
			As Restated
years ended December 31 (in millions)	2019		2018		2017
Current
United States
Federal	$	8	$	21	$	8
State and local	3		(1)		11
International	258		308		261
Current income tax expense	269		328		280
Deferred
United States
Federal	(140)		(228)		230
State and local	(29)		—		1
International	(141)		(35)		(20)
Deferred income tax expense (benefit)	(310)		(263)		211
Income tax expense (benefit)	$	(41)	$	65	$	491


			As Restated
as of December 31 (in millions)	2019		2018
Deferred tax assets
Accrued liabilities and other	$	209	$	227
Pension and other postretirement benefits	258		222
Tax credit and net operating loss carryforwards	928		862
Swiss tax reform net asset basis step-up	159		—
Operating lease liabilities	153		—
Valuation allowances	(420)		(310)
Total deferred tax assets	1,287		1,001
Deferred tax liabilities
Subsidiaries’ unremitted earnings	57		43
Long-lived assets and other	649		690
Operating lease right-of-use assets	152		—
Total deferred tax liabilities	858		733
Net deferred tax asset	$	429	$	268

At December 31, 2019, we had U.S. state operating loss carryforwards totaling $1.1 billion, U.S. federal operating loss carryforwards totaling $58 million and tax credit carryforwards totaling $410 million, which includes a U.S. foreign tax credit carryforward of $395 million. The U.S. federal and state operating loss carryforwards expire between 2020 and 2038 and the tax credits expire between 2020 and 2038.

At December 31, 2019, with respect to our operations outside the U.S., we had foreign operating loss carryforwards totaling $1.3 billion and foreign tax credit carryforwards totaling $49 million. The foreign operating loss carryforwards expire between 2020 and 2031 with $814 million having no expiration date. The foreign tax credits expire between 2021 and 2027 with $48 million having no expiration date.

Realization of these operating loss and tax credit carryforwards depends on generating sufficient future earnings. A valuation allowance of $420 million and $310 million was recognized as of December 31, 2019 and 2018, respectively, to reduce the deferred tax assets associated with net operating loss and tax credit carryforwards because we do not believe it is more likely than not that these assets will be fully realized prior to expiration. After evaluating the 2017 Tax Act and related U.S. Treasury Regulations, any elections or other opportunities that may be available, and the future expiration of certain U.S. tax provisions that will impact the utilization of our U.S. foreign tax credit carryforwards, management expects to be able to realize some, but not all, of the U.S. foreign tax credit deferred tax assets up to its overall domestic loss balance plus other recurring and non-recurring foreign inclusions. Therefore, a valuation allowance of $180 million and $175 million was recognized with respect to the foreign tax credit carryforwards as of December 31, 2019 and 2018, respectively. We will continue to evaluate the need for additional valuation allowances and, as circumstances change, the valuation allowance may change.

As a result of Swiss tax reform legislation enacted during 2019, we recognized an $863 million net asset basis step-up that is amortizable as a tax deduction ratably over tax years 2025 through 2029. The net asset basis step-up resulted in a $159 million deferred tax asset. We expect to realize some, but not all, of the Swiss deferred tax assets based principally on expected future earnings generated by the Swiss subsidiary during the period in which the tax basis will be amortized. Therefore, a valuation allowance of $69 million was recognized on the Swiss deferred tax assets as of December 31, 2019, resulting in a net deferred tax benefit of $90 million for the year ended December 31, 2019.


			As Restated
years ended December 31 (in millions)	2019		2018		2017
Income tax expense at U.S. statutory rate	$	204	$	340	$	383
Tax incentives	(140)		(161)		(139)
State and local taxes, net of federal benefit	(17)		5		(6)
Impact of foreign taxes	65		122		(41)
Swiss tax reform net asset basis step-up	(159)		—		—
Deferred tax revaluation due to 2017 Tax Act and foreign tax reform	(19)		(8)		(283)
Transition tax due to 2017 Tax Act	(16)		(5)		529
U.S. valuation allowance due to 2017 Tax Act	—		(194)		339
Other valuation allowances	110		21		(6)
Stock compensation windfall tax benefits	(54)		(40)		(56)
Foreign tax credits	—		—		(246)
Research and development tax credits	(13)		(17)		(5)
Other, net	(2)		2		22
Income tax expense (benefit)	$	(41)	$	65	$	491

In the above reconciliation, the 2017 income tax expense associated with deferred tax revaluation, the transition tax and the U.S. valuation allowance, all of which result directly or indirectly from the enactment of the 2017 Tax Act, included, or were, provisional amounts. In 2018, we completed our one-year measurement period adjustments to the 2017 Tax Act provisional amounts in accordance with SAB 118. In addition, the tax impact of non-deductible corrections of misstatements related to foreign exchange gains and losses for the years ended December 31, 2018 and 2017 is included above within the impact of foreign taxes.

