Tax Matters

12 Months Ended

Dec. 31, 2024

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)	2024		2023		2022
United States	$	1,867	$	1,636	$	1,645
International	1,266		1,300		1,011
Income before provision for taxes on income	$	3,133	$	2,936	$	2,656

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

	Year Ended December 31,
(MILLIONS OF DOLLARS)	2024		2023		2022
United States:
Current income taxes:
Federal	$	645	$	341	$	514
State and local	65		35		81
Deferred income taxes:
Federal	(297)		(40)		(198)
State and local	(42)		25		(49)
Total U.S. tax provision	371		361		348
International:
Current income taxes	265		281		235
Deferred income taxes	1		(46)		(38)
Total international tax provision	266		235		197
Provision for taxes on income	$	637	$	596	$	545

Tax Rate Reconciliation

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

	Year Ended December 31,
	2024		2023		2022
U.S. statutory income tax rate	21	%	21	%	21	%
State and local taxes, net of federal benefits	0.6		1.6		0.9
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)	0.4		0.9		0.1
Foreign Derived Intangible Income	(1.5)		(0.7)		(0.2)
U.S. Research and Development Tax Credit	(0.6)		(0.7)		(0.7)
Share-based payments	(0.2)		(0.3)		(0.6)
Non-deductible / non-taxable items	0.2		0.2		0.1
Taxation of non-U.S. operations	0.2		(0.8)		(0.4)
All other—net	0.2		(0.9)		0.3
Effective tax rate	20.3	%	20.3	%	20.5	%

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

Our effective income tax rate was 20.3%, 20.3% and 20.5% in 2024, 2023 and 2022, respectively.

The effective tax rate for 2024, as compared to 2023, was primarily attributable to the favorable impact of a higher benefit in the U.S. related to foreign-derived intangible income and lower net discrete tax expenses, offset by a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings, repatriation costs and Pillar Two global minimum tax). 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 global minimum tax provisions (Pillar Two) resulting from the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project are effective beginning in 2024 and the impact of these provisions is included in our effective tax rate for 2024.

The lower effective tax rate for 2023, as compared to 2022, was primarily attributable to a higher benefit in the U.S. related to foreign-derived intangible income, a more favorable jurisdictional mix of earnings (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.

In 2022 and 2024, 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, the 2022 income tax benefit was deferred to 2023 and 2024 and the 2024 income tax benefit was deferred to 2025 and 2026. A portion of the 2022 benefit was recognized during 2024. The remaining deferred benefit is included in Other current assets on our Consolidated Balance Sheets as of December 31, 2024 in the amount of $43 million.

B. 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,
	2024		2023
(MILLIONS OF DOLLARS)	Assets (Liabilities)
Prepaid/deferred items	$	219	$	72
Inventories	21		30
Capitalized research and development for tax	301		224
Identifiable intangible assets	(103)		(154)
Property, plant and equipment	(179)		(199)
Employee benefits	74		62
Restructuring and other charges	10		(1)
Legal and product liability reserves	14		12
Net operating loss/credit carryforwards	139		133
Unremitted earnings	(3)		(4)
All other	3		16
Subtotal	496		191
Valuation allowance	(123)		(131)
Net deferred tax asset/(liability)(a)(b)	$	373	$	60

(a)    The change in the total net deferred tax asset/(liability) from December 31, 2023 to December 31, 2024 is primarily attributable to an increase in deferred tax assets related to (i) prepaid/deferred items as a result of a prepayment from a related foreign entity in Belgium; and (ii) the capitalization and amortization of research and development costs for U.S. tax purposes, as well as a decrease in deferred tax liabilities related to identifiable intangible assets.

(b)    In 2024, included in Noncurrent deferred tax assets ($540 million) and Noncurrent deferred tax liabilities ($167 million). In 2023, included in Noncurrent deferred tax assets ($206 million) and Noncurrent deferred tax liabilities ($146 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 2025 to 2044.

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, 2024 and 2023, a valuation allowance of $123 million and $131 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, 2024, the cumulative amount of such undistributed earnings was approximately $8.5 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, 2024, 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.

C. 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, 2024, 2023 and 2022, we had approximately $214 million, $209 million and $192 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest and penalties. As of December 31, 2024, 2023 and 2022, we had approximately $1 million,

$0 million and $11 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)	2024		2023		2022
Balance, January 1	$	(209)	$	(194)	$	(189)
Increases based on tax positions taken during a prior period(a)	(1)		(27)		(20)
Decreases based on tax positions taken during a prior period(a)	—		20		9
Increases based on tax positions taken during the current period(a)	(7)		(13)		(4)
Settlements	1		—		7
Lapse in statute of limitations(a)	3		5		3
Balance, December 31(b)	$	(213)	$	(209)	$	(194)

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

(b)    In 2024, included in Other taxes payable ($213 million). 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).

•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 $12 million, $10 million and $4 million in 2024, 2023 and 2022, respectively. Gross accrued interest totaled $37 million, $26 million and $16 million as of December 31, 2024, 2023 and 2022, respectively, and were included in Other taxes payable. As of December 31, 2024, 2023 and 2022, gross accrued penalties totaled $1 million, $1 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 income tax audit by the U.S. Internal Revenue Service (IRS) for tax years 2017 through 2018. For U.S. state tax purposes, tax years 2017 through 2024 are open for examination. In July 2024, the IRS issued Notices of Proposed Adjustment (NOPA) related to the one-time mandatory deemed repatriation tax incurred on the 2018 U.S. Federal Income Tax return. In September 2024, the IRS issued a Revenue Agent Report (RAR) for the adjustments identified in the NOPA and a protest was filed with the IRS on November 15, 2024. As of December 31, 2024, the additional tax liability, based on the income adjustment proposed by the IRS under the RAR, is approximately $450 million, excluding interest and penalties.

Based on current facts and circumstances, we disagree with the IRS' position and will defend our position taken on the 2018 U.S. Federal Income tax return. We believe the amount previously accrued related to this uncertain tax position remains appropriate, but we will continue to evaluate the adequacy of our tax reserve as the audit progresses. However, the outcome of the tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are not consistent with management's expectations, we could be required to adjust our provision for income taxes and this amount could be material to our financial statements.

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 (2021-2024), Asia-Pacific (2015-2024, primarily reflecting Australia, China and Japan), Europe (2012-2024, primarily reflecting France, Germany, Italy, Spain and the U.K.) and Latin America (2016-2024, 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.