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Income Taxes
 12 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Provision for Income Taxes
The provision for income taxes the years ended September 30 consisted of:
(Millions of dollars)
2019
 
2018
 
2017
Current:
 
 
 
 
 
Federal
$
235

 
$
665

 
$
(230
)
State and local, including Puerto Rico
41

 
73

 
(20
)
Foreign
300

 
387

 
200

 
$
576

 
$
1,124

 
$
(50
)
Deferred:
 
 
 
 
 
Domestic
$
(566
)
 
$
(201
)
 
$
(64
)
Foreign
(67
)
 
(61
)
 
(10
)
 
(633
)
 
(262
)
 
(74
)
Income tax (benefit) provision
$
(57
)
 
$
862

 
$
(124
)

The components of Income Before Income Taxes for the years ended September 30 consisted of:
(Millions of dollars)
2019
 
2018
 
2017
Domestic, including Puerto Rico
$
1,340

 
$
(135
)
 
$
(386
)
Foreign
(164
)
 
1,308

 
1,362

Income Before Income Taxes
$
1,176

 
$
1,173

 
$
976


U.S. tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Act"), was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign-sourced earnings.
During fiscal year 2019, the Company finalized its accounting for the income tax effects of the Act, and all adjustments related to finalization of its calculations were included as a component of Income tax (benefit) provision in fiscal year 2019. The Company recognized additional tax benefit of $50 million and additional tax cost of $640 million in 2019 and 2018, respectively, as a result of this legislation. These amounts are reflected in the Company's consolidated statements of income within Income tax (benefit) provision.
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The Company has elected to account for its GILTI tax due as a period expense in the year the tax is incurred.
The Company has analyzed its U.S. cash needs in conjunction with the Internal Revenue Service ("IRS") and Treasury Regulations that were released during fiscal year 2019 and has concluded that it will assert indefinite reinvestment for all historical unremitted foreign earnings as of September 30, 2019. As a result of the change in assertion, the deferred tax liability recorded in connection with the hypothetical repatriation of the unremitted foreign earnings was reversed during the fourth quarter of fiscal 2019. The change in assertion resulted in a total tax benefit of $138 million, of which $67 million is related to the tax legislation benefit previously recorded, and is included as a component of Income tax (benefit) provision in fiscal 2019.
Unrecognized Tax Benefits
The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The Company believes it is reasonably possible that the amount of unrecognized benefits will change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, tax payments, other activity, or final decisions in matters that are the subject of controversy in various taxing jurisdictions in which we operate.
(Millions of dollars)
2019
 
2018
 
2017
Balance at October 1
$
543

 
$
349

 
$
469

Increase due to acquisitions
3

 
140

 
—

Increase due to current year tax positions
11

 
43

 
41

Increase due to prior year tax positions
6

 
43

 
19

Decreases due to prior year tax positions
(39
)
 
—

 
(30
)
Decrease due to settlements with tax authorities
—

 
(29
)
 
(145
)
Decrease due to lapse of statute of limitations
(5
)
 
(3
)
 
(5
)
Balance at September 30
$
519

 
$
543

 
$
349


Upon the Company's acquisition of CareFusion in 2015, the Company became a party to a tax matters agreement with Cardinal Health resulting from Cardinal Health's spin-off of CareFusion in fiscal year 2010. Under the tax matters agreement, the Company is obligated to indemnify Cardinal Health for certain tax exposures and transaction taxes prior to CareFusion’s spin-off from Cardinal Health. The indemnification payable is approximately $156 million at September 30, 2019 and is included in Deferred Income Taxes and Other on the consolidated balance sheet.
At September 30, 2019, 2018 and 2017, there are $624 million, $632 million and $415 million of unrecognized tax benefits that if recognized, would affect the effective tax rate. During the fiscal years ended September 30, 2019, 2018 and 2017, the Company reported interest and penalties associated with unrecognized tax benefits of $26 million, $20 million and $57 million on the consolidated statements of income as a component of Income tax (benefit) provision. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. The IRS has completed its audit for fiscal year 2014 for the BD business prior to its acquisition of CareFusion. The IRS has also completed its audit for fiscal years 2016 and 2017 for the combined BD and CareFusion business. For the BD legacy business, all years are effectively settled with the exception of 2015 for which the Company believes it is adequately reserved for any potential exposures. The IRS is currently examining the CareFusion legacy fiscal year 2014 and short period 2015. With the exception of the CareFusion legacy fiscal year 2010 audit, all other periods are at various stages of appeals or protests. With regard to Bard, all examinations have been completed through calendar year 2014. The IRS has commenced the examination of calendar years 2015, 2016 and 2017. For the other major tax jurisdictions where the Company conducts business, tax years are generally open after 2013.
Deferred Income Taxes
Deferred income taxes at September 30 consisted of:
 
