XML 75 R17.htm IDEA: XBRL DOCUMENT

Income Taxes

12 Months Ended

Dec. 29, 2019

The provision for taxes on income consists of:



(Dollars in Millions)	2019			2018			2017
Currently payable:
U.S. taxes	$	1,941		1,284			12,095
International taxes	2,744			2,434			1,872
Total currently payable	4,685			3,718			13,967
Deferred:
U.S. taxes	(814		)	1,210		⁽¹⁾	(1,956	)
International taxes	(1,662		)	(2,226	)		4,362
Total deferred	(2,476		)	(1,016	)		2,406
Provision for taxes on income	$	2,209		2,702			16,373

⁽¹⁾Includes $1.4 billion of deferred tax expense for the adoption of the deferred method to account for GILTI.

A comparison of income tax expense at the U.S. statutory rate of 21% in 2019 and 2018 and 35% in 2017, to the Company’s effective tax rate is as follows:



(Dollars in Millions)	2019				2018			2017
U.S.	$	3,543			5,575			4,865
International	13,785				12,424			12,808
Earnings before taxes on income:	$	17,328			17,999			17,673
Tax rates:
U.S. statutory rate	21.0		%		21.0			35.0
International operations ⁽¹⁾	(5.9		)		(3.7	)		(12.8	)
U.S. taxes on international income ⁽²⁾	1.8				1.4			0.7
Tax benefits on share-based compensation	(0.5		)		(1.5	)		(2.1	)
All other	0.2				(0.3	)		(1.5	)
TCJA and related impacts	(3.9		)	⁽³⁾	(1.9	)	⁽³⁾	73.3		⁽⁴⁾
Effective Rate	12.7		%		15.0			92.6

(1) For all periods presented the Company has subsidiaries operating in Puerto Rico under various tax incentives. International operations reflects the impacts of operations in jurisdictions with statutory tax rates different than the U.S., particularly Ireland, Switzerland and Puerto Rico, which is a favorable impact on the effective tax rate as compared with the U.S. statutory rate. The 2017 amount also includes tax cost related to the revaluation of deferred tax balances related to the change in the Belgian statutory tax rate increasing the tax provision by approximately 3.4%.

(2) Includes the impact of the GILTI tax, the Foreign-Derived Intangible Income deduction and other foreign income that is taxable under the U.S. tax code.

(3) Represents impact of adjustments to balances originally recorded as part of the 2017 TCJA provisional tax charge. Further information provided below.

(4) Includes U.S. state and local taxes provisionally recorded as part TCJA provisional charge which was approximately 0.6% of the total effective tax rate.

The 2019 tax rate decreased by 2.3% compared to the fiscal year 2018 tax rate. In addition to the impact of Swiss tax reform discussed in more detail below, the primary drivers of the net decrease were as follows:

•

The Company reorganized the ownership structure of certain wholly-owned international subsidiaries in the fiscal fourth quarter of 2019, which resulted in a reduction of certain withholding and local taxes that it had previously recognized as part of the provisional Tax Cuts and Jobs Act (TCJA) tax charge in the fiscal year 2017 and finalized in the fiscal year 2018. Following the completion of this restructuring and approval by the applicable local authorities, the Company reversed a deferred tax liability of $0.6 billion and a related deferred tax asset of $0.2 billion for U.S. foreign tax credits, for a net deferred tax benefit of $0.4 billion decreasing the annual effective tax rate by 2.2%. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation.


•	The impact of the agreement in principle to settle opioid litigation for $4 billion (see Note 21 to the Consolidated Financial Statements) which reduced the U.S. earnings before taxes at an effective tax rate of 23.5% and decreased the Company’s annual effective tax rate by approximately 2.1%.

•

In December of fiscal year 2019, the U.S. Treasury issued final foreign tax credit regulations, which resulted in the Company revising the amount of foreign tax credits that were initially recorded in the fiscal year 2017 as part of the provisional TCJA tax charge. As a result, the Company recorded an increased deferred tax asset related to these foreign tax credits of approximately $0.3 billion or 1.7% to the annual effective tax rate. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation.

