Tax Matters

9 Months Ended

Sep. 27, 2020

Income Tax Disclosure [Abstract]

Tax Matters

Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was (1.2)% for the third quarter of 2020, compared to 28.4% for the third quarter of 2019 and was 9.7% for the first nine months of 2020, compared to 13.4% for the first nine months of 2019.

The lower effective tax rate for the third quarter of 2020 in comparison with the same period in 2019 was primarily due to:

•the non-recurrence of the tax expense of $2.7 billion recorded in the third quarter of 2019 associated with the gain related to the completion of the GSK Consumer Healthcare joint venture transaction;

•tax benefits associated with intangible asset impairment charges of $900 million related to Biopharma IPR&D acquired in connection with our Array acquisition; and

•the favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business.

The lower effective tax rate for the first nine months of 2020 in comparison with the same period in 2019 was primarily due to the aforementioned factors above, partially offset by:

•the non-recurrence of the $1.4 billion tax benefits, representing taxes and interest, recorded in the first nine months of 2019 due to the favorable settlement of an IRS audit for multiple tax years (see Notes to Consolidated Financial Statements––Note 5D. Tax Matters: Tax Contingencies in our 2019 Financial Report); and

•the non-recurrence of the tax benefit recorded in the first nine months of 2019 as a result of additional guidance issued by the U.S. Department of Treasury related to the TCJA.

We have elected, with the filing of our 2018 U.S. Federal Consolidated Income Tax Return, to pay our initial estimated $15 billion repatriation tax liability on accumulated post-1986 foreign earnings over eight years through 2026. The third annual installment of this liability, which is due to be paid in April 2021, is reported in current Income taxes payable, and the remaining liability is reported in noncurrent Other taxes payable in our condensed consolidated balance sheet as of September 27, 2020. Our obligations may vary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. As of September 27, 2020, neither the CARES Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on our effective tax rate.

B. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.

The U.S. is one of our major tax jurisdictions, and we are regularly audited by the IRS. With respect to Pfizer, the IRS has issued a Revenue Agent’s Report (RAR) for tax years 2011-2013. We are not in agreement with the RAR and are currently appealing certain disputed issues. Tax years 2014-2015 are currently under audit. Tax years 2016-2020 are open, but not under audit. All other tax years are closed.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2013-2020), Japan (2017-2020), Europe (2011-2020, primarily reflecting Ireland, the U.K., France, Italy, Spain and Germany), Latin America (1998-2020, primarily reflecting Brazil) and Puerto Rico (2016-2020).

C. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)

Components of Tax provision/(benefit) on other comprehensive income/(loss) include:
	Three Months Ended				Nine Months Ended
(MILLIONS OF DOLLARS)	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Foreign currency translation adjustments, net(a)	$	47	$	86	$	(144)	$	96
Unrealized holding gains/(losses) on derivative financial instruments, net	(43)		31		(126)		37
Reclassification adjustments for (gains)/losses included in net income	7		(3)		(13)		(62)
	(37)		28		(139)		(24)
Unrealized holding gains/(losses) on available-for-sale securities, net	30		2		29		6
Reclassification adjustments for (gains)/losses included in net income	(11)		(1)		(3)		4
	19		1		26		10
Benefit plans: actuarial gains/(losses), net	(288)		(41)		(308)		(42)
Reclassification adjustments related to amortization	15		23		46		41
Reclassification adjustments related to settlements, net	40		9		52		10
Other	(48)		(1)		(28)		2
	(281)		(10)		(238)		12
Reclassification adjustments related to amortization of prior service costs and other, net	(11)		(11)		(32)		(33)
Reclassification adjustments related to curtailments of prior service costs and other, net	—		(11)		—		(11)
Other	(1)		1		1		1
	(11)		(21)		(31)		(43)
Tax provision/(benefit) on other comprehensive income/(loss)	$	(262)	$	84	$	(527)	$	50

(a)Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.