Income Taxes

12 Months Ended

Dec. 31, 2019

In December 2017, the President of the U.S. signed into law the 2017 Tax Act. The 2017 Tax Act included significant changes to the U.S. corporate income tax system, such as the reduction in the corporate income tax rate from 35 percent to 21 percent, transition to a territorial tax system, changes to business related exclusions, deductions and credits, and modifications to international tax provisions, including a one-time repatriation transition tax (also known as the ‘Toll Tax’) on unremitted foreign earnings and a global intangible low-taxed income (GILTI) provision, the new U.S. minimum tax on the earnings of our foreign subsidiaries. In 2017, we recognized a provisional amount of $1.91 billion, which was included as a component of income tax expense from continuing operations. This amount represented approximately $3.6 billion attributable to the Toll Tax, partially offset by the changes in deferred taxes resulting from the transition to a U.S. territorial system, including the re-measurement of deferred taxes. In 2018, we recorded $313.3 million of income tax benefit, mainly attributable to measurement period adjustments to the Toll Tax and GILTI.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Deferred taxes related to GILTI are also recognized for the future tax effects of temporary differences.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position, based on its technical merits, will be sustained upon examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

Following is the composition of income tax expense:



	2019			2018			2017
Current:
Federal⁽¹⁾	$	280.2		$	169.6		$	3,181.0
Foreign	299.8			106.8			47.5
State	(14.4		)	4.7			(5.4		)
Total current tax expense	565.6			281.1			3,223.1
Deferred:
Federal⁽²⁾	141.3			(3.7		)	(601.2		)
Foreign	(24.1		)	248.7			(230.9		)
State	(54.8		)	3.4			0.2
Total deferred tax (benefit) expense	62.4			248.4			(831.9		)
Income taxes	$	628.0		$	529.5		$	2,391.2

⁽¹⁾ The 2019 current tax expense includes $153.1 million of tax benefit from utilization of net operating loss carryforwards. The 2018 and 2017 current tax expense includes $201.5 million and $3.25 billion of tax expense, respectively, related to effects of the 2017 Tax Act.

⁽²⁾ The 2018 and 2017 deferred tax benefit includes $26.2 million and $1.33 billion of tax benefit, respectively, related to the effects of the 2017 Tax Act.

Significant components of our deferred tax assets and liabilities as of December 31 were as follows:



	2019			2018
Deferred tax assets:
Purchases of intangible assets	$	2,512.4		$	2,627.7
Compensation and benefits	934.3			781.6
Tax credit carryforwards and carrybacks	455.8			359.4
Tax loss carryforwards and carrybacks	318.8			248.2
Sales rebates and discounts	197.3			45.5
Operating lease liabilities	140.6			—
Product return reserves	98.1			95.3
Other comprehensive loss on hedging transactions	59.6			68.9
Debt	53.9			40.3
Other	835.7			646.3
Total gross deferred tax assets	5,606.5			4,913.2
Valuation allowances	(616.5		)	(574.8		)
Total deferred tax assets	4,990.0			4,338.4
Deferred tax liabilities:
Earnings of foreign subsidiaries	(1,776.4		)	(1,745.3		)
Intangibles	(1,298.0		)	(86.9		)
Inventories	(686.4		)	(681.3		)
Prepaid employee benefits	(305.9		)	(240.1		)
Property and equipment	(274.1		)	(260.9		)
Financial instruments	(139.4		)	(22.8		)
Operating lease assets	(124.7		)	—
Total deferred tax liabilities	(4,604.9		)	(3,037.3		)
Deferred tax assets - net	$	385.1		$	1,301.1

The deferred tax asset and related valuation allowance amounts for U.S. federal and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.

At December 31, 2019, based on filed tax returns we have tax credit carryforwards and carrybacks of $799.2 million available to reduce future income taxes; $149.3 million, if unused, will expire by 2026, and $55.6 million, if unused, will expire between 2032 and 2038. The remaining portion of the tax credit carryforwards is

related to federal tax credits of $86.6 million, international tax credits of $114.7 million, and state tax credits of $393.0 million, all of which are substantially reserved.

