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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The components of earnings before income taxes and the components of our income tax provision are as follows:
| Year ended December 31,
| 2022 |  | 2021 |  | 2020
| (in millions)
Domestic | $ | 4,699 |  |  | $ | 1,979 |  |  | $ | 421 |
Non-U.S. | 396 |  |  | (436) |  |  | 42 |
Earnings before income taxes | $ | 5,095 |  |  | $ | 1,543 |  |  | $ | 463 |
Current |  |  |  |  |
Federal | $ | 702 |  |  | $ | 394 |  |  | $ | 106 |
Foreign | 395 |  |  | 30 |  |  | 6 |
State | 168 |  |  | 55 |  |  | (7) |
| 1,265 |  |  | 479 |  |  | 105 |
Deferred |  |  |  |  |
Federal | (102) |  |  | (137) |  |  | (76) |
Foreign | (18) |  |  | (50) |  |  | 4 |
State | 13 |  |  | (9) |  |  | (2) |
| (107) |  |  | (196) |  |  | (74) |
Income tax provision | $ | 1,158 |  |  | $ | 283 |  |  | $ | 31 |
Differences in the expected income tax provision based on statutory rates applied to earnings before income taxes and the income tax provision reflected in the consolidated statements of operations are summarized below.
| Year ended December 31, |  |
| 2022 |  |  |  | 2021 |  |  |  | 2020 |  |
| (in millions, except percentages)
Earnings before income taxes | $ | 5,095 |  |  |  |  | $ | 1,543 |  |  |  |  | $ | 463 |  |  |
Expected tax provision at U.S. statutory rate of 21% | $ | 1,070 |  |  |  |  | $ | 324 |  |  |  |  | $ | 97 |  |  |
State income taxes, net of federal | 143 |  |  |  |  | 34 |  |  |  |  | (1) |  |  |
Net earnings attributable to noncontrolling interest | (124) |  |  |  |  | (72) |  |  |  |  | (24) |  |  |
Foreign tax rate differential | (9) |  |  |  |  | (1) |  |  |  |  | 1 |  |  |
U.S. tax on foreign earnings | 3 |  |  |  |  | — |  |  |  |  | (6) |  |  |
Foreign partnership basis difference | — |  |  |  |  | — |  |  |  |  | (7) |  |  |
Non-deductible goodwill impairment | — |  |  |  |  | 60 |  |  |  |  | — |  |  |
Transfer pricing arbitration | 69 |  |  |  |  | — |  |  |  |  | — |  |  |
Federal income tax return audits | — |  |  |  |  | (38) |  |  |  |  | — |  |  |
Terra amended tax returns | — |  |  |  |  | — |  |  |  |  | (24) |  |  |
Other | 6 |  |  |  |  | (24) |  |  |  |  | (5) |  |  |
Income tax provision | $ | 1,158 |  |  |  |  | $ | 283 |  |  |  |  | $ | 31 |  |  |
Effective tax rate | 22.7 | % |  |  |  | 18.3 | % |  |  |  | 6.7 | % |  |
Our effective tax rate is impacted by earnings attributable to the noncontrolling interest in CFN, as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interest. As a result, earnings attributable to the noncontrolling interest of $591 million, $343 million and $115 million in 2022, 2021 and 2020, respectively, which are included in earnings before income taxes, impacted the effective tax rate in all three years. See Note 17—Noncontrolling Interest for additional information. The foreign tax rate differential is impacted by the inclusion of equity earnings from our equity method investment in PLNL, a foreign operating affiliate, which are included in pre-tax earnings on an after-tax basis. In 2021 and 2020, the foreign tax rate differential includes $12 million and $6 million of tax expense, respectively, for the revaluing of deferred taxes due to an enacted rate change in the jurisdiction of a foreign affiliate. U.S. tax on foreign earnings is inclusive of the current year tax on global intangible low-tax income (GILTI), benefit from the GILTI Section 250 deduction and foreign tax credits, as well as adjustments to prior year amounts for these items. Non-deductible goodwill impairment in the table above relates to the goodwill impairment recognized in 2021 as described in Note 5—United Kingdom Operations Restructuring and Impairment Charges. We did not record an income tax benefit for the goodwill impairment as it is nondeductible for income tax purposes. In 2021, we reached agreement on certain issues related to U.S. federal income tax audits for the tax years 2012 through 2016 and reversed accruals for unrecognized tax benefits of $13 million related to those tax years. This resulted in a $38 million federal income tax benefit, which included the reduction in our unrecognized tax benefits. The federal income tax benefit was offset by $12 million of state income tax liability resulting from adjustments to U.S. federal taxable income, which is included in the line “State income tax, net of federal” in the table above. 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 served as security until the matter was resolved, as discussed below. 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 was subject to tax in Canada, resulting in our having additional Canadian tax liability for those tax years of approximately $129 million. 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 $102 million, primarily reflecting the estimated interest payable to Canada. The $69 million in the effective tax rate table above excludes the state income tax liability of $9 million, which is included in the line “State income tax, net of federal.” In the second half of 2022, this tax liability and the related interest was assessed and paid, resulting in total payments of $224 million, which also reflect the impact of changes in foreign currency exchange rates. 