INCOME TAXES

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



	Year Ended December 31,
Dollars in Millions	2018		2017			2016
Current:
U.S.	$	485	$	2,782		$	1,144
Non-U.S.	450		364			468
Total Current	935		3,146			1,612
Deferred:
U.S.	29		1,063			(101		)
Non-U.S.	57		(53		)	(103		)
Total Deferred	86		1,010			(204		)
Total Provision	$	1,021	$	4,156		$	1,408

Effective Tax Rate

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



	% of Earnings Before Income Taxes
Dollars in Millions	2018					2017					2016
Earnings before income taxes:
U.S.	$	2,338				$	2,280				$	3,100
Non-U.S.	3,630					2,851					2,815
Total	$	5,968				$	5,131				$	5,915
U.S. statutory rate	1,253			21.0	%	1,796			35.0	%	2,070			35.0	%
Deemed repatriation transition tax	(56		)	(0.9	)%	2,611			50.9	%	—			—
Deferred tax remeasurement	—			—		285			5.6	%	—			—
Global intangible low taxed income (GILTI)	94			1.6	%	—			—		—			—
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(202		)	(3.4	)%	(561		)	(10.9	)%	(442		)	(7.5	)%
U.S. Federal valuation allowance	119			2.0	%	—			—		(29		)	(0.5	)%
U.S. Federal, state and foreign contingent tax matters	(55		)	(0.9	)%	72			1.4	%	87			1.5	%
U.S. Federal research based credits	(138		)	(2.3	)%	(144		)	(2.8	)%	(144		)	(2.4	)%
Goodwill allocated to divestitures	—			—		4			0.1	%	34			0.6	%
U.S. Branded Prescription Drug Fee	21			0.3	%	52			1.0	%	52			0.9	%
Non-deductible R&D charges	17			0.3	%	266			5.2	%	100			1.7	%
Puerto Rico excise tax	(152		)	(2.6	)%	(131		)	(2.6	)%	(131		)	(2.2	)%
Domestic manufacturing deduction	—			—		(78		)	(1.5	)%	(122		)	(2.1	)%
State and local taxes (net of valuation allowance)	67			1.1	%	77			1.5	%	23			0.4	%
Foreign and other	53			0.9	%	(93		)	(1.9	)%	(90		)	(1.6	)%
	$	1,021		17.1	%	$	4,156		81.0	%	$	1,408		23.8	%

New Tax reform legislation was enacted on December 22, 2017, known as the Tax Cuts and Jobs Act of 2017 (The Act). The Act moved from a worldwide tax system to a quasi-territorial tax system and was comprised of broad and complex changes to the U.S. tax code including, but not limited to, (1) reduced the U.S. tax rate from 35% to 21%; (2) added a deemed repatriation transition tax on certain foreign earnings and profits; (3) generally eliminated U.S. federal income taxes on dividends from foreign subsidiaries; (4) included certain income of controlled foreign companies in U.S. taxable income (GILTI); (5) created a new minimum tax referred to as a base erosion anti-abuse income tax; (6) limited certain U.S. Federal research based credits; and (7) eliminated the domestic manufacturing deduction.

Although many aspects of the Act were not effective until 2018, additional tax expense of $2.9 billion was recognized in the fourth quarter of 2017 upon its enactment, including a $2.6 billion one-time deemed repatriation transition tax on previously untaxed post-1986 foreign earnings and profits (including related tax reserves). Those earnings were effectively taxed at a 15.5% rate to the extent that the specified foreign corporations held cash and certain other assets and an 8.0% rate on the remaining earnings and profits. The remaining additional tax expense included an adjustment to measure net deferred tax assets at the new U.S. tax rate of 21%. The provisional tax charge for the deemed repatriation transition tax (including related tax reserves) under Staff Accounting Bulletin No. 118 was reduced by $56 million in 2018.

The accounting for the reduction of deferred tax assets to the 21% tax rate was complete as of December 31, 2017, and the tax charge for the deemed repatriation transition tax is complete as of December 31, 2018.

Prior to the enactment of the act, earnings for certain of our manufacturing operations in low tax jurisdictions, such as Switzerland, Ireland and Puerto Rico, were indefinitely reinvested. As a result of the transition tax under the Act, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability or foreign and state income and withholding tax that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable. BMS operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

A valuation allowance was set up in 2018 as a result of the Nektar equity investment fair value losses that would be considered limited as a capital loss.

