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Tax Matters
 12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Tax Matters
The income tax provision in the Consolidated Statements of Income includes tax costs and benefits, such as uncertain tax positions, repatriation decisions and audit settlements, among others.
The components of Income before provision for taxes on income follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2019

 
2018

 
2017

United States
 
$
965

 
$
937

 
$
897

International
 
836

 
753

 
628

Income before provision for taxes on income
 
$
1,801

 
$
1,690

 
$
1,525


The components of Provision for taxes on income based on the location of the taxing authorities follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2019

 
2018

 
2017

United States:
 
 
 
 
 
 
Current income taxes:
 
 
 
 
 
 
Federal
 
$
192

 
$
199

 
$
384

State and local
 
28

 
32

 
25

Deferred income taxes:
 
 
 
 
 
 
Federal
 
(5
)
 
(107
)
 
113

State and local
 
(15
)
 
3

 
2

Total U.S. tax provision
 
200

 
127

 
524

International:
 
 
 
 
 
 
Current income taxes
 
161

 
148

 
126

Deferred income taxes
 
(60
)
 
(9
)
 
13

Total international tax provision
 
101

 
139

 
139

Provision for taxes on income(a)(b)(c)
 
$
301

 
$
266

 
$
663

(a)  
In 2019, 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 impact of the GILTI tax, a new provision of the Tax Act, which became effective for the company in the first quarter of 2019;
•
a $20 million discrete tax benefit recorded in 2019 related to the excess tax benefits for share-based compensation payments;
•
an $18 million discrete tax benefit related to the changes in valuation allowances;
•
a $14 million net discrete tax benefit recorded in the third quarter of 2019, due to a change in tax basis related to purchase accounting;
•
a $12 million net discrete tax benefit recorded in 2019, related to changes in various other tax items;
•
an $8 million discrete tax benefit recorded in 2019 related to a remeasurement of deferred tax assets and liabilities as a result of a change in U.S. and non-U.S. statutory tax rates;
•
U.S. tax benefit related to U.S. Research and Development Tax Credit; and
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(b)  
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).
(c)
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).
Tax Rate Reconciliation
The reconciliation of the U.S. statutory income tax rate to our effective tax rate follows:
 
 
Year Ended December 31,
 
 
2019

 
2018

 
2017

U.S. statutory income tax rate
 
21
 %
 
21
 %
 
35
 %
State and local taxes, net of federal benefits
 
0.6

 
1.8

 
0.7

Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)
 
0.5

 
1.2

 
6.0

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)
 
(0.7
)
 
(0.5
)
 
(1.3
)
Share-based compensation
 
(1.0
)
 
(0.8
)
 
(0.5
)
Non-deductible / non-taxable items
 
(0.2
)
 
(1.6
)
 
0.5

Taxation of non-U.S. operations(d)(e)
 
(3.1
)
 
(0.3
)
 
(3.9
)
All other—net
 
(0.4
)
 
0.1

 
(0.7
)
Effective tax rate
 
16.7
 %
 
15.7
 %
 
43.5
 %
(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 benefit associated with the U.S. Research and Development Tax Credit was a decrease to our effective tax rate. Included in 2017, is also the benefit associated with the U.S. Domestic Production Activities deduction which was also a decrease to our effective tax rate.
(d)
The rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate in 2017 through 2019 due to the jurisdictional mix of earnings.
(e)
In 2019, the rate impact of non-U.S. operations also includes (i) an $18 million discrete tax benefit related to the changes in valuation allowances, (ii) a $14 million net discrete tax benefit recorded in the third quarter of 2019, due to a change in tax basis related to purchase accounting, and (iii) a $10 million discrete tax benefit recorded in 2019 related to the effective settlement of certain issues with non-U.S. tax authorities.

B. Tax Matters Agreement
In connection with the separation from Pfizer in 2013, we entered into a tax matters agreement with Pfizer that governs the parties' respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.
In general, under the agreement:
•
Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis.
•
We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of the separation from Pfizer.
•
Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the separation from Pfizer.
We will not generally be entitled to receive payment from Pfizer in respect of any of our tax attributes or tax benefits or any reduction of taxes of Pfizer. Neither party's obligations under the agreement will be limited in amount or subject to any cap. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.
Pfizer is primarily responsible for preparing and filing any tax return with respect to the Pfizer affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign income tax purposes or U.S. state or local non-income tax purposes that includes Pfizer or any of its subsidiaries, including those that also include us and/or any of our subsidiaries. We are generally responsible for preparing and filing any tax returns that include only us and/or any of our subsidiaries.
The party responsible for preparing and filing a given tax return will generally have exclusive authority to control tax contests related to any such tax return.
C. Deferred Taxes
Deferred taxes arise as a result of basis differentials between financial statement accounting and tax amounts.
The components of our deferred tax assets and liabilities follow:
 
 
As of December 31,
 
 
2019

 
2018

(MILLIONS OF DOLLARS)
 
Assets (Liabilities)
Prepaid/deferred items
 
$
42

 
$
34

Inventories
 
(1
)
 
(2
)
Intangibles
 
(296
)
 
(370
)
Property, plant and equipment
 
(149
)
 
(114
)
Employee benefits
 
61

 
54

Restructuring and other charges
 
4

 
5

Legal and product liability reserves
 
14

 
12

Net operating loss/credit carryforwards
 
118

 
128

Unremitted earnings
 
(2
)
 
(5
)
All other
 
(1
)
 
—

Subtotal
 
(210
)
 
(258
)
Valuation allowance
 
(136
)
 
