit associated with U.S. federal and state tax deductions, and a one-time net deferred tax benefit of $13 million primarily associated with establishing deferred tax assets on amortizable tax basis in the U.S. 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 2024 and 2023 deferred tax assets (liabilities) are set forth below:
|  | 2024 |  | 2023
Operating losses and interest deduction carryforwards |  | $ | 213 |  |  | $ | 230 |
Capital losses |  | 70 |  |  | 71 |
Tax credit carryforwards |  | 200 |  |  | 188 |
Employee benefits |  | 83 |  |  | 75 |
Share-based compensation |  | 44 |  |  | 58 |
Lease-related liabilities |  | 267 |  |  | 242 |
Accrued liabilities and other |  | 66 |  |  | 59 |
Intangible assets |  | 575 |  |  | 610 |
Property, plant and equipment |  | 25 |  |  | 30 |
Deferred income |  | 105 |  |  | 103 |
Capitalized Research & Development Costs |  | 120 |  |  | 92 |
Gross deferred tax assets |  | 1,768 |  |  | 1,758 |
Deferred tax asset valuation allowances |  | (369) |  |  | (386) |
Net deferred tax assets |  | $ | 1,399 |  |  | $ | 1,372 |
Property, plant and equipment |  | $ | (47) |  |  | $ | (51) |
Operating lease right-of-use assets |  | (235) |  |  | (210) |
Employee benefits |  | (6) |  |  | (8) |
Derivative Instruments |  | (5) |  |  | (17) |
Other |  | (36) |  |  | (42) |
Gross deferred tax liabilities |  | $ | (329) |  |  | $ | (328) |
Net deferred tax assets (liabilities) |  | $ | 1,070 |  |  | $ | 1,044 |
The details of the 2024 and 2023 valuation allowance activity are set forth below:
|  | 2024 |  | 2023
Beginning of Year |  | $ | (386) |  |  | $ | (458) |
Increases |  | (5) |  |  | (19) |
Decreases |  | 16 |  |  | 91 |
Other Adjustments |  | 6 |  |  | — |
End of Year |  | $ | (369) |  |  | $ | (386) |
Reported in Consolidated Balance Sheets as:
|  | 2024 |  | 2023
Deferred income taxes |  | $ | 1,071 |  |  | $ | 1,045 |
Other liabilities and deferred credits |  | (1) |  |  | (1) |
|  | $ | 1,070 |  |  | $ | 1,044 |
As of December 31, 2024, we had approximately $5 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, 2024, are as follows:
|  | Gross Amount |  | Deferred Tax Asset |  | Valuation Allowance |  | Expiration
Federal net operating losses - Indefinite |  | $ | 51 |  |  | $ | 11 |  |  | $ | — |  |  | None
Foreign net operating losses |  | 296 |  |  | 45 |  |  | (17) |  |  | 2025-2044
Foreign net operating losses - Indefinite |  | 333 |  |  | 76 |  |  | (11) |  |  | None
State net operating losses |  | 1,176 |  |  | 49 |  |  | (35) |  |  | 2025-2044
Foreign capital loss carryforward - Indefinite |  | 281 |  |  | 70 |  |  | (70) |  |  | None
Foreign tax credits (US Tax Return) |  | 164 |  |  | 164 |  |  | (117) |  |  | 2025-2034
Foreign country tax credits |  | 36 |  |  | 36 |  |  | (13) |  |  | 2031
State interest deduction carryforward - Indefinite |  | 758 |  |  | 32 |  |  | (30) |  |  | None
|  | $ | 3,095 |  |  | $ | 483 |  |  | $ | (293) |  |  |
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, 2024, the Company had $126 million of gross unrecognized tax benefits, $81 million of which would impact the effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:
|  | 2024 |  | 2023
Beginning of Year |  | $ | 151 |  |  | $ | 128 |
Additions on tax positions - current year |  | 6 |  |  | 9 |
Additions for tax positions - prior years |  | 1 |  |  | 42 |
Reductions for tax positions - prior years |  | (10) |  |  | (28) |
Reductions for settlements |  | (22) |  |  | — |
End of Year |  | $ | 126 |  |  | $ | 151 |
During 2024, 2023, and 2022 the Company recognized $3 million, $20 million, and less than $1 million of net expense, respectively, for interest and penalties in our Consolidated Statements of Income as components of its Income tax provision. The Company has recorded $20 million and $16 million of net tax payables, as of December 31, 2024 and 2023, 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 2013-2019. Our operations in certain foreign jurisdictions are currently under audit and remain subject to examination for tax years as far back as 1999. See Note 20 for discussion of an Internal Revenue Service Proposed Adjustment.

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