Tax Matters

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Tax Matters

8. Tax Matters

A. Taxes on Income

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)	2023		2022		2021
United States	$	1,636	$	1,645	$	1,308
International	1,300		1,011		1,180
Income before provision for taxes on income	$	2,936	$	2,656	$	2,488

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

	Year Ended December 31,
(MILLIONS OF DOLLARS)	2023		2022		2021
United States:
Current income taxes:
Federal	$	341	$	514	$	311
State and local	35		81		35
Deferred income taxes:
Federal	(40)		(198)		(84)
State and local	25		(49)		(10)
Total U.S. tax provision	361		348		252
International:
Current income taxes	281		235		188
Deferred income taxes	(46)		(38)		14
Total international tax provision	235		197		202
Provision for taxes on income	$	596	$	545	$	454

Tax Rate Reconciliation

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

	Year Ended December 31,
	2023		2022		2021
U.S. statutory income tax rate	21	%	21	%	21	%
State and local taxes, net of federal benefits	1.6		0.9		0.8
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)	0.9		0.1		0.1
Foreign Derived Intangible Income	(0.7)		(0.2)		(1.1)
U.S. Research and Development Tax Credit	(0.7)		(0.7)		(0.6)
Share-based payments	(0.3)		(0.6)		(0.9)
Non-deductible / non-taxable items	0.2		0.1		0.3
Taxation of non-U.S. operations	(0.8)		(0.4)		(1.3)
All other—net	(0.9)		0.3		(0.1)
Effective tax rate	20.3	%	20.5	%	18.2	%

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

Our effective income tax rate was 20.3%, 20.5% and 18.2% in 2023, 2022 and 2021, respectively.

The lower effective tax rate for 2023, compared with 2022, was primarily attributable to a higher benefit in the U.S. related to foreign-derived intangible income, a more favorable jurisdictional mix of earning (which includes the impact of the location of earnings and repatriation costs), partially offset by a higher net discrete tax expense in 2023, mainly related to changes to prior years’ tax positions. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible items and non-taxable items.

The higher effective tax rate for 2022, compared with 2021, was attributable to a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs), a lower benefit in the U.S. related to foreign-derived intangible income and lower net discrete tax benefits in 2022. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items.

In 2022, the company implemented an initiative to maximize its cash position in the U.S. This initiative resulted in a tax benefit in the U.S. in connection with a prepayment from a related foreign entity in Belgium which qualifies as foreign-derived intangible income; however, this income tax benefit was deferred to 2023 and 2024. A portion of this benefit was recognized during 2023. The remaining deferred benefit is included in Other current assets on our Consolidated Balance Sheets as of December 31, 2023 in the amount of $12 million.

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,
	2023		2022
(MILLIONS OF DOLLARS)	Assets (Liabilities)
Prepaid/deferred items	$	72	$	192
Inventories	30		22
Capitalized R&D for tax	224		111
Identifiable intangible assets	(154)		(154)
Property, plant and equipment	(199)		(204)
Employee benefits	62		61
Restructuring and other charges	(1)		1
Legal and product liability reserves	12		14
Net operating loss/credit carryforwards	133		112
Unremitted earnings	(4)		(4)
All other	16		9
Subtotal	191		160
Valuation allowance	(131)		(129)
Net deferred tax asset/(liability)(a)(b)	$	60	$	31

(a)    The change in the total net deferred tax asset/(liability) from December 31, 2022 to December 31, 2023 is primarily attributable to an increase in deferred tax assets related to the capitalization and amortization of research & development costs for U.S. tax purposes and an increase in net operating loss/credit carryforwards, partially offset by a decrease in deferred tax assets related to prepaid/deferred items as a result of a prepayment from a related foreign entity in Belgium.

(b)    In 2023, included in Noncurrent deferred tax assets ($206 million) and Noncurrent deferred tax liabilities ($146 million). In 2022, included in Noncurrent deferred tax assets ($173 million) and Noncurrent deferred tax liabilities ($142 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 2024 to 2043.

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, 2023 and 2022, a valuation allowance of $131 million and $129 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, 2023, the cumulative amount of such undistributed earnings was approximately $7.6 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, 2023, 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 Cuts and Jobs Act of 2017, it is not practicable to estimate the additional deferred tax liability associated with the potential repatriation of the unremitted earnings.

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, 2023, 2022 and 2021, we had approximately $209 million, $192 million and $188 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest and penalties. As of December 31, 2023, 2022 and 2021, we had approximately $0 million,

$11 million and $3 million, respectively, in assets associated with uncertain tax benefits 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)	2023		2022		2021
Balance, January 1	$	(194)	$	(189)	$	(188)
Increases based on tax positions taken during a prior period(a)	(27)		(20)		(1)
Decreases based on tax positions taken during a prior period(a)	20		9		7
Increases based on tax positions taken during the current period(a)	(13)		(4)		(9)
Settlements	—		7		—
Lapse in statute of limitations(a)	5		3		2
Balance, December 31(b)	$	(209)	$	(194)	$	(189)

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

(b)    In 2023, included in Other taxes payable ($209 million). In 2022, included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($192 million). In 2021, included in Noncurrent deferred tax assets and Other noncurrent assets ($1 million) and Other taxes payable ($188 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. We recorded net interest expense of $10 million, $4 million and $1 million in 2023, 2022 and 2021, respectively. Gross accrued interest totaled $26 million, $16 million and $12 million as of December 31, 2023, 2022 and 2021, respectively, and were included in Other taxes payable. As of December 31, 2023, 2022 and 2021, gross accrued penalties totaled $1 million, $3 million and $3 million, 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 2017 through 2018. For U.S. state tax purposes, tax years 2014 through 2023 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 (2021-2023), Asia-Pacific (2015-2023, primarily reflecting Australia, China and Japan), Europe (2012-2023, primarily reflecting France, Germany, Italy, Spain and the U.K.) and Latin America (2016-2023, 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.