Income Taxes

The provision for taxes on income consists of:



(Dollars in Millions)	2016			2015		2014
Currently payable:
U.S. taxes	$	1,896		2,748		2,625
International taxes	1,708			1,309		1,174
Total currently payable	3,604			4,057		3,799
Deferred:
U.S. taxes	294			37		(258	)
International taxes	(635		)	(307	)	699
Total deferred	(341		)	(270	)	441
Provision for taxes on income	$	3,263		3,787		4,240

A comparison of income tax expense at the U.S. statutory rate of 35% in 2016, 2015 and 2014, to the Company’s effective tax rate is as follows:



(Dollars in Millions)	2016			2015		2014
U.S.	$	7,457		8,179		8,001
International	12,346			11,017		12,562
Earnings before taxes on income:	$	19,803		19,196		20,563
Tax rates:
U.S. statutory rate	35.0		%	35.0		35.0
International operations excluding Ireland	(9.4		)	(6.7	)	(7.0	)
Ireland and Puerto Rico operations⁽¹⁾	(7.8		)	(8.7	)	(6.9	)
Research and orphan drug tax credits	(0.4		)	(0.2	)	(0.3	)
U.S. state and local	(0.1		)	0.4		1.0
U.S. manufacturing deduction	(0.6		)	(0.6	)	(0.6	)
U.S. tax on international income	1.3			0.2		1.4
Additional tax benefits on share based compensation	(1.8		)	—		—
U.S. tax benefit on asset/business disposals	—			—		(1.9	)
All other	0.3			0.3		(0.1	)
Effective tax rate	16.5		%	19.7		20.6

⁽¹⁾The Company has subsidiaries operating in Puerto Rico under various tax incentives.

The 2016 effective tax rate decreased by 3.2% as compared to 2015. As described in Note 1, the Company adopted a new accounting standard for the reporting of additional tax benefits on share-based compensation that vested or were exercised during the fiscal year. The adoption of this new standard reduced the effective tax rate of fiscal 2016 by 1.8% versus 2015.

The remainder of the change in the effective tax rate was primarily related to the lower earnings before taxes in the United States and the settlement of several uncertain tax positions in 2016 versus 2015.

The decrease in the 2015 effective tax rate, as compared to 2014, was primarily attributable to the increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions and a tax benefit resulting from a restructuring of international affiliates. Additionally, the 2014 effective tax rate was affected by the items mentioned below.

The increase in the 2014 effective tax rate, as compared to 2013, was attributable to the following: the divestiture of the Ortho-Clinical Diagnostics business at an approximate 44% effective tax rate, litigation accruals at low tax rates, the mix of earnings into higher tax jurisdictions, primarily the U.S., the accrual of an additional year of the Branded Prescription Drug Fee, which is not tax deductible, and additional U.S. tax expense related to a planned increase in dividends from current year foreign earnings as compared to the prior year. These increases to the 2014 effective tax rate were partially offset by a tax benefit of $0.4 billion associated with the Conor Medsystems divestiture.

The 2014 effective tax rate was also reduced as the Company adjusted its unrecognized tax benefits as a result of (i) the federal appeals court’s decision in OMJ Pharmaceuticals, Inc.’s litigation regarding credits under former Section 936 of the Internal Revenue Code and (ii) a settlement of substantially all issues related to the Company’s U.S. Internal Revenue Service audit of tax years 2006 - 2009. The impact of the settlement is reflected in the U.S. tax on international income and the All other line items within the above reconciliation.

The items noted above reflect the key drivers of the rate reconciliation.

Temporary differences and carryforwards for 2016 and 2015 were as follows:



	2016 Deferred Tax				2015 Deferred Tax
(Dollars in Millions)	Asset		Liability		Asset		Liability
Employee related obligations	$	2,958			2,863
Stock based compensation	749				790
Depreciation			(219	)			(247	)
Non-deductible intangibles			(6,672	)			(6,663	)
International R&D capitalized for tax	1,264				1,318
Reserves & liabilities	1,857				1,801
Income reported for tax purposes	1,309				960
Net operating loss carryforward international	717				997
Miscellaneous international	1,135		(15	)	922	⁽¹⁾	(249	)
Miscellaneous U.S.	155				436
Total deferred income taxes	$	10,144	(6,906	)	10,087		(7,159	)

⁽¹⁾Net of a valuation allowance related to Belgium of $196 million. In 2016, this allowance was reversed and the related deferred tax asset was utilized to reduce current tax expense.

The Company has wholly-owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will realize future taxable income sufficient to utilize these deferred tax assets.

The following table summarizes the activity related to unrecognized tax benefits:



(Dollars in Millions)	2016			2015		2014
Beginning of year	$	3,080		2,465		2,729
Increases related to current year tax positions	348			570		281
Increases related to prior period tax positions	11			182		295
Decreases related to prior period tax positions	(338		)	(79	)	(288	)
Settlements	(37		)	(4	)	(477	)
Lapse of statute of limitations	(23		)	(54	)	(75	)
End of year	$	3,041		3,080		2,465

The unrecognized tax benefits of $3.0 billion at January 1, 2017, if recognized, would affect the Company’s annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. The IRS has completed its audit for the tax years through 2009 and is currently auditing the tax years 2010-2012. In other major jurisdictions where the Company conducts business, the years remain open generally back to the year 2004. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.

The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest expense of $7 million, $44 million and $12 million in 2016, 2015 and 2014, respectively. The total amount of accrued interest was $344 million and $366 million in 2016 and 2015, respectively.