At December 31, 2019, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. federal income tax purposes of $949.7 million: $181.4 million will expire by 2024; $345.4 million will expire between 2025 and 2039; and $422.9 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses of $116.1 million and other state carryforwards of $3.6 million are fully reserved as of December 31, 2019.

Domestic and Puerto Rican companies contributed approximately 44 percent, 15 percent, and 16 percent for the years ended December 31, 2019, 2018, and 2017, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2031.

The 2017 Tax Act introduced international tax provisions that fundamentally change the U.S. taxation of foreign earnings. As a result, substantially all of the unremitted earnings of our foreign subsidiaries are considered to not be indefinitely reinvested for continued use in our foreign operations. At December 31, 2019, we had accrued an immaterial amount of foreign withholding taxes and state income taxes that would be owed upon future distributions of unremitted earnings of our foreign subsidiaries that are not indefinitely reinvested. For the amount considered to be indefinitely reinvested, it is not practicable to determine the amount of the related deferred income tax liability due to the complexities in the tax laws and assumptions we would have to make.

Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows:



	2019		2018		2017
Cash payments of income taxes	$	1,180.5	$	1,076.7	$	221.5

The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight-year period. We made this election; therefore, we have included Toll Tax payments accordingly.

Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income before income taxes to reported income tax expense:



	2019			2018			2017
Income tax at the U.S. federal statutory tax rate	$	1,105.8		$	772.8		$	806.7
Add (deduct):
International operations, including Puerto Rico	(242.0		)	(627.1		)	(480.8		)
General business credits	(108.8		)	(87.4		)	(66.8		)
Non-deductible acquired IPR&D⁽¹⁾	—			309.9			300.1
2017 Tax Act	—			175.3			1,914.0
Other	(127.0		)	(14.0		)	(82.0		)
Income taxes	$	628.0		$	529.5		$	2,391.2

⁽¹⁾Non-deductible acquired IPR&D was related to ARMO in 2018 and CoLucid in 2017. See Note 3 for additional information related to acquisitions.

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



	2019			2018			2017
Beginning balance at January 1	$	2,034.6		$	1,000.8		$	843.3
Additions based on tax positions related to the current year	187.2			798.2			133.8
Additions for tax positions of prior years	425.3			410.9			93.8
Reductions for tax positions of prior years	(100.3		)	(115.4		)	(59.3		)
Settlements	(260.5		)	(33.2		)	(2.4		)
Lapses of statutes of limitation	(161.5		)	(20.5		)	(19.3		)
Changes related to the impact of foreign currency translation	(16.2		)	(6.2		)	10.9
Ending balance at December 31	$	2,108.6		$	2,034.6		$	1,000.8

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $1.53 billion and $1.48 billion at December 31, 2019 and 2018, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in most major taxing jurisdictions for years before 2011.

The U.S. examination of tax years 2013-2015 began in 2016, and certain matters were effectively settled during the second quarter of 2019. As a result, our gross uncertain tax positions were reduced by approximately $200 million, we made a cash payment of approximately $125 million, and our consolidated results were benefited by an immaterial reduction in tax expense. During the fourth quarter of 2019, certain matters for tax year 2015 were effectively settled upon conclusion of the Internal Revenue Service's (IRS) examination which resulted in an immaterial reduction in tax expense and gross uncertain tax positions. Also in the fourth quarter of 2019, the IRS began its examination of tax years 2016-2018.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized income tax (benefit) expense related to interest and penalties as follows:



	2019			2018		2017
Income tax (benefit) expense	$	(26.4	)	$	25.1	$	22.8

At December 31, 2019 and 2018, our accruals for the payment of interest and penalties totaled $150.8 million and $183.9 million, respectively.