INCOME TAXES

The provision/(benefit) for income taxes consisted of:



	Year Ended December 31,
Dollars in Millions	2015			2014			2013
Current:
U.S.	$	337		$	334		$	375
Non-U.S.	456			560			427
Total Current	793			894			802
Deferred:
U.S.	(394		)	(403		)	(390		)
Non-U.S.	47			(139		)	(101		)
Total Deferred	(347		)	(542		)	(491		)
Total Provision	$	446		$	352		$	311

Effective Tax Rate

The reconciliation of the effective tax/(benefit) rate to the U.S. statutory Federal income tax rate was:



	% of Earnings Before Income Taxes
Dollars in Millions	2015					2014					2013
Earnings/(Loss) before income taxes:
U.S.	$	(1,329	)			$	(349	)			$	(135	)
Non-U.S.	3,406					2,730					3,026
Total	$	2,077				$	2,381				$	2,891
U.S. statutory rate	727			35.0	%	833			35.0	%	1,012			35.0	%
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(535		)	(25.8	)%	(509		)	(21.4	)%	(620		)	(21.4	)%
U.S. tax effect of capital losses	—			—		(361		)	(15.2	)%	—			—
Valuation allowance release	(84		)	(4.0	)%	—			—		(10		)	(0.3	)%
U.S. Federal, state and foreign contingent tax matters	56			2.7	%	228			9.6	%	134			4.6	%
U.S. Federal research based credits	(132		)	(6.4	)%	(131		)	(5.4	)%	(220		)	(7.6	)%
Goodwill allocated to divestitures	25			1.2	%	210			8.8	%	—			—
U.S. Branded Prescription Drug Fee	44			2.1	%	84			3.5	%	63			2.2	%
R&D charges	369			17.8	%	52			2.2	%	—			—
State and local taxes (net of valuation allowance)	16			0.8	%	20			0.8	%	25			0.9	%
Foreign and other	(40		)	(1.9	)%	(74		)	(3.1	)%	(73		)	(2.6	)%
	$	446		21.5	%	$	352		14.8	%	$	311		10.8	%

The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries that have been considered or are expected to be indefinitely reinvested offshore. U.S. taxes have not been provided on approximately $25 billion of undistributed earnings of foreign subsidiaries as of December 31, 2015. These undistributed earnings primarily relate to operations in Switzerland, Ireland and Puerto Rico. If these undistributed earnings are repatriated to the U.S. in the future, or if it were determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required. Due to complexities in the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that will have to be provided. Reforms to U.S. tax laws related to foreign earnings have been proposed and if adopted, may increase taxes, which could reduce the results of operations and cash flows. BMS operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

The divestiture of certain businesses resulted in capital loss tax benefits including $361 million from the sale of Amylin shares in 2014. Valuation allowances attributed to capital loss carryforwards were released in 2015 following the divestiture of Recothrom*, Ixempra* and other mature brands. Additional reserves of $123 million were established in 2014 for certain transfer pricing matters related to tax periods from 2008 through 2014. The retroactive reinstatement of the 2012 U.S. Federal research and development credit in 2013 resulted in additional tax credits of $82 million in 2013. Orphan drug credits are included in the U.S. Federal research based credits for all periods presented. Goodwill allocated to business divestitures (including the diabetes business in 2014) was not deductible for tax purposes as well as the U.S. Branded Prescription Drug Fee in all periods. Research and development charges resulting primarily from the acquisition of Flexus and Cardioxyl in 2015 and iPierian in 2014 were also not deductible for tax purposes.

Deferred Taxes and Valuation Allowance

The components of current and non-current deferred income tax assets/(liabilities) were as follows:



	December 31,
Dollars in Millions	2015			2014
Deferred tax assets
Foreign net operating loss carryforwards	$	3,090		$	3,473
U.S. capital loss carryforwards	39			562
State net operating loss and credit carryforwards	324			337
U.S. Federal net operating loss and credit carryforwards	173			161
Deferred income	1,009			1,163
Milestone payments and license fees	560			440
Pension and postretirement benefits	462			467
Intercompany profit and other inventory items	607			531
Other foreign deferred tax assets	172			202
Share-based compensation	122			95
Legal and other settlements	63			14
Repatriation of foreign earnings	(1		)	94
Internal transfer of intellectual property	635			247
Other	337			311
Total deferred tax assets	7,592			8,097
Valuation allowance	(3,534		)	(4,259		)
Deferred tax assets net of valuation allowance	4,058			3,838

Deferred tax liabilities
Depreciation	(105		)	(128		)
Acquired intangible assets	(338		)	(390		)
Goodwill and other	(802		)	(832		)
Total deferred tax liabilities	(1,245		)	(1,350		)
Deferred tax assets, net	$	2,813		$	2,488

Recognized as:
Deferred income taxes – current	$	—		$	1,644
Deferred income taxes – non-current	2,844			915
Income taxes payable – current	—			(11		)
Income taxes payable – non-current	(31		)	(60		)
Total	$	2,813		$	2,488

The Company has elected to early adopt Accounting Standard Update 2015-17 as of December 31, 2015 on a prospective basis, which results in all deferred taxes being reported as non-current on the balance sheet.