2019
 
2018
(Millions of dollars)
Assets
 
Liabilities
 
Assets
 
Liabilities
Compensation and benefits
$
513

 
$
—

 
$
458

 
$
—

Property and equipment
—

 
255

 
—

 
253

Intangibles
—

 
2,624

 
—

 
2,948

Loss and credit carryforwards
1,327

 
—

 
1,290

 
—

Other
634

 
189

 
707

 
384

 
2,474

 
3,068

 
2,455

 
3,585

Valuation allowance
(1,240
)
 
—

 
(1,181
)
 
—

Net (a)
$
1,234

 
$
3,068

 
$
1,275

 
$
3,585


(a)
Net deferred tax assets are included in Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other on the consolidated balance sheets.
Deferred tax assets and liabilities are netted on the balance sheet by separate tax jurisdictions. Deferred taxes have not been provided on undistributed earnings of foreign subsidiaries as of September 30, 2019 since the determination of the total amount of unrecognized deferred tax liability is not practicable.
Generally, deferred tax assets have been established as a result of net operating losses and credit carryforwards with expiration dates from 2020 to an unlimited expiration date. Valuation allowances have been established as a result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets on these losses and credit carryforwards. The valuation allowance at September 30, 2019 is primarily the result of foreign losses due to the Company’s global re-organization of its foreign entities and these generally have no expiration date. Valuation allowances are also maintained with respect to deferred tax assets for certain federal and state carryforwards that may not be realized and that principally expire in 2022.
Tax Rate Reconciliation
A reconciliation of the federal statutory tax rate to the Company’s effective income tax rate was as follows:
 
2019
 
2018
 
2017
Federal statutory tax rate
21.0
 %
 
24.5
 %
 
35.0
 %
New U.S. tax legislation (see discussion above)
(4.3
)
 
54.6

 
—

State and local income taxes, net of federal tax benefit
0.1

 
0.8

 
(2.6
)
Effect of foreign and Puerto Rico (losses) earnings and foreign tax credits
(12.2
)
 
7.3

 
(40.8
)
Effect of Research Credits and FDII/Domestic Production Activities
(3.3
)
 
(2.8
)
 
(2.7
)
Effect of change in accounting for excess tax benefit relating to share-based compensation (see Note 2)
(4.7
)
 
(6.7
)
 
(7.9
)
Effect of gain on divestitures
(2.0
)
 
1.3

 
—

Effect of uncertain tax position
—

 
3.3

 
—

Effect of valuation allowance release
—

 
(4.8
)
 
—

Effect of application for change in accounting method
—

 
(4.5
)
 
—

Effect of nondeductible compensation
—

 
1.6

 
—

Other, net
0.6

 
(1.1
)
 
6.3

Effective income tax rate
(4.8
)%
 
73.5
 %
 
(12.7
)%

The Company has reassessed its permanent reinvestment assertion that was in effect as of September 30, 2018 in light of the IRS and Treasury Regulations that were released in June of 2019 and the impact of certain transactions that were executed in the fourth quarter of fiscal 2019. The Company changed its assertion such that the Company is now permanently reinvested with respect to all of its historical foreign earnings as of September 30, 2019. The Company recorded a benefit of $138 million within Income tax (benefit) provision in 2019 as a result of this change in its permanent reinvestment assertion.
Tax Holidays and Payments
The approximate amounts of tax reductions related to tax holidays in various countries in which the Company does business were $157 million, $107 million and $146 million, in 2019, 2018 and 2017, respectively. The benefit of the tax holiday on diluted earnings per share was approximately $0.57, $0.40 and $0.65 for fiscal years 2019, 2018 and 2017, respectively. The tax holidays expire at various dates through 2028.
The Company made income tax payments, net of refunds, of $536 million in 2019, $235 million in 2018 and $265 million in 2017.