•

The Company reassessed its uncertain tax positions related to the current IRS audit and increased its unrecognized tax benefit by $0.3 billion liability which increased the annual effective tax rate by approximately 1.5% (see section on Unrecognized Tax Benefits for additional information). As these positions were related to uncertain tax regarding international transfer pricing, this expense has been classified as “International Operations” on the Company’s effective tax rate reconciliation. Subsequent to December 29, 2019, the Company received and agreed to Notices of Proposed Adjustments (NOPAs) from the IRS. The Company believes it is adequately reserved for potential exposures.


•	There were several one-time tax impacts that resulted in a cumulative net tax benefit to the 2018 annual effective tax rate of 1.2%. These items included the LifeScan divestiture, the adjustment to the 2017 provisional TCJA tax charge and the acceleration of certain tax deductions as part of the 2017 tax return.


•	More income in higher tax jurisdictions relative to lower tax jurisdictions as compared to 2018.

On September 28, 2018 the Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (TRAF). On May 19, 2019 a public referendum was held in Switzerland that approved the federal reform proposals. In the fiscal third quarter of 2019, the Swiss Federal Council enacted TRAF which became effective on January 1, 2020. The Federal transitional provisions

of TRAF allow companies, under certain conditions, to adjust their tax basis adjustments to fair value (i.e., “step-up”) which is used for tax depreciation and amortization purposes resulting in a deduction over the transitional period. The subsequent adjustment to the Company’s asset tax basis will require review and approval by the tax authorities.

TRAF also provides for parameters which enable the Swiss cantons to establish localized tax rates and regulations for companies. The new cantonal tax parameters include favorable tax benefits for patents and additional research and development tax deductions. The cantonal transitional provisions of TRAF are also expected to allow companies to elect either 1) tax basis step-up similar to the Federal transition benefit or 2) alternative statutory tax rate for a period not to exceed 5 years. The Company currently has operations located in various Swiss cantons and enactment may not be uniform in both the substantive nature of the legislation and the timing of enactment.

The Company recorded a net tax expense of $0.1 billion which increased the effective tax rate for the fiscal year 2019 by approximately 0.6%. This net tax expense related to federal and certain cantonal enactments in the fiscal year 2019 consisting of the following provisions:


•	approximately $0.6 billion tax expense relating to the remeasurement of Swiss deferred tax assets and liabilities for the change in the Federal and cantonal tax rates, where enactment occurred by December 29, 2019; this expense has been reflected as “International Operations” on the Company’s effective tax rate reconciliation.


•	a $0.9 billion deferred tax asset related to the estimated value of a Federal tax basis step-up of the Company’s Swiss subsidiaries’ assets; this benefit has been reflected as “International Operations” on the Company’s effective tax rate reconciliation.


•	approximately $450 million of U.S. deferred tax expense relating to the GILTI deferred tax liability resulting from the remeasurement of the Swiss deferred tax assets and liabilities and the new deferred tax asset for the Federal step-up. this benefit has been reflected as “U.S. tax on international income” on the Company’s effective tax rate reconciliation.

In the fiscal fourth quarter of 2019, the Swiss Federal Tax Administration issued authoritative guidance that required the Company to decrease the estimated value of the Federal tax basis step-up by approximately $0.3 billion from the determination made in the fiscal third quarter of 2019. Further authoritative guidance from the relevant Swiss tax authorities may be issued in the future and additional revisions may be required in the fiscal period that they are issued.

The Company is currently assessing and applying for approval for the elective transition provisions in several cantons which includes discussions with local tax authorities on the application of the new law. The Company has recorded an estimated impact of the transitional provisions based on the best available information for cantons where enactment has occurred but the Company has not yet received a final tax ruling.