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. Due primarily to the availability of additional foreign tax credits to offset in part the increased Canadian tax referenced above, the Company will file amended tax returns in the United States to request a refund of taxes paid. Terra Amended Tax Returns We completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, we determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 we amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) and paid additional income and withholding taxes, and related interest and penalties. In 2013, the Internal Revenue Service (IRS) commenced an examination of the U.S. tax aspects of the Amended Tax Returns. In 2017, we also made a Voluntary Disclosures Program filing with the CRA with respect to the Canadian tax aspects of the Amended Tax Returns and paid additional Canadian taxes due. In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee on Taxation of the U.S. Congress (the Joint Committee). For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter. In late 2019, we received notification that the Joint Committee had approved the IRS audit reports and related income tax refunds relating to the income tax related matter. As a result of the approval by the Joint Committee, we recognized in the fourth quarter of 2019 the following amounts in our consolidated statement of operations: (i) $5 million of interest income ($4 million, net of tax); and (ii) a reduction in income tax expense of $10 million as a result of the favorable settlement of certain uncertain tax positions. No income tax refunds were received in 2019 related to the Amended Tax Returns. In 2020, we received notification that the Joint Committee approved the IRS audit report and related withholding tax refunds relating to the withholding tax matter and we received IRS Notices indicating the amount of tax and interest to be refunded and received with respect to the income tax and withholding tax returns. As a result of these events, we recognized $26 million of interest-related income and $18 million of income tax benefit, which consisted of the following: •additional income of $26 million ($23 million, net of tax) representing $16 million of interest income related to the U.S. Federal income tax matter and withholding tax matter and a $10 million reversal of previously accrued interest related to the Canadian tax aspects of this matter, •a reduction in our liabilities for unrecognized tax benefits of $12 million with a corresponding reduction in income tax expense related to the U.S. Federal withholding tax matter, and •an additional income tax benefit of $9 million related to the U.S. Federal income tax matter and related state amended returns. In 2020, we received U.S. Federal income tax refunds, including interest, of $110 million relating to the Amended Tax Returns, consisting of $68 million related to the income tax matter and $42 million related to the withholding tax matter, which finalized these matters with the IRS. In addition, in late 2020, the CRA settled with us the voluntary disclosure matter, and, in the first quarter of 2021, we received approximately $20 million of withholding tax refunds, including interest, from the CRA. Deferred Taxes Deferred tax assets and deferred tax liabilities are as follows:
| December 31,
| 2022 |  | 2021
| (in millions)
Deferred tax assets: |  |  |
Net operating loss and capital loss carryforwards, state | $ | 34 |  |  | $ | 38 |
Net operating loss and capital loss carryforwards, foreign | 114 |  |  | 122 |
Retirement and other employee benefits | 25 |  |  | 51 |
Foreign tax credits | 44 |  |  | 18 |
State tax credits | 7 |  |  | 29 |
Operating lease liabilities | 64 |  |  | 62 |
Other | 35 |  |  | 25 |
| 323 |  |  | 345 |
Valuation allowance | (190) |  |  | (150) |
| 133 |  |  | 195 |
Deferred tax liabilities: |  |  |
Depreciation and amortization | (139) |  |  | (157) |
Investments in partnerships | (858) |  |  | (998) |
Operating lease right-of-use assets | (63) |  |  | (60) |
Foreign earnings | (12) |  |  | — |
Other | (19) |  |  | (9) |
| (1,091) |  |  | (1,224) |
Net deferred tax liability | $ | (958) |  |  | $ | (1,029) |
As of December 31, 2022, we recorded a deferred tax liability of $12 million on the undistributed earnings of our Canadian affiliates for which the Company does not have an indefinite reinvestment assertion. We have not provided for deferred taxes on the remainder of undistributed earnings from our foreign affiliates because such earnings would not give rise to additional tax liabilities upon repatriation or such earnings are considered to be indefinitely reinvested. As of December 31, 2022, our net operating loss and capital loss carryforwards are primarily comprised of state net operating loss carryforwards of $33 million with expiration dates generally ranging from 2030 to 2037 and foreign capital loss carryforwards of $114 million, which can be carried forward indefinitely. Our foreign affiliates have operations that do not normally generate capital gains and have no practical plans to do so in the future. As a result, we have recorded a full valuation allowance against all foreign capital loss carryforwards. As of December 31, 2022, we have state tax credit carryforwards resulting in a deferred tax asset of $7 million. The state tax credits have expiration dates generally ranging from 2038 to 2042. In 2022, the net increase in the valuation allowance is primarily attributable to excess foreign tax credits associated with certain U.S. taxed foreign branch income and the reversal of future deductible temporary differences of one of our foreign affiliates in the