Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Earnings Before Income Tax Expense

years ended December 31 (in millions)	2021		2020		2019
Domestic	$	(1,644)	$	(4,467)	$	(2,784)
Foreign	14,633		7,865		11,210
Total earnings before income tax expense	$	12,989	$	3,398	$	8,426

Income Tax Expense

years ended December 31 (in millions)	2021		2020		2019
Current
Domestic	$	1,987	$	907	$	102
Foreign	351		194		320
Total current taxes	$	2,338	$	1,101	$	422
Deferred
Domestic	$	(839)	$	(58)	$	(137)
Foreign	(59)		(2,267)		259
Total deferred taxes	$	(898)	$	(2,325)	$	122
Total income tax expense (benefit)	$	1,440	$	(1,224)	$	544

Effective Tax Rate Reconciliation

years ended December 31	2021		2020		2019
Statutory tax rate	21.0	%	21.0	%	21.0	%
Effect of foreign operations	(5.4)		2.4		(8.4)
U.S. tax credits	(2.8)		(10.6)		(3.3)
Impacts related to U.S. tax reform	—		(1.1)		(1.6)
Non-deductible expenses	0.3		7.2		1.0
Tax law changes and related restructuring	(2.0)		(48.5)		3.1
Tax audit settlements	(0.4)		(5.1)		(4.7)
All other, net	0.4		(1.3)		(0.6)
Effective tax rate	11.1	%	(36.0	%)	6.5	%

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 2021, 2020 and 2019 differed from the statutory tax rate principally due to the impact of 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, changes in enacted tax rates and laws and related restructuring, tax audit settlements and accretion on contingent consideration. The 2020 effective income tax rate included the recognition of a net tax benefit of $1.7 billion related to changes in tax laws and related restructuring, including certain intra-group transfers of intellectual property and deferred tax remeasurement. 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 2020 and 2019 included 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, including a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed. 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. The effective income tax rates for 2019 also included the effects of Stemcentrx impairment related expenses.

Deferred Tax Assets and Liabilities

as of December 31 (in millions)	2021		2020
Deferred tax assets
Compensation and employee benefits	$	937	$	1,109
Accruals and reserves	667		438
Chargebacks and rebates	837		555
Advance payments	809		324
Net operating losses and other credit carryforwards	10,095		2,765
Other	1,234		1,371
Total deferred tax assets	14,579		6,562
Valuation allowances	(9,391)		(1,203)
Total net deferred tax assets	5,188		5,359
Deferred tax liabilities
Excess of book basis over tax basis of intangible assets	(4,711)		(5,274)
Excess of book basis over tax basis in investments	(308)		(335)
Other	(904)		(982)
Total deferred tax liabilities	(5,923)		(6,591)
Net deferred tax liabilities	$	(735)	$	(1,232)

The decrease in net deferred tax assets is primarily related to the utilization of net operating losses and other carryforwards offset by an increase in advance payments. The decrease in deferred tax liabilities is primarily related to amortization of intangible assets.

In connection with the Allergan acquisition, the company recorded adjustments within the measurement period in 2021 related to foreign net operating losses and other credit carryforwards that are not expected to be realized. The adjustments reflected an increase of $8.2 billion to deferred tax assets and an offsetting increase to valuation allowances, resulting in no net impact to deferred tax assets.

The company had valuation allowances of $9.4 billion as of December 31, 2021 and $1.2 billion as of December 31, 2020. These were principally related to foreign and state net operating losses and other credit carryforwards that are not expected to be realized.

As of December 31, 2021, the company had U.S. federal and state credit carryforwards of $214 million as well as U.S. federal, state and foreign net operating loss carryforwards of $34.4 billion, which will expire at various times through 2041. The remaining U.S. federal and foreign loss carryforwards of $3.2 billion have no expiration.

The Act significantly changed the timing and manner in which earnings of foreign subsidiaries are subject to U.S. tax. Therefore, unremitted foreign earnings subject to the Act’s transition tax are not considered indefinitely reinvested. Post-2017 earnings subject to the U.S. minimum tax on foreign sourced earnings or eligible for the 100 percent foreign dividends received deduction are also not considered indefinitely reinvested earnings. However, the company generally 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.

Unrecognized Tax Benefits

years ended December 31 (in millions)	2021		2020		2019
Beginning balance	$	5,264	$	2,661	$	2,852
Increase due to acquisition	—		2,674		—
Increase due to current year tax positions	208		91		113
Increase due to prior year tax positions	137		59		499
Decrease due to prior year tax positions	(62)		(7)		(21)
Settlements	(24)		(141)		(749)
Lapse of statutes of limitations	(34)		(73)		(33)
Ending balance	$	5,489	$	5,264	$	2,661

If recognized, the net amount of potential tax benefits that would impact the company's effective tax rate is $5.2 billion in 2021 and $5.0 billion in 2020. Of the unrecognized tax benefits recorded in the table above as of December 31, 2021, AbbVie would be indemnified for approximately $79 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. "Increase due to acquisition" in the table above includes amounts related to federal, state and international tax items recorded in acquisition accounting related to the Allergan acquisition.

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 $161 million in 2021, $142 million in 2020 and $51 million in 2019, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross interest and penalties of $803 million at December 31, 2021, $642 million at December 31, 2020 and $191 million at December 31, 2019.

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 $225 million. All significant federal, state, local and international matters have been concluded for years through 2008. The company believes adequate provision has been made for all income tax uncertainties.