As of December 29, 2019, the one canton where the Company maintains significant operations has not yet enacted TRAF legislation and the amounts recorded in the fiscal year 2019 do not include estimates for unenacted legislation. On February 9, 2020 a public referendum on the legislative change was held in this canton and the legislation was approved by the voters; formal enactment is expected in the fiscal first half of 2020. The Company has not yet elected the transitional provision in this canton. However, the net financial benefit is estimated to be between $0.2 billion and $0.5 billion in the fiscal first half of 2020.

U.S. Tax Cuts and Jobs Act (TCJA) (2018 and 2017)

In the fiscal year 2017, the United States enacted into law new U.S. tax legislation, the TCJA. This law included provisions for a comprehensive overhaul of the corporate income tax code, including a reduction of the statutory corporate tax rate from 35% to 21%, effective on January 1, 2018. This legislation also eliminated or reduced certain corporate income tax deductions as well as introduced new provisions that taxed certain foreign income not previously taxed by the United States. The TCJA also included a provision for a tax on all previously undistributed earnings of U.S. companies located in foreign jurisdictions. Undistributed earnings in the form of cash and cash equivalents were taxed at a rate of 15.5% and all other earnings were taxed at a rate of 8.0%. This tax is payable over 8 years and will not accrue interest. These payments began in 2018 and will continue through 2025. The remaining balance at the end of the fiscal year 2019 was approximately $8.2 billion, of which $7.7 billion is classified as noncurrent and reflected as “Long-term taxes payable” on the Company’s balance sheet. The balance of this account is related to receivables from tax authorities not expected to be received in the next 12 months.

In the fourth quarter of 2017, the Company recorded a provisional tax cost of approximately $13.0 billion which consisted primarily of the following components:


•	a $10.1 billion charge on previously undistributed foreign earnings as of December 31, 2017


•	a $4.5 billion deferred tax liability for foreign local and withholding taxes, offset by a $1.1 billion deferred tax asset for U.S. foreign tax credits, for repatriation of substantially all those earnings


•	a $0.6 billion tax benefit relating to the remeasurement of U.S. deferred tax assets and liabilities and the impact of the TCJA on unrecognized tax benefits


•	a $0.1 billion charge for U.S. state and local taxes on the repatriation of these foreign earnings

In the fiscal year 2018, the Company completed its full assessment and finalized the accounting for the impact of the TCJA. The Company recorded net adjustments to the above components of the provisional charge of approximately $0.2 billion. These revisions were based on updated estimates and additional analysis by management as well as applying interpretative guidance issued by the U.S. Department of Treasury to the facts and circumstances that existed as of the TCJA enactment date. This charge was primarily related to additional deferred tax liabilities for foreign local and withholding taxes for the remaining balance of undistributed foreign earnings as of December 31, 2017 that were not provided for in the 2017 provisional charge.

The TCJA also includes provisions for a tax on GILTI. GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets, as provided by the TCJA. In the fiscal year 2018, the Company elected to treat GILTI as a period expense under the deferred method and recorded a deferred tax cost of approximately $1.4 billion in the fiscal year 2018 related to facts and circumstances that existed on the date of TCJA enactment. See Note 1 for further information regarding income taxes accounting policies.

During 2018, the Company reorganized the ownership structure of certain foreign subsidiaries which resulted in a reduction of certain foreign withholding taxes that it had recognized as part of the provisional TCJA tax charge in the fourth quarter of 2017. Following the completion of this restructuring and as a result of clarification by Swiss tax authorities regarding the applicability of withholding tax to repatriation of certain earnings, the Company reversed a deferred tax liability of $2.8 billion and a related deferred tax asset of $0.9 billion for U.S. foreign tax credits, for a net deferred tax benefit of $1.9 billion. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation.

