Taxes on Income

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Taxes on Income

Taxes on Income

A reconciliation between the effective tax rate for income from continuing operations and the U.S. statutory rate is as follows:

	2022				2021				2020
	Amount		Tax Rate		Amount		Tax Rate		Amount		Tax Rate
U.S. statutory rate applied to income from continuing operations before taxes	$	3,453	21.0	%	$	2,915	21.0	%	$	1,231	21.0	%
Differential arising from:
Foreign earnings	(1,835)		(11.1)		(1,446)		(10.4)		(965)		(16.5)
GILTI and the foreign-derived intangible income deduction	462		2.8		(75)		(0.5)		349		6.0
State taxes	(110)		(0.7)		2		—		57		1.0
R&D tax credit	(81)		(0.5)		(81)		(0.6)		(108)		(1.8)
Tax settlements	(10)		(0.1)		(275)		(2.0)		(13)		(0.2)
Valuation allowances	108		0.7		102		0.7		37		0.6
Restructuring	11		0.1		61		0.4		105		1.8
Acquisition of VelosBio	—		—		(9)		(0.1)		559		9.5
Acquisition of Pandion	—		—		356		2.6		—		—
Acquisition of OncoImmune	—		—		—		—		97		1.7
Other	(80)		(0.5)		(29)		(0.1)		(9)		(0.2)
	$	1,918	11.7	%	$	1,521	11.0	%	$	1,340	22.9	%

Where applicable, the impact of changes in uncertain tax positions is reflected in the reconciling items above.

The Company’s remaining transition tax liability under the Tax Cuts and Jobs Act (TCJA) of 2017, which has been reduced by payments and the utilization of foreign tax credits, was $2.2 billion at December 31, 2022, of which $732 million is included in Income taxes payable and the remainder of $1.5 billion is included in Other Noncurrent Liabilities. As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable.

The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the U.S., particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2025), thereby yielding

a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. The Company has an additional Cantonal tax holiday in Switzerland that provides for a tax rate reduction and is effective through 2032.

Income from continuing operations before taxes consisted of:

Years Ended December 31	2022		2021		2020
Domestic	$	1,011	$	1,854	$	(3,814)
Foreign	15,433		12,025		9,677
	$	16,444	$	13,879	$	5,863

Taxes on income from continuing operations consisted of:

Years Ended December 31	2022		2021		2020
Current provision
Federal	$	2,265	$	74	$	893
Foreign	1,164		1,273		969
State	57		(13)		44
	3,486		1,334		1,906
Deferred provision
Federal	(1,510)		240		(605)
Foreign	71		(77)		64
State	(129)		24		(25)
	(1,568)		187		(566)
	$	1,918	$	1,521	$	1,340

Deferred income taxes at December 31 consisted of:

	2022				2021
	Assets		Liabilities		Assets		Liabilities
Product intangibles and licenses	$	—	$	2,575	$	—	$	3,207
R&D capitalization	1,341		—		274		—
Inventory related	43		423		119		370
Accelerated depreciation	—		657		—		589
Equity investments	—		92		—		335
Pensions and other postretirement benefits	372		284		487		338
Compensation related	335		—		301		—
Unrecognized tax benefits	91		—		75		—
Net operating losses and other tax credit carryforwards	912		—		867		—
Other	511		267		434		180
Subtotal	3,605		4,298		2,557		5,019
Valuation allowance	(599)				(287)
Total deferred taxes	$	3,006	$	4,298	$	2,270	$	5,019
Net deferred income taxes			$	1,292			$	2,749
Recognized as:
Other Assets	$	503			$	692
Deferred Income Taxes			$	1,795			$	3,441

The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2022, $349 million of deferred tax assets on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $345 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $563 million of deferred tax assets relating to various U.S. tax credit carryforwards and

NOL carryforwards. Valuation allowances of $247 million have been established on these U.S. tax credit carryforwards and NOL carryforwards.

Income taxes paid in 2022, 2021 and 2020 (including amounts attributable to discontinued operations in 2021 and 2020) were $3.2 billion, $2.4 billion and $2.7 billion, respectively. Income taxes paid consisted of:

Years Ended December 31	2022		2021		2020
Domestic (1)	$	1,891	$	1,211	$	977
Foreign	1,348		1,201		1,763
	$	3,239	$	2,412	$	2,740

(1)    Includes TCJA transition tax payments.

Tax benefits relating to stock option exercises were $45 million in 2022, $21 million in 2021 and $12 million in 2020.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2022		2021		2020
Balance January 1	$	1,529	$	1,537	$	1,225
Additions related to current year positions	344		306		298
Additions related to prior year positions	48		63		110
Reductions for tax positions of prior years (1)	(40)		(230)		(4)
Settlements (1)	(6)		(46)		(70)
Lapse of statute of limitations	(40)		(58)		(22)
Spin-off of Organon	—		(43)		—
Balance December 31	$	1,835	$	1,529	$	1,537

(1)    Amount in 2021 reflects a settlement with the IRS discussed below.

If the Company were to recognize the unrecognized tax benefits of $1.8 billion at December 31, 2022, the income tax provision would reflect a favorable net impact of $1.8 billion.

The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2022 could decrease by up to approximately $31 million in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures.

Interest and penalties associated with uncertain tax positions amounted to an expense (benefit) of $54 million in 2022, $(37) million in 2021 and $16 million in 2020. These amounts reflect the beneficial impacts of various tax settlements, including the settlement discussed below. Liabilities for accrued interest and penalties were $256 million and $192 million as of December 31, 2022 and 2021, respectively.

In 2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of $190 million (of which $172 million related to continuing operations and $18 million related to discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $236 million net tax benefit in 2021 (of which $207 million related to continuing operations and $29 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.

The IRS is currently conducting examinations of the Company’s tax returns for the years 2017 and 2018. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2003 through 2022.