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Income Taxes
 9 Months Ended
Sep. 30, 2022
Income Tax Disclosure [Abstract]  
Income Taxes
For the three months ended September 30, 2023, we recorded an income tax provision of $23 million on pre-tax income of $253 million, or an effective tax rate of 9.1%, compared to an income tax provision of $155 million on pre-tax income of $693 million, or an effective tax rate of 22.3%, for the three months ended September 30, 2022. For the three months ended September 30, 2023, our income tax provision includes a $9 million income tax benefit arising from the finalization of tax return filing positions and adjustments to accrued withholding taxes as a result of changes reflected on our filed U.S. federal return. This income tax benefit in relation to pre-tax income of $253 million contributed to a lower effective tax rate in the third quarter of 2023 compared to the U.S. statutory rate of 21%.
For the nine months ended September 30, 2023, we recorded an income tax provision of $326 million on pre-tax income of $1.81 billion, or an effective tax rate of 18.0%, compared to an income tax provision of $913 million on pre-tax income of $3.84 billion, or an effective tax rate of 23.8%, for the nine months ended September 30, 2022.
For the three and 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 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. In addition, for the nine months ended September 30, 2022, our income tax provision includes $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.
Our effective tax rate is 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, 2023 of 9.1%, which is based on pre-tax income of $253 million, including $66 million of earnings attributable to the noncontrolling interest, would be 3.2 percentage points higher if based on pre-tax income exclusive of the $66 million of 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 nine months ended September 30, 2023 of 18.0%, which is based on pre-tax income of $1.81 billion, including $235 million of earnings attributable to the noncontrolling interest, would be 2.7 percentage points higher if based on pre-tax income exclusive of the $235 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.
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.
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 through 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.
In the second half of 2022, this tax liability and the related interest were 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 has filed amended tax returns in the United States to request a refund of taxes paid.
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 on our consolidated statement of operations of the amounts recorded as a result of this evaluation of transfer pricing positions, 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.