Internal transfers of intellectual property resulted in deferred tax assets of $635 million and prepaid taxes of $484 million (included in other assets) at December 31, 2015. These assets are amortized over their expected lives.

The U.S. Federal net operating loss carryforwards were $419 million at December 31, 2015. These carryforwards were acquired as a result of certain acquisitions and are subject to limitations under Section 382 of the Internal Revenue Code. The net operating loss carryforwards expire in varying amounts beginning in 2022. The U.S. Federal tax credit carryforwards expire in varying amounts beginning in 2017. The realization of the U.S. Federal tax credit carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. The capital loss carryforward available of $102 million is dependent on generating sufficient domestic-sourced capital gain income and is scheduled to expire in 2019. The foreign and state net operating loss carryforwards expire in varying amounts beginning in 2016 (certain amounts have unlimited lives).

At December 31, 2015, a valuation allowance of $3,534 million was established for the following items: $3,090 million primarily for foreign net operating loss and tax credit carryforwards, $340 million for state deferred tax assets including net operating loss and tax credit carryforwards, $11 million for U.S. Federal net operating loss carryforwards and $29 million for U.S. Federal capital losses and $64 million for other U.S. Federal deferred tax assets.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2015			2014			2013
Balance at beginning of year	$	4,259		$	4,623		$	4,404
Provision	71			140			252
Utilization	(436		)	(109		)	(68		)
Foreign currency translation	(366		)	(395		)	40
Acquisitions	6			—			(5		)
Balance at end of year	$	3,534		$	4,259		$	4,623

Income tax payments were $577 million in 2015, $544 million in 2014 and $478 million in 2013. The current tax benefit realized as a result of stock related compensation credited to capital in excess of par value of stock was $147 million in 2015, $131 million in 2014 and $129 million in 2013.

Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are subject to examination by various Federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. Liabilities are established for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, transfer pricing matters, tax credits and deductibility of certain expenses. Such liabilities represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes known. The effect of changes in estimates related to contingent tax liabilities is included in the effective tax rate reconciliation above.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2015			2014			2013
Balance at beginning of year	$	934		$	756		$	642
Gross additions to tax positions related to current year	52			106			74
Gross additions to tax positions related to prior years	56			218			108
Gross additions to tax positions assumed in acquisitions	1			—			—
Gross reductions to tax positions related to prior years	(34		)	(57		)	(87		)
Settlements	(46		)	(65		)	26
Reductions to tax positions related to lapse of statute	(9		)	(12		)	(8		)
Cumulative translation adjustment	(10		)	(12		)	1
Balance at end of year	$	944		$	934		$	756

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2015		2014			2013
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	671	$	668		$	508
Accrued interest	93		96			83
Accrued penalties	16		17			34
Interest expense	2		27			24
Penalty expense/(benefit)	1		(7		)	3

Accrued interest and penalties payable for unrecognized tax benefits are included in either current or non-current income taxes payable. Interest and penalties related to unrecognized tax benefits are included in income tax expense.

BMS is currently under examination by a number of tax authorities, including but not limited to the major tax jurisdictions listed in the table below, which have proposed or are considering proposing material adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. BMS estimates that it is reasonably possible that the total amount of unrecognized tax benefits at December 31, 2015 will decrease in the range of approximately $270 million to $330 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits, primarily settlement related, will involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is reasonably possible that new issues will be raised by tax authorities that may increase unrecognized tax benefits; however, an estimate of such increases cannot reasonably be made at this time. BMS believes that it has adequately provided for all open tax years by tax jurisdiction.

The following is a summary of major tax jurisdictions for which tax authorities may assert additional taxes based upon tax years currently under audit and subsequent years that will likely be audited:



U.S.		2008 to 2015
Canada		2006 to 2015
France		2013 to 2015
Germany		2007 to 2015
Italy		2003 to 2015
Mexico		2010 to 2015