Income Taxes

12 Months Ended

Dec. 31, 2019

Earnings Before Income Tax Expense



years ended December 31 (in millions)	2019			2018			2017
Domestic	$	(2,784	)	$	(4,274	)	$	(2,678	)
Foreign	11,210			9,471			10,405
Total earnings before income tax expense	$	8,426		$	5,197		$	7,727

Income Tax Expense



years ended December 31 (in millions)	2019			2018			2017
Current
Domestic	$	102		$	593		$	6,204
Foreign	320			434			376
Total current taxes	$	422		$	1,027		$	6,580
Deferred
Domestic	$	(137	)	$	(1,497	)	$	(4,898	)
Foreign	259			(20		)	736
Total deferred taxes	$	122		$	(1,517	)	$	(4,162	)
Total income tax expense (benefit)	$	544		$	(490	)	$	2,418

Impacts Related to U.S. Tax Reform

The Tax Cuts and Jobs Act (the Act) was signed into law in December 2017, resulting in significant changes to the U.S. corporate tax system. The Act reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed. These changes were generally effective for tax years beginning in 2018.

The Act also created a minimum tax on certain foreign sourced earnings. The company’s accounting policy for the minimum tax on foreign sourced earnings is to report the tax effects on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.

Additionally, the Act significantly changed the timing and manner in which earnings of foreign subsidiaries are subject to U.S. tax. Therefore, unremitted foreign earnings previously considered indefinitely reinvested that were subject to the Act’s transition tax are no longer considered indefinitely reinvested. Post-2017 earnings subject to the U.S. minimum tax on foreign sourced earnings and the 100 percent foreign dividends received deduction are also not considered indefinitely reinvested earnings. As such, the company records foreign withholding tax liabilities related to the future cash repatriation of such earnings. However, the company considers instances of outside basis differences in foreign subsidiaries that would incur additional U.S. tax upon reversal (e.g., capital gain distribution) to be permanent in duration. The unrecognized tax liability is not practicable to determine.

Effective Tax Rate Reconciliation



years ended December 31	2019		2018		2017
Statutory tax rate	21.0	%	21.0	%	35.0	%
Effect of foreign operations	(8.4	)	(28.7	)	(12.2	)
U.S. tax credits	(3.3	)	(7.3	)	(4.0	)
Impacts related to U.S. tax reform	(1.6	)	8.2		12.0
Stock-based compensation excess tax benefit	(0.2	)	(1.5	)	(0.9	)
Tax audit settlements	(4.7	)	(2.5	)	(1.2	)
Deferred tax remeasurements due to change in tax rate	3.1		—		—
All other, net	0.6		1.4		2.6
Effective tax rate	6.5	%	(9.4	)%	31.3	%

The effective income tax rate fluctuates year to year due to the allocation of the company's taxable earnings among jurisdictions, as well as certain discrete factors and events in each year, including changes in tax law, acquisitions and collaborations. The effective income tax rates in 2019, 2018 and 2017 differed from the statutory tax rate principally due to changes in enacted tax rates and laws, the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions, business development activities, the cost of repatriation decisions, Boehringer Ingelheim accretion on contingent consideration and Stemcentrx impairment related expenses. The effective tax rates for these periods also reflected the benefit from U.S. tax credits principally related to research and development credits, the orphan drug tax credit and Puerto Rico excise tax credits. The Puerto Rico excise tax credits relate to legislation enacted by Puerto Rico that assesses an excise tax on certain products manufactured in Puerto Rico. The tax is levied on gross inventory purchases from entities in Puerto Rico and is included in cost of products sold in the consolidated statements of earnings. The majority of the tax is creditable for U.S. income tax purposes.

The effective income tax rate in 2019, 2018 and 2017 included impacts related to U.S. tax reform. In 2018, there was a favorable impact of the effective date of provisions of the Act related to the earnings from certain foreign subsidiaries. For 2019, the impact of the Act affected the full year earnings of these subsidiaries, resulting in additional tax expense compared to prior year. The 2019 effective income tax rate also reflects the effects of deferred tax remeasurement due to a change in foreign tax law, accretion for contingent consideration and impairment related expenses. In addition, the company recognized a net tax benefit of $400 million in 2019, $131 million in 2018 and $91 million in 2017 related to the resolution of various tax positions pertaining to prior years.

Deferred Tax Assets and Liabilities



as of December 31 (in millions)	2019			2018
Deferred tax assets
Compensation and employee benefits	$	810		$	529
Accruals and reserves	371			371
Chargebacks and rebates	477			417
Advance payments	615			867
Net operating losses and other credit carryforwards	838			228
Other	406			353
Total deferred tax assets	3,517			2,765
Valuation allowances	(731		)	(103		)
Total net deferred tax assets	2,786			2,662
Deferred tax liabilities
Excess of book basis over tax basis of intangible assets	(2,712		)	(2,940		)
Excess of book basis over tax basis in investments	(249		)	(211		)
Other	(440		)	(250		)
Total deferred tax liabilities	(3,401		)	(3,401		)
Net deferred tax liabilities	$	(615	)	$	(739	)

As of December 31, 2019, gross state net operating losses were $1.0 billion and tax credit carryforwards were $188 million. The state tax carryforwards expire between 2020 and 2039. As of December 31, 2019, foreign net operating loss carryforwards were $2.9 billion. Foreign net operating loss carryforwards of $2.8 billion expire between 2020 and 2036 and the remaining do not have an expiration period.

The company had valuation allowances of $731 million as of December 31, 2019 and $103 million as of December 31, 2018. These were principally related to foreign and state net operating losses and credit carryforwards that are not expected to be realized.

Unrecognized Tax Benefits



years ended December 31 (in millions)	2019			2018			2017
Beginning balance	$	2,852		$	2,701		$	1,168
Increase due to current year tax positions	113			163			1,768
Increase due to prior year tax positions	499			110			16
Decrease due to prior year tax positions	(21		)	(36		)	(2		)
Settlements	(749		)	(79		)	(233		)
Lapse of statutes of limitations	(33		)	(7		)	(16		)
Ending balance	$	2,661		$	2,852		$	2,701

AbbVie and Abbott entered into a tax sharing agreement, effective on the date of separation, which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation. AbbVie will be responsible for unrecognized tax benefits and related interest and penalties for periods after separation or in instances where an existing entity was transferred to AbbVie upon separation.

If recognized, the net amount of potential tax benefits that would impact the company's effective tax rate is $2.4 billion in 2019 and $2.7 billion in 2018. Of the unrecognized tax benefits recorded in the table above as of December 31, 2019, AbbVie would be indemnified for approximately $83 million. The “Increase due to current year tax positions” and "Increase due to prior year tax positions" in the table above include amounts related to federal, state and international tax items.

AbbVie recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statements of earnings. AbbVie recognized gross income tax expense of $51 million in 2019, $73 million in 2018 and $24 million in 2017, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross

interest and penalties of $191 million at December 31, 2019, $190 million at December 31, 2018 and $120 million at December 31, 2017.

The company is routinely audited by the tax authorities in significant jurisdictions and a number of audits are currently underway. It is reasonably possible during the next 12 months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitation, the company's gross unrecognized tax benefits balance may change within the next 12 months up to $54 million. All significant federal, state, local and international matters have been concluded for years through 2012. The company believes adequate provision has been made for all income tax uncertainties.