The 2017 Tax Act reduced the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, upon its enactment in 2017, we remeasured our deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a SAB 118 provisional deferred tax benefit of $283 million to reflect the reduced U.S. tax rate and other effects of the 2017 Tax Act. In 2018, we collected all of the necessary data to complete our analysis of the effect of the 2017 Tax Act on the remeasurement of the underlying deferred taxes and recognized an additional deferred tax benefit of $8 million.

The 2017 Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recognized a $529 million provisional charge in 2017 for that one-time transitional tax, the majority of which was non-cash. This charge was inclusive of relevant non-U.S. withholding taxes and U.S. state income taxes on the portion of the earnings expected to be repatriated. In 2018, after further study of the 2017 Tax Act and related U.S. Treasury Regulations, and further analysis of historical earnings and profits and tax pools, as well as refinements of the cash portion of the charge, which was provisional due to certain foreign subsidiaries with non-calendar tax year-ends, we reduced our one-time transitional tax expense by $5 million.

Additionally, the 2017 Tax Act changed the rules that enabled taxpayers to generate foreign source income related to export sales that were eligible to utilize foreign tax credits. Consequently, we did not believe in 2017 that it would be more likely than not that we would be able to utilize our existing foreign tax credit deferred tax assets within the applicable carryforward periods. As such, a provisional $339 million U.S. valuation allowance was recognized in respect of our foreign tax credit deferred tax assets in accordance with SAB118. After studying the 2017 Tax Act and related U.S. Treasury Regulations and evaluating any elections or other opportunities that may be available, we currently expect to be able to realize some, but not all, of the foreign tax credit deferred tax assets up to our overall domestic loss (ODL) balance plus recurring and non-recurring foreign inclusions. Accordingly, we reduced our provisional foreign tax credit deferred tax asset valuation allowance and recognized a 2018 benefit of $194 million.

The enactment of the 2017 Tax Act created a territorial tax system that allows companies to repatriate certain foreign earnings without incurring additional U.S. federal tax by providing for a 100% dividend exemption. Under the dividend-exemption provision, 100% of the foreign-source portion of dividends paid by certain foreign corporations to a U.S. corporate stockholder are exempt from U.S. federal taxation. As a result of the U.S. change to a territorial tax system and the incurrence of the one-time transition tax charge, we plan to repatriate our foreign earnings that were previously considered indefinitely reinvested with the exception of approximately $192 million of accumulated earnings as of December 31, 2019 related to one of our foreign operations. Additional withholding taxes of $19 million would be incurred if such earnings were remitted currently.

In 2019, Switzerland and India enacted tax reform legislation that had a material impact on our effective tax rate. We recognized a deferred tax benefit of $90 million to reflect a tax basis step-up, net of a valuation allowance, partially offset by a $5 million deferred tax revaluation to reflect an increase in the statutory tax rate, under the newly enacted Swiss tax laws. We also recognized a net deferred tax benefit of $24 million associated with deferred tax revaluation in India to reflect a decrease in the statutory tax rate. Our effective tax rate was also favorably impacted by $57 million in 2019 related to a notional interest deduction on the share capital of a foreign subsidiary. The gross tax benefit of the deduction is included in the table above within impact of foreign taxes and the portion not expected to be realized is included within other valuation allowances.

We classify interest and penalties associated with income taxes in income tax expense (benefit) within the consolidated statements of income. Net interest and penalties recognized were not significant during 2019, 2018 and 2017. The liability recognized related to interest and penalties was $21 million and $22 million as of December 31, 2019 and 2018, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate are $70 million, $84 million and $88 million as of December 31, 2019, 2018 and 2017, respectively.


as of and for the years ended (in millions)	2019		2018		2017
Balance at beginning of the year	$	127	$	108	$	82
Increase associated with tax positions taken during the current year	8		33		33
Increase (decrease) associated with tax positions taken during a prior year	(3)		13		2
Settlements	(20)		(5)		(6)
Decrease associated with lapses in statutes of limitations	(1)		(22)		(3)
Balance at end of the year	$	111	$	127	$	108

Of the gross unrecognized tax benefits, $62 million and $68 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2019 and 2018, respectively. We have recognized net indemnification receivables from Baxalta in the amount of $6 million, $6 million and $13 million as of December 31, 2019, 2018 and 2017, respectively, related to the unrecognized tax benefits for which we are the primary obligor but economically relate to Baxalta operations.

We have received tax incentives in Puerto Rico, Switzerland, Dominican Republic, Costa Rica and certain other tax jurisdictions outside the United States. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share from continuing operations by $0.27 in 2019, $0.29 in 2018, and $0.25 in 2017. The above grants provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2025 to 2027.

As of December 31, 2019, we had ongoing audits in the United States, Germany, Sweden, Belgium and other jurisdictions. During 2019, Baxter obtained a settlement in a transfer pricing Competent Authority proceeding, covering the period from 2009 through 2013, between the U.S. and Switzerland. Tax years 2009 and forward remain under examination by the IRS while additional Competent Authority proceedings take place. We believe that it is reasonably possible that our gross unrecognized tax benefits will be reduced within the next 12 months by $27 million. While the final outcome of these matters is inherently uncertain, we believe we have made adequate tax provisions for all years subject to examination.