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Income Taxes | 9 Months Ended
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Sep. 30, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | For the three months ended September 30, 2022, we recorded an income tax provision of $155 million on pre-tax income of $693 million, or an effective tax rate of 22.3%, compared to an income tax benefit of $46 million on pre-tax loss of $137 million, or an effective tax rate of 34.3%, for the three months ended September 30, 2021. For the three months ended September 30, 2022, our income tax provision includes $18 million of income tax expense to record a valuation allowance in the United Kingdom due to the uncertainty surrounding the realization of the deferred tax assets as a result of the impairment described in Note 5—United Kingdom Operations Restructuring and Impairment Charges. For the nine months ended September 30, 2022, we recorded an income tax provision of $913 million on pre-tax income of $3.84 billion, or an effective tax rate of 23.8%, compared to an income tax provision of $57 million on pre-tax income of $458 million, or an effective tax rate of 12.3%, for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, our income tax provision includes $18 million of income tax expense to record a valuation allowance in the United Kingdom, $22 million of income tax benefit due to share-based compensation activity and $78 million of income tax provision related to the Canada Revenue Agency Competent Authority Matter, as discussed below. For the nine months ended September 30, 2021, we did not record an income tax benefit related to the goodwill impairment described in Note 5—United Kingdom Operations Restructuring and Impairment Charges, above, as the impairment is non-deductible for income tax purposes. For the nine months ended September 30, 2021, our income tax provision includes a $36 million benefit reflecting the impact of agreement on certain issues related to U.S. federal income tax audits, including the reversal of an accrual for unrecognized tax benefits. Our effective tax rate is also impacted by earnings attributable to the noncontrolling interest in CF Industries Nitrogen, LLC (CFN), as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interest. Our effective tax rate for the three months ended September 30, 2022 of 22.3%, which is based on pre-tax income of $693 million, including $100 million of earnings attributable to the noncontrolling interest, would be 3.7 percentage points higher if based on pre-tax income exclusive of the $100 million of earnings attributable to the noncontrolling interest. Our effective tax rate for the three months ended September 30, 2021 of 34.3%, which is based on pre-tax loss of $137 million, including $94 million of earnings attributable to the noncontrolling interest, would be 14.0 percentage points lower if based on pre-tax loss exclusive of the $94 million of earnings attributable to the noncontrolling interest. Our effective tax rate for the nine months ended September 30, 2022 of 23.8%, which is based on pre-tax income of $3.84 billion, including $442 million of earnings attributable to the noncontrolling interest, would be 3.1 percentage points higher if based on pre-tax income exclusive of the $442 million of earnings attributable to the noncontrolling interest. Our effective tax rate for the nine months ended September 30, 2021 of 12.3%, which is based on pre-tax income of $458 million, including $189 million of earnings attributable to the noncontrolling interest, would be 8.7 percentage points higher if based on pre-tax income exclusive of the $189 million of earnings attributable to the noncontrolling interest. Canada Revenue Agency Competent Authority Matter In 2016, the Canada Revenue Agency (CRA) and Alberta Tax and Revenue Administration (Alberta TRA) issued Notices of Reassessment for tax years 2006 through 2009 to one of our Canadian affiliates asserting a disallowance of certain patronage deductions. We filed Notices of Objection with respect to the Notices of Reassessment with the CRA and Alberta TRA and posted letters of credit in lieu of paying the additional tax liability assessed. The letters of credit serve as security until the matter is resolved. In 2018, the matter, including the related transfer pricing topic regarding the allocation of profits between Canada and the United States, was accepted for consideration under the bilateral settlement provisions of the U.S.-Canada tax treaty (the Treaty) by the United States and Canadian competent authorities, and included tax years 2006 through 2011. In the second quarter of 2021, the Company submitted the transfer pricing aspect of the matter into the arbitration process under the terms of the Treaty. In February 2022, we were informed that a decision was reached by the arbitration panel for tax years 2006 through 2011. In March 2022, we received further details of the results of the arbitration proceedings and the settlement provisions between the United States and Canadian competent authorities, and we accepted the decision of the arbitration panel. Under the terms of the arbitration decision, additional income for tax years 2006 through 2011 is subject to tax in Canada, resulting in our having additional Canadian tax liability for those tax years of approximately $129 million, based on current estimates. In the third quarter of 2022, $81 million of this tax liability and $66 million of related interest was assessed and paid. As a result, the letters of credit we had posted in lieu of paying the additional tax liability assessed by the Notices of Reassessment were cancelled. We expect the remaining tax liability and related interest will be assessed and paid in the fourth quarter of 2022. Due primarily to the availability of additional foreign tax credits to offset in part the increased Canadian tax referenced above, the Company will then file amended tax returns in the United States to request a refund of tax overpaid. In the nine months ended September 30, 2022, as a result of the impact of these events on our Canadian and U.S. federal and state income taxes, we recognized an income tax provision of $78 million, reflecting the net impact of $129 million of accrued income taxes payable to Canada for tax years 2006 to 2011, partially offset by net income tax receivables of approximately $51 million in the United States, and we accrued net interest of $103 million, primarily reflecting the impact of estimated interest payable to Canada. Of the $78 million of income tax provision and $103 million of net interest expense recognized in the nine months ended September 30, 2022, a reduction of $1 million of net interest expense was recognized in the three months ended September 30, 2022. Transfer pricing positions As a result of the outcome of the arbitration decision discussed above, we also evaluated our transfer pricing positions between Canada and the United States for open years 2012 and after. Based on this evaluation, we recorded the following in the nine months ended September 30, 2022: •liabilities for unrecognized tax benefits of approximately $314 million with a corresponding income tax provision, and accrued interest of approximately $123 million related to the liabilities for unrecognized tax benefits, and •noncurrent income tax receivables of approximately $359 million with a corresponding income tax benefit, and accrued interest income of approximately $33 million related to the noncurrent income tax receivables. In the nine months ended September 30, 2022, the impact of these evaluations of transfer pricing positions on our consolidated statement of operations, including $29 million of net deferred income tax provision for other transfer pricing tax effects, was $16 million of income tax benefit and $90 million of net interest expense before tax ($98 million after tax). Of the $16 million of income tax benefit and $90 million of net interest expense recognized in the nine months ended September 30, 2022, $3 million of income tax provision and $4 million of net interest expense ($5 million after tax) was recognized in the three months ended September 30, 2022. Unrecognized tax benefits As of September 30, 2022, the total amount of our unrecognized tax benefits was $329 million, and the total amounts accrued for interest and penalties related to income taxes included in other liabilities was $123 million, which primarily reflects the impacts of the evaluation of our transfer pricing positions. As of December 31, 2021, the total amount of our unrecognized tax benefits was $27 million and the total amounts accrued for interest and penalties related to income taxes was $4 million. We expect that the ultimate outcome of these unrecognized tax benefits related to transfer pricing will not have a material net impact on our results of operations, financial condition or cash flows. However, we can provide no assurance as to the ultimate outcome. Based on the information currently available, we believe we have adequately reserved for the open tax years.

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