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Tax Matters (Tables)
 12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Schedule of Income before Income Tax, Domestic and Foreign
The components of Income before provision for taxes on income follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

United States
 
$
937

 
$
897

 
$
723

International
 
753

 
628

 
505

Income before provision for taxes on income
 
$
1,690

 
$
1,525

 
$
1,228
Schedule Of Components Of Provision For Income Taxes
The components of Provision for taxes on income based on the location of the taxing authorities follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

United States:
 
 
 
 
 
 
Current income taxes:
 
 
 
 
 
 
Federal
 
$
199

 
$
384

 
$
281

State and local
 
32

 
25

 
3

Deferred income taxes:
 
 
 
 
 
 
Federal
 
(107
)
 
113

 
(38
)
State and local
 
3

 
2

 
11

Total U.S. tax provision
 
127

 
524

 
257

International:
 
 
 
 
 
 
Current income taxes
 
148

 
126

 
179

Deferred income taxes
 
(9
)
 
13

 
(27
)
Total international tax provision
 
139

 
139

 
152

Provision for taxes on income(a)(b)(c)
 
$
266

 
$
663

 
$
409

(a)  
In 2018, the Provision for taxes on income reflects the following:
•
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business, the impact of non-deductible items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
•
the reduction of the U.S. federal corporate income tax rate, from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act;
•
a $45 million net tax benefit recorded in 2018, associated with a measurement-period adjustment to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings pursuant to the Tax Act;
•
a $23 million discrete tax benefit recorded in 2018 related to the favorable impact of certain tax accounting method changes;
•
a $15 million discrete tax benefit recorded in 2018 related to the excess tax benefits for share-based compensation payments;
•
a $5 million discrete tax benefit recorded in 2018 related to a remeasurement of deferred tax assets and liabilities as a result of a change in non-U.S. statutory tax rates;
•
U.S. tax benefit related to U.S. Research and Development Tax Credit;
•
tax expense related to the changes in valuation allowances and the resolution of other tax items; and
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(b)
In 2017, the Provision for taxes on income reflects the following:
•
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;
•
a $212 million net discrete provisional tax expense recorded in the fourth quarter of 2017, related to the impact of the Tax Act enacted on December 22, 2017, including a one-time mandatory deemed repatriation tax, partially offset by a net tax benefit related to the remeasurement of the deferred tax assets and liabilities, as of the date of enactment, due to the reduction in the U.S. federal corporate tax rate;
•
U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;
•
a $15 million discrete tax benefit recorded in the fourth quarter of 2017 related to the effective settlement of certain issues with U.S. and non-U.S. tax authorities;
•
a $9 million discrete tax benefit recorded in 2017 related to the excess tax benefits for share-based compensation payments;
•
a $3 million discrete tax benefit recorded in the first quarter of 2017 related to a remeasurement of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward;
•
tax expense related to the changes in valuation allowances and the resolution of other tax items; and
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(c)  
In 2016, the Provision for taxes on income reflects the following:
•
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy initiative, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;
•
U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;
•
a $15 million discrete tax benefit recorded in the fourth quarter of 2016 related to prior period tax adjustments;
•
a $10 million discrete tax benefit recorded in the first quarter of 2016 related to a remeasurement of deferred taxes as a result of a change in statutory tax rates;
•
a $7 million discrete tax benefit recorded in 2016 related to the excess tax benefits for share-based compensation payments;
•
a $2 million discrete tax benefit related to a remeasurement of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward;
•
a net tax expense of approximately $35 million mainly recorded in the first half of 2016 related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015 offset by the remeasurement of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal and without consideration of implementation of any future operational changes, and does not include any benefits associated with a successful appeal of the decision;
•
tax expense related to the changes in valuation allowances and the resolution of other tax items; and
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
Schedule of Effective Income Tax Rate Reconciliation
The reconciliation of the U.S. statutory income tax rate to our effective tax rate follows:
 
 
Year Ended December 31,
 
 
2018

 
2017

 
2016

U.S. statutory income tax rate
 
21
 %
 
35
 %
 
35
 %
State and local taxes, net of federal benefits
 
1.8

 
0.7

 
0.8

Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)
 
1.2

 
6.0

 
0.4

Impact of the Tax Act(b)
 
(3.9
)
 
7.7

 
—

Impact of Tax Accounting Method Changes
 
(1.3
)
 
—

 
—

U.S. Research and Development Tax Credit and U.S. Domestic Production Activities deduction(c)
 
(0.5
)
 
(1.3
)
 
(1.4
)
Share-based compensation
 
(0.8
)
 
(0.5
)
 
(0.5
)
Non-deductible / non-taxable items
 
(1.6
)
 
0.5

 
0.2

Taxation of non-U.S. operations(d)(e)
 
(0.3
)
 
(3.9
)
 
(3.0
)
Annulment of Belgium Excess Profit Ruling(f)
 