The 2018 effective tax rate decreased by 77.6% compared to 2017. The 2017 effective tax rate was primarily driven by the approximately $13 billion provisional tax charge recorded in the fourth quarter of 2017 and the impact of a Belgian statutory tax rate change which increased the 2017 effective rate by 3.4%. Additional drivers of the 2018 annual effective tax were:


•	the reduction of the U.S. statutory corporate tax rate including the effects of tax elections which resulted in the acceleration of certain deductions into the 2017 tax return. The impact of these accelerated deductions decreased the annual effective tax rate by approximately 1.7%


•	the impact of the adjustments to the 2017 provisional TCJA charge, including both Staff Accounting Bulletin (SAB) 118 adjustments and the internal restructuring, decreased the effective tax rate by approximately 1.9%


•	GILTI tax which increased the annual effective tax rate by approximately 1.6%, which excludes the impact of the SAB 118 adjustment for the adoption of the deferred method for GILTI


•	tax benefits received from stock-based compensation during fiscal 2018 and 2017, reduced the effective tax rate by 1.5% and 2.0%, respectively


•	in the fourth quarter of 2018, the Company completed the divestiture of its LifeScan business (See Note 20 to the Consolidated Financial Statements), which increased the Company's annual effective tax rate by approximately 0.8%


•	more income in higher tax jurisdictions relative to lower tax jurisdictions as compared to 2017

Temporary differences and carryforwards for 2019 and 2018 were as follows:



	2019 Deferred Tax				2018 Deferred Tax
(Dollars in Millions)	Asset		Liability		Asset	Liability
Employee related obligations	$	2,393			2,398
Stock based compensation	546				639
Depreciation & amortization	1,122				1,784
Non-deductible intangibles			(5,752	)		(5,967	)
International R&D capitalized for tax	1,189				1,282
Reserves & liabilities	2,384				1,647
Income reported for tax purposes	1,605				1,104
Net operating loss carryforward international	838				786
Undistributed foreign earnings	765		(1,289	)	693	(2,240	)
Global intangible low-taxed income			(2,965	)		(2,971	)
Miscellaneous international	696		(81	)	603	(93	)
Miscellaneous U.S.	410				469
Total deferred income taxes	$	11,948	(10,087	)	11,405	(11,271	)

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 generate future taxable income sufficient to utilize these deferred tax assets.

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



(Dollars in Millions)	2019			2018		2017
Beginning of year	$	3,326		3,151		3,041
Increases related to current year tax positions	249			242		332
Increases related to prior period tax positions	408			145		232
Decreases related to prior period tax positions	(105		)	(137	)	(416	)	(1)
Settlements	(9		)	(40	)	(2	)
Lapse of statute of limitations	(16		)	(35	)	(36	)
End of year	$	3,853		3,326		3,151

⁽¹⁾ In 2017, $347 million of this decrease is related to the TCJA.

The unrecognized tax benefits of $3.9 billion at December 29, 2019, 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. With respect to the United States, the Internal Revenue Service (IRS) has completed its audit for the tax years through 2009 and is currently auditing the tax years 2010-2012. The Company currently expects completion of this audit and settlement of the related tax liabilities in the fiscal year 2020. As of the December 29, 2019, the Company has classified unrecognized tax benefits and related interest of approximately $0.9 billion as a current liability on the “Accrued taxes on Income” line of the Consolidated Balance Sheet. This is the amount expected to be paid over the next 12 months with respect to the IRS audit. Subsequent to December 29, 2019, the Company made a payment for approximately $0.6 billion to the U.S. Treasury related to the estimated 2010-2012 tax audit liability in anticipation of the final settlement later in fiscal 2020. The completion of this tax audit may result in additional adjustments to the Company’s unrecognized tax benefit liability.

In other major jurisdictions where the Company conducts business, the years that remain open to tax audit go back to the year 2006. The Company believes it is possible that tax audits may be completed over the next twelve months by taxing authorities in some jurisdictions outside of the United States. 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, except as previously noted on amounts related to the current United States IRS audit. Interest expense and penalties related to

unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest expense of $50 million, $53 million and $60 million in 2019, 2018 and 2017, respectively. The total amount of accrued interest was $559 million and $503 million in 2019 and 2018, respectively.