Income Taxes

12 Months Ended

Sep. 30, 2020

Provision for Income Taxes

The provision (benefit) for income taxes the years ended September 30 consisted of:


(Millions of dollars)	2020		2019		2018
Current:
Federal	$	(50)	$	235	$	665
State and local, including Puerto Rico	47		41		73
Foreign	400		300		387
	$	397	$	576	$	1,124
Deferred:
Domestic	$	(184)	$	(577)	$	(201)
Foreign	(101)		(56)		(61)
	(286)		(633)		(262)
Income tax provision (benefit)	$	111	$	(57)	$	862

The components of Income Before Income Taxes for the years ended September 30 consisted of:


(Millions of dollars)	2020		2019		2018
Domestic, including Puerto Rico	$	(489)	$	799	$	(135)
Foreign	1,474		377		1,308
Income Before Income Taxes	$	985	$	1,176	$	1,173

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. 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.

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 provision (benefit) 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 provision (benefit). During fiscal year 2019, the Company also changed its assertion with respect to historical unremitted foreign earnings, which 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 provision (benefit) in fiscal 2019. The Company asserts indefinite reinvestment for all historical unremitted foreign earnings as of September 30, 2020.

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)	2020		2019		2018
Balance at October 1	$	577	$	601	$	407
Increase due to acquisitions	1		3		140
Increase due to current year tax positions	35		11		43
Increase due to prior year tax positions	76		6		43
Decreases due to prior year tax positions	(49)		(39)		—
Decrease due to settlements with tax authorities	(4)		—		(29)
Decrease due to lapse of statute of limitations	(16)		(5)		(3)
Balance at September 30	$	620	$	577	$	601

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 $164 million at September 30, 2020 and is included in Deferred Income Taxes and Other Liabilities on the consolidated balance sheet.

At September 30, 2020, 2019 and 2018, there are $719 million, $624 million and $632 million of unrecognized tax benefits that if recognized, would affect the effective tax rate. During the fiscal years ended September 30, 2020, 2019 and 2018, the Company reported interest and penalties associated with unrecognized tax benefits of $1 million, $26 million and $20 million on the consolidated statements of income as a component of Income tax provision (benefit). 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 2015 and 2017 for the combined BD and CareFusion business. The IRS is currently examining the CareFusion legacy fiscal year 2014 and short period 2015, as well as BD's combined company for fiscal years 2016, 2018, and 2019. With regard to Bard, all examinations have been completed through calendar year 2014, and calendar years 2015, 2016, and 2017 are currently under examination by the IRS. For the other major tax jurisdictions where the Company conducts business, tax years are generally open after 2012.

Deferred Income Taxes

Deferred income taxes at September 30 consisted of:


	2020				2019
(Millions of dollars)	Assets		Liabilities		Assets		Liabilities
Compensation and benefits	$	554	$	—	$	513	$	—
Property and equipment	—		361		—		312
Intangibles	—		2,408		—		2,624
Loss and credit carryforwards	1,900		—		1,327		—
Product recall and liability reserves	241		—		182		—
Other	501		137		396		74
	3,196		2,906		2,417		3,011
Valuation allowance	(1,820)		—		(1,240)		—
Net (a)	$	1,376	$	2,906	$	1,177	$	3,011

(a)Net deferred tax assets are included in Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other Liabilities 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, 2020 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 2021 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, 2020 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:


	2020		2019		2018
Federal statutory tax rate	21.0	%	21.0	%	24.5	%
New U.S. tax legislation (see discussion above)	—		(4.3)		54.6
State and local income taxes, net of federal tax benefit	(1.9)		0.1		0.8
Foreign income tax at rates other than 21%	(14.8)		(6.6)		(11.7)
Effect of foreign operations	19.1		(5.5)		19.0
Effect of Research Credits and FDII/Domestic Production Activities	(5.0)		(3.3)		(2.8)
Effect of tax benefit relating to share-based compensation	(4.5)		(3.9)		(6.1)
Effect of gain on divestitures	(4.5)		(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	1.9		(0.3)		(1.7)
Effective income tax rate	11.3	%	(4.8)	%	73.5	%

The fluctuations in the Company’s reported tax rates are primarily due to the Act, the effects of which were recorded in fiscal years 2018 and 2019, as well as the geographical mix of income attributable to foreign countries that have income tax rates that vary from the U.S. tax rate.

Tax Holidays and Payments

The approximate tax impact related to tax holidays in various countries in which the Company does business were $136 million, $(43) million and $107 million, in 2020, 2019 and 2018, respectively. The impact of the tax holiday on diluted earnings per share was approximately $0.48, $(0.16) and $0.40 for fiscal years 2020, 2019 and 2018, respectively. The tax holidays expire at various dates through 2028.

The Company made income tax payments, net of refunds, of $518 million in 2020, $536 million in 2019 and $235 million in 2018.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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