U.S. Federal, state and foreign contingent tax matters includes a $119 million tax benefit in 2018 with respect to lapse of statutes.

Goodwill allocated to business divestitures as well as the U.S. Branded Prescription Drug Fee are not deductible for tax purposes.

R&D charges primarily from acquisition related and milestone payments to former shareholders are not deductible for tax purposes. These include Cormorant and IFM in 2018; Flexus, Cardioxyl and IFM in 2017; and Flexus, Padlock and Cormorant in 2016.

Puerto Rico imposes an excise tax on the gross company purchase price of goods sold from our manufacturer in Puerto Rico. The excise tax is recognized in Cost of products sold when the intra-entity sale occurs. For U.S. income tax purposes, the excise tax is not deductible but results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.

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	2018			2017
Deferred tax assets
Foreign net operating loss carryforwards	$	2,978		$	2,872
State net operating loss and credit carryforwards	121			143
U.S. Federal net operating loss and credit carryforwards	67			99
Deferred income	188			212
Milestone payments and license fees	552			386
Pension and postretirement benefits	26			131
Intercompany profit and other inventory items	670			651
Other foreign deferred tax assets	327			312
Share-based compensation	54			60
Other	352			280
Total deferred tax assets	5,335			5,146
Valuation allowance	(3,193		)	(2,827		)
Deferred tax assets net of valuation allowance	2,142			2,319

Deferred tax liabilities
Depreciation	(61		)	(11		)
Acquired intangible assets	(220		)	(216		)
Goodwill and other	(533		)	(527		)
Total deferred tax liabilities	(814		)	(754		)
Deferred tax assets, net	$	1,328		$	1,565

Recognized as:
Deferred income taxes – non-current	$	1,371		$	1,610
Income taxes payable – non-current	(18		)	(45		)
Liabilities related to assets held-for-sale	(25		)	—
Total	$	1,328		$	1,565

The U.S. Federal net operating loss carryforwards were $206 million at December 31, 2018. 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 foreign and state net operating loss carryforwards expire in varying amounts beginning in 2018 (certain amounts have unlimited lives).

At December 31, 2018, a valuation allowance of $3.2 billion was established for the following items: $2.9 billion primarily for foreign net operating loss and tax credit carryforwards, $134 million for state deferred tax assets including net operating loss and tax credit carryforwards and $138 million for U.S. Federal deferred tax assets including equity fair value adjustments and U.S. Federal net operating loss carryforwards.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2018			2017			2016
Balance at beginning of year	$	2,827		$	3,078		$	3,534
Provision	458			50			39
Utilization	(43		)	(335		)	(355		)
Foreign currency translation	(48		)	341			(142		)
Acquisitions	—			2			2
Non U.S. rate change	(1		)	(309		)	—
Balance at end of year	$	3,193		$	2,827		$	3,078

Income tax payments were $747 million in 2018, $546 million in 2017 and $2.0 billion in 2016.

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 credit deductibility of certain expenses, and deemed repatriation transition tax. 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	2018			2017			2016
Balance at beginning of year	$	1,155		$	995		$	944
Gross additions to tax positions related to current year	48			173			49
Gross additions to tax positions related to prior years	21			30			49
Gross additions to tax positions assumed in acquisitions	—			—			1
Gross reductions to tax positions related to prior years	(106		)	(22		)	(22		)
Settlements	2			(20		)	(13		)
Reductions to tax positions related to lapse of statute	(119		)	(13		)	(4		)
Cumulative translation adjustment	(6		)	12			(9		)
Balance at end of year	$	995		$	1,155		$	995

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2018		2017		2016
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	853	$	1,002	$	854
Accrued interest	167		148		112
Accrued penalties	11		15		17

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 which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time.

It is also reasonably possible that the total amount of unrecognized tax benefits at December 31, 2018 could decrease in the range of approximately $320 million to $360 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 may result in the payment of additional taxes, adjustment of certain deferred taxes and/or 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 2012, 2015 to 2018
Canada		2009 to 2018
France		2015 to 2018
Germany		2008 to 2018
Italy		2017 to 2018
Mexico		2013 to 2018