(155
)
Net deferred tax liability(a)(b)
 
$
(346
)
 
$
(413
)
(a) 
The decrease in the total net deferred tax liability from December 31, 2018 to December 31, 2019 is primarily attributable to a decrease in deferred tax liabilities related to intangibles and valuation allowances representing the amounts determined to be unrecoverable, partially offset by an increase in deferred tax liabilities related to property, plant and equipment. In addition, the decrease in the total net deferred tax liability was also attributable to an increase in deferred tax assets related to prepaid/deferred items, employee benefits, partially offset by a decrease in net operating loss/credit carryforwards.
(b) 
In 2019, included in Noncurrent deferred tax assets ($88 million) and Noncurrent deferred tax liabilities ($434 million). In 2018, included in Noncurrent deferred tax assets ($61 million) and Noncurrent deferred tax liabilities ($474 million).
We have carryforwards, primarily related to net operating losses, which are available to reduce future foreign, U.S. federal, and U.S. state income taxes payable with either an indefinite life or expiring at various times from 2020 to 2039.
Valuation allowances are provided when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies. On the basis of this evaluation, as of December 31, 2019 and December 31, 2018, a valuation allowance of $136 million and $155 million, respectively, has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.
In general, it is our practice and intention to permanently reinvest the majority of the earnings of the company’s non-U.S. subsidiaries. As of December 31, 2019, the cumulative amount of such undistributed earnings was approximately $5.9 billion, for which we have not provided U.S. and local income taxes, such as U.S. state income taxes, local withholding taxes, and taxes on currency gains and losses. Since these earnings are intended to be indefinitely reinvested overseas as of December 31, 2019, we cannot predict the time or manner of a potential repatriation. As such, other than the deferred tax liability associated with the one-time mandatory deemed repatriation tax on such undistributed earnings imposed by the Tax Act, it is not practicable to estimate the additional deferred tax liability associated with the potential repatriation of the unremitted earnings due to the complexity of the hypothetical calculation.
D. Tax Contingencies
We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statute of limitations expire. We treat these events as discrete items in the period of resolution.
For a description of our accounting policies associated with accounting for income tax contingencies, see Note 3. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies. For a description of the risks associated with estimates and assumptions, see Note 3. Significant Accounting Policies: Estimates and Assumptions.
Uncertain Tax Positions
As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. As of December 31, 2019, 2018 and 2017, we had approximately $180 million, $182 million and $161 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest:
•
Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction. As of December 31, 2019, 2018 and 2017, we had approximately $3 million, $3 million and $3 million, respectively, in assets associated with uncertain tax positions recorded in Noncurrent deferred tax assets and Other noncurrent assets.
•
Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.
The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
(MILLIONS OF DOLLARS)
 
2019

 
2018

 
2017

Balance, January 1
 
$
(185
)
 
$
(164
)
 
$
(68
)
Increases based on tax positions taken during a prior period(a)(b)
 
(3
)
 
(24
)
 
(4
)
Decreases based on tax positions taken during a prior period(a)(c)
 
12

 
6

 
12

Increases based on tax positions taken during the current period(a)(d)
 
(8
)
 
(11
)
 
(107
)
Settlements(e)
 
—

 
6

 
—

Lapse in statute of limitations
 
2

 
2

 
3

Balance, December 31(f)
 
$
(182
)
 
$
(185
)
 
$
(164
)
(a) 
Primarily included in Provision for taxes on income.
(b) 
In 2019, the increases are primarily related to movements on prior year positions. 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. See A. Taxes on Income.
(c) 
In 2019, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with non-U.S. tax authorities, including movements in foreign translation adjustments on prior year positions. 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. See A. Taxes on Income.
(d) 
In 2019 and 2018, the increases are primarily related to movements on current year positions. 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. See A. Taxes on Income.
(f)
In 2019, included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($180 million). In 2018, included in Noncurrent deferred tax assets and Other noncurrent assets ($3 million) and Other taxes payable ($182 million). In 2017, included in Noncurrent deferred tax assets and Other noncurrent assets ($3 million) and Other taxes payable ($161 million).
•
Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in Provision for taxes on income in our Consolidated Statements of Income. In 2019, we recorded a net interest expense of $2 million; in 2018, we recorded a net interest expense of $1 million; and in 2017, we recorded a net interest expense of $1 million. Gross accrued interest totaled $9 million, $8 million and $7 million as of December 31, 2019, 2018 and 2017, respectively, and were included in Other taxes payable. Gross accrued penalties totaled $3 million, $3 million and $4 million as of December 31, 2019, 2018 and 2017, respectively, and were included in Other taxes payable.
Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions
We are subject to taxation in the U.S. including various states, and foreign jurisdictions. The U.S. is one of our major tax jurisdictions, and we are currently under audit for tax years 2015 through 2017. For U.S. Federal and state tax purposes, the tax years 2013 through 2019 are open for examination (see B. Tax Matters Agreement for years prior to 2013).
In addition to the open audit years in the U.S., we have open audit years in other major foreign tax jurisdictions, such as Canada (2016-2019), Asia-Pacific (2011-2019, primarily reflecting Australia, China and Japan), Europe (2012-2019, primarily reflecting France, Germany, Italy, Spain and the United Kingdom) and Latin America (2006-2019, primarily reflecting Brazil and Mexico).
Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. We do not expect that within the next twelve months any of our gross unrecognized tax benefits, exclusive of interest, could significantly decrease as a result of settlements with taxing authorities or the expiration of the statutes of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal
administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.