United Kingdom, partially offset by the impact of changes in foreign currency exchange rates. The excess foreign tax credits carried forward, subject to U.S. foreign tax credit limitation rules, are not expected to be utilized prior to expiration and have a full valuation allowance of $44 million reflecting an increase of $26 million in 2022. Based on recent losses generated in the United Kingdom, and projections for future income over the period for which the deferred tax assets will reverse, we believe it is more likely than not that the foreign affiliate in the United Kingdom will not realize the deferred tax assets and therefore have recorded a full valuation allowance of $24 million. See Note 5—United Kingdom Operations Restructuring and Impairment Charges for additional detail. In 2021, the valuation allowance activity was primarily attributable to state tax credit carryforwards and excess foreign tax credits associated with certain U.S. taxed foreign branch income. Due to the expiration of statute of limitations on state tax credits and increases in taxable income, we no longer have valuation allowances on the remaining state tax credit carryforwards resulting in a decrease of $27 million. The excess foreign tax credits carried forward, subject to U.S. foreign tax credit limitation rules, are not expected to be utilized prior to expiration and have a full valuation allowance of approximately of $18 million. In 2020, the valuation allowance activity was primarily attributable to a capital loss. As a result of an intercompany transaction with a foreign affiliate, we recognized a capital loss which will be carried forward and for which we recorded a deferred tax asset of approximately $90 million. The foreign affiliate operations do not normally generate capital gains, and there is no practical plan to do so in the future; therefore, we established a full valuation allowance of approximately $90 million against the deferred tax asset. Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| December 31,
| 2022 |  | 2021
| (in millions)
Unrecognized tax benefits: |  |  |
Balance as of January 1 | $ | 27 |  |  | $ | 81 |
Additions for tax positions taken during the current year | — |  |  | — |
Additions for tax positions taken during prior years | 154 |  |  | 5 |
Reductions related to lapsed statutes of limitations | — |  |  | — |
Reductions related to settlements with tax jurisdictions | — |  |  | (59) |
Balance as of December 31 | $ | 181 |  |  | $ | 27 |
In 2022, we increased the amount of our unrecognized tax benefits by $154 million, which primarily relates to the Canada Revenue Agency Competent Authority Matter discussed above. As a result of the outcome of the arbitration decision, we evaluated our transfer pricing positions between Canada and the United States for open years 2012 and after. In order to mitigate the assessment of future Canadian interest on these Canadian transfer pricing positions, in the fourth quarter of 2022, we made payments to the Canadian taxing authorities of CAD $363 million (approximately $267 million), which were recorded as noncurrent income tax receivables and included in other assets on our consolidated balance sheet. For the amounts ultimately owed and paid to the Canadian tax authorities upon resolution of these tax years, the Company would seek refunds of related taxes paid in the United States. As of December 31, 2022, we had $181 million of unrecognized tax benefits. Due to the majority of our unrecognized tax benefits being related to transfer pricing positions which have a corollary receivable for the other jurisdiction impacted by the transfer pricing relationship, recognizing these unrecognized tax benefits would result in additional tax expense of $6 million in the future. These receivables are included in other assets on our consolidated balance sheet. In 2021, we increased the amount of our unrecognized tax benefits by $5 million related to an addition for state investment tax credits. In addition, we reduced the amount of unrecognized tax benefits in 2021 by $59 million primarily related to the effective settlement of the U.S. federal income tax audits for the tax years 2012 through 2016, as described above. We file federal, provincial, state and local income tax returns principally in the United States, Canada and the United Kingdom, as well as in certain other foreign jurisdictions. In general, filed tax returns remain subject to examination by United States tax jurisdictions for years 2017 and thereafter, by Canadian tax jurisdictions for years 2012 and thereafter, and by the United Kingdom for years 2020 and thereafter. As a result of uncertainties regarding tax audits and their possible outcomes, an estimate of the range of possible impacts to unrecognized tax benefits in the next twelve months cannot be made at this time. Interest expense and penalties related to our unrecognized tax benefits recorded for the year ended December 31, 2022 was $66 million. Interest expense and penalties recorded for the year ended December 31, 2020 was $(29) million. Interest expense and penalties recorded for the year ended December 31, 2021 were not material. Amounts recognized in our consolidated balance sheets for accrued interest and penalties related to our unrecognized tax benefits of $62 million and $4 million as of December 31, 2022 and 2021, respectively, are included in other liabilities.

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