—

 
—

 
2.9

All other—net
 
0.1

 
(0.7
)
 
(1.1
)
Effective tax rate
 
15.7
 %
 
43.5
 %
 
33.3
 %
(a) 
For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see A. Taxes on Income and D. Tax Contingencies.
(b) 
In 2018, the rate impact related to the Tax Act was a decrease to our effective tax rate. This tax benefit represents the measurement-period adjustment related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings. In 2017, the rate impact related to the Tax Act was an increase to our effective tax rate. The provisional net tax charge represented the amount related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings, partially offset by a net tax benefit related to the remeasurement of the company’s deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate.    
(c) 
In all years, the decrease in the rate was due to the benefit associated with the U.S. Research and Development Tax Credit. In 2017 and 2016, the decrease in the rate was also due to the benefit associated with the U.S. Domestic Production Activities deduction.
(d)
The rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate in 2016 through 2018 due to the jurisdictional mix of earnings.
(e)
In all years, the impact to the rate due to increases in uncertain tax positions was more than offset by the jurisdictional mix of earnings and other U.S. tax implications of our foreign operations described in the above footnotes.
(f) 
The rate impact related to the European Commission’s negative decision on the excess profits rulings in Belgium was an increase to our effective tax rate in 2016. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015, offset by the remeasurement of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal and without consideration of implementation of any future operational changes, and does not include any benefits associated with a successful appeal of the decision.
Schedule of Deferred Tax Assets and Liabilities
The components of our deferred tax assets and liabilities follow:
 
 
As of December 31,
 
 
2018

 
2017

(MILLIONS OF DOLLARS)
 
Assets (Liabilities)
Prepaid/deferred items
 
$
34

 
$
54

Inventories
 
(2
)
 
8

Intangibles
 
(370
)
 
(170
)
Property, plant and equipment
 
(114
)
 
(80
)
Employee benefits
 
54

 
53

Restructuring and other charges
 
5

 
4

Legal and product liability reserves
 
12

 
14

Net operating loss/credit carryforwards
 
128

 
137

Unremitted earnings
 
(5
)
 
(148
)
All other
 
—

 
(2
)
Subtotal
 
(258
)
 
(130
)
Valuation allowance
 
(155
)
 
(170
)
Net deferred tax liability(a)(b)
 
$
(413
)
 
$
(300
)
(a) 
The increase in the total net deferred tax liability from December 31, 2017 to December 31, 2018 is primarily attributable to an increase in deferred tax liabilities related to intangibles and property, plant and equipment recorded as a result of the acquisition of Abaxis, partially offset by a decrease in deferred tax liabilities related to unremitted earnings, due to a reclass of the one-time mandatory deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable to reflect the liability, which became a fixed obligation in 2018, payable over eight years. In addition, the increase in the total net deferred tax liability was also attributable to a decrease in deferred tax assets related to prepaid/deferred items, inventory, net operating loss/credit carryforwards, partially offset by a decrease in valuation allowances representing the amounts determined to be unrecoverable.
(b) 
In 2018, included in Noncurrent deferred tax assets ($61 million) and Noncurrent deferred tax liabilities ($474 million). In 2017, included in Noncurrent deferred tax assets ($80 million) and Noncurrent deferred tax liabilities ($380 million).
Schedule of Unrecognized Tax Benefits Roll Forward
The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

Balance, January 1
 
$
(164
)
 
$
(68
)
 
$
(61
)
Increases based on tax positions taken during a prior period(a)(b)
 
(24
)
 
(4
)
 
(48
)
Decreases based on tax positions taken during a prior period(a)(c)
 
6

 
12

 
2

Increases based on tax positions taken during the current period(a)(d)
 
(11
)
 
(107
)
 
(9
)
Settlements(e)
 
6

 
—

 
46

Lapse in statute of limitations
 
2

 
3

 
2

Balance, December 31(f)
 
$
(185
)
 
$
(164
)
 
$
(68
)
(a) 
Primarily included in Provision for taxes on income.
(b) 
In 2018, the increases are primarily related to the impact of the Tax Act and movements on prior year positions. In 2017, the increases are primarily related to movements on prior year positions, including movements in foreign translation adjustments on prior year positions. In 2016, the increases are primarily related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.
(c) 
In 2018, the decreases are primarily related to movements on prior year positions and closure of audits with U.S. and non-U.S. tax authorities, including movements in foreign translation adjustments on prior year positions. In 2017, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with U.S. and non-U.S. tax authorities. In 2016, the decreases are primarily related to movements on prior year positions. See A. Taxes on Income.
(d) 
In 2017, the increases are primarily related to the impact of the Tax Act. See A. Taxes on Income.
(e) 
In 2018, the decreases are due to settlements with U.S. and non-U.S. tax authorities. In 2016, the decreases are due to cash payments related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.
(f)
In 2018, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($182 million). In 2017, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($161 million). In 2016, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($65 million).