Income Taxes

3 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Tax Disclosure

7. Income Taxes

Fluctuations in our provision for/(benefit from) income taxes as a percentage of pre-tax loss (“effective tax rate”) are due to changes in international and U.S. state effective tax rates resulting from our business mix and discrete items.

Cordis Divestiture

During the three months ended September 30, 2021, we completed the divestiture of the Cordis business. In connection with the closing, we recorded net tax expense of $9 million. The tax effects of these matters during the three months ended September 30, 2021 were included in our full year effective tax rate forecast. We currently estimate that the tax expense associated with this matter for the full fiscal 2022 will be $38 million.

Tax Effects of Opioid Litigation Charges

In connection with the $1.02 billion pre-tax charges for the opioid litigation during the three months ended September 30, 2020, the net tax benefit was $450 million for the three months ended September 30, 2020, and $228 million for fiscal 2021. Our tax benefits are estimates, which reflect our current assessment of the estimated future deductibility of the amount that may be paid under the accrual taken in connection with the opioid litigation and are net of unrecognized tax benefits of $34 million during the three months ended September 30, 2020, and $219 million for fiscal 2021.

We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the U.S. Tax Cuts and Jobs Act ("Tax Act"); however, these estimates require significant judgment since the U.S. tax law governing deductibility was changed by the Tax Act. Further, it is possible Congress or the tax authorities could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of the tax benefit may differ materially from these estimates.

Effective Tax Rate

During the three months ended September 30, 2021 and 2020, the effective tax rate was 26.3 percent and 61.8 percent, respectively. The decrease in the effective tax rate for the three months ended September 30, 2021 compared to the prior year period was primarily due to the treatment of the tax impacts of the opioid litigation accrual recorded in prior year.

Unrecognized Tax Benefits

We had $931 million and $932 million of unrecognized tax benefits at September 30, 2021 and June 30, 2021, respectively. The September 30, 2021 and June 30, 2021 balances include $848 million and $849 million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate.

At September 30, 2021 and June 30, 2021, we had $51 million and $49 million, respectively, accrued for the payment of interest and penalties related to unrecognized tax benefits, which we recognize in the provision for/(benefit from) income taxes in the condensed consolidated statements of earnings/(loss). These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the condensed consolidated balance sheets.

It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the U.S. Internal Revenue Service ("IRS") or other taxing authorities, possible settlement of audit issues, reassessment of existing unrecognized tax benefits or the expiration of statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is between zero and a net decrease of $20 million, exclusive of penalties and interest.

Other Tax Matters

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal years 2015 through 2020.

We are a party to a tax matters agreement with CareFusion Corporation ("CareFusion"), which has been acquired by Becton, Dickinson and Company. Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to our fiscal 2010 spin-off of CareFusion. The indemnification receivable was $72 million at both September 30, 2021 and June 30, 2021, and is included in other assets in the condensed consolidated balance sheets.

As a result of the acquisition of the Patient Recovery Business, Medtronic plc is obligated to indemnify us for certain tax exposures and transaction taxes related to periods prior to the acquisition. The indemnification receivable was $12 million at both September 30, 2021 and June 30, 2021, and is included in other assets in the condensed consolidated balance sheets.