Tax Matters

12 Months Ended

Dec. 31, 2021

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)	2021		2020		2019
United States	$	1,308	$	1,109	$	965
International	1,180		887		836
Income before provision for taxes on income	$	2,488	$	1,996	$	1,801

The components of Provision for taxes on income based on the location of the taxing authorities follow:

	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
United States:
Current income taxes:
Federal	$	311	$	232	$	192
State and local	35		36		28
Deferred income taxes:
Federal	(84)		(29)		(5)
State and local	(10)		(14)		(15)
Total U.S. tax provision	252		225		200
International:
Current income taxes	188		154		161
Deferred income taxes	14		(19)		(60)
Total international tax provision	202		135		101
Provision for taxes on income(a)(b)(c)	$	454	$	360	$	301

(a)     In 2021, 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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;

•tax benefit related to foreign-derived intangible income;

•U.S. tax benefit related to U.S. Research and Development Tax Credit;

•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);

•a $24 million discrete tax benefit recorded in 2021 related to the excess tax benefits for share-based payments;

•an $8 million net discrete tax benefit recorded in 2021 related to the effective settlement of certain issues with tax authorities;

•a $6 million net discrete tax benefit recorded in 2021 related to changes in various other tax items; and

•a $1 million discrete tax expense recorded in 2021 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates.

(b)     In 2020, 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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;

•U.S. tax benefit related to U.S. Research and Development Tax Credit;

•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);

•a $29 million discrete tax benefit recorded in 2020 related to the excess tax benefits for share-based payments;

•a $19 million net discrete tax benefit recorded in 2020 related to changes in various other tax items;

•a $7 million discrete tax benefit recorded in 2020 related to the remeasurement of deferred tax assets and liabilities resulting from the integration of acquired businesses;

•a $5 million discrete tax expense related to the changes in valuation allowances;

•a $4 million discrete tax benefit recorded in 2020 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates; and

•a $4 million net discrete tax benefit recorded in 2020 related to the effective settlement of certain issues with tax authorities.

(c)     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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;

•U.S. tax benefit related to U.S. Research and Development Tax Credit;

•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);

•the impact of the Global Intangible Low-Tax Income 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 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;

•a $10 million net discrete tax benefit recorded in 2019 related to the effective settlement of certain issues with tax authorities; and

•an $8 million discrete tax benefit recorded in 2019 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates.

Tax Rate Reconciliation

The reconciliation of the U.S. statutory income tax rate to our effective tax rate follows:

	Year Ended December 31,
	2021		2020		2019
U.S. statutory income tax rate	21	%	21	%	21	%
State and local taxes, net of federal benefits	0.8		0.9		0.6
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)	0.1		0.1		0.5
Foreign Derived Intangible Income	(1.1)		—		(0.6)
U.S. Research and Development Tax Credit	(0.6)		(0.7)		(0.7)
Share-based payments	(0.9)		(1.3)		(1.0)
Non-deductible / non-taxable items	0.3		0.4		0.4
Taxation of non-U.S. operations(b)(c)	(1.3)		(1.6)		(3.1)
All other—net	(0.1)		(0.8)		(0.4)
Effective tax rate	18.2	%	18.0	%	16.7	%

(a)    For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see above in this section and D. Tax Contingencies.

(b)    In all years, the rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate due to the jurisdictional mix of earnings.

(c)     In 2020, the rate impact of non-U.S. operations also includes (i) a $5 million discrete tax expense related to the changes in valuation allowances, and (ii) an $8 million net discrete tax benefit related to changes in various other tax items. 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 due to a change in tax basis related to purchase accounting, and (iii) a $10 million discrete tax benefit 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,
	2021		2020
(MILLIONS OF DOLLARS)	Assets (Liabilities)
Prepaid/deferred items	$	109	$	64
Inventories	10		15
Intangibles	(187)		(237)
Property, plant and equipment	(183)		(168)
Employee benefits	58		59
Restructuring and other charges	3		3
Legal and product liability reserves	14		15
Net operating loss/credit carryforwards	132		127
Unremitted earnings	(7)		(6)
All other	5		1
Subtotal	(46)		(127)
Valuation allowance	(174)		(157)
Net deferred tax liability(a)(b)	$	(220)	$	(284)

(a)    The decrease in the total net deferred tax liability from December 31, 2020 to December 31, 2021 is primarily attributable to a decrease in deferred tax liabilities related to intangibles, partially offset by an increase in valuation allowances representing the amounts determined to be unrecoverable, and 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 and net operation loss/credit carry forwards, partially offset by a decrease in inventory and employee benefits.

(b)    In 2021, included in Noncurrent deferred tax assets ($100 million) and Noncurrent deferred tax liabilities ($320 million). In 2020, included in Noncurrent deferred tax assets ($94 million) and Noncurrent deferred tax liabilities ($378 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 2022 to 2041.

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, 2021 and December 31, 2020, a valuation allowance of $174 million and $157 million, respectively, has been recorded to reflect 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, 2021, the cumulative amount of such undistributed earnings was approximately $7.0 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, 2021, 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, 2021, 2020 and 2019, we had approximately $188 million, $187 million and $180 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest and penalties:

•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, 2021, 2020 and 2019, we had approximately $3 million 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)	2021		2020		2019
Balance, January 1	$	(188)	$	(182)	$	(185)
Increases based on tax positions taken during a prior period(a)(b)	(1)		(6)		(3)
Decreases based on tax positions taken during a prior period(a)(c)	7		6		12
Increases based on tax positions taken during the current period(a)(d)	(9)		(9)		(8)
Lapse in statute of limitations	2		3		2
Balance, December 31(e)	$	(189)	$	(188)	$	(182)

(a)    Primarily included in Provision for taxes on income.

(b)    In 2021, 2020 and 2019, the increases are primarily related to movements on prior year positions.

(c)    In 2021 and 2020, the decreases are primarily related to effective settlement of certain issues with tax authorities. In 2019, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with tax authorities, including movements in foreign translation adjustments on prior year positions.

(d)    In 2021, 2020 and 2019, the increases are primarily related to movements on current year positions.

(e)     In 2021, included in Noncurrent deferred tax assets and Other noncurrent assets ($1 million) and Other taxes payable ($188 million). In 2020, included in Noncurrent deferred tax assets and Other noncurrent assets ($1 million) and Other taxes payable ($187 million). In 2019, included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($180 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 2021, we recorded a net interest expense of $1 million; in 2020, we recorded a net interest expense of $2 million; and in 2019, we recorded a net interest expense of $2 million. Gross accrued interest totaled $12 million, $11 million and $9 million as of December 31, 2021, 2020 and 2019, respectively, and were included in Other taxes payable. As of December 31, 2021, 2020 and 2019, gross accrued penalties totaled $3 million 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 2018. For U.S. Federal and state tax purposes, the tax years 2015 through 2021 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 (2018-2021), Asia-Pacific (2011-2021, primarily reflecting Australia, China and Japan), Europe (2012-2021, primarily reflecting France, Germany, Italy, Spain and the U.K.) and Latin America (2006-2021, 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.