Tax Matters (Tables)

12 Months Ended

Dec. 31, 2020

Schedule of Income before Income Tax, Domestic and Foreign


Components of Income from continuing operations before provision/(benefit) for taxes on income include:
	Year Ended December 31,
(MILLIONS OF DOLLARS)	2020		2019		2018
United States	$	(2,488)	$	7,064	$	(6,111)
International	9,986		4,420		9,706
Income from continuing operations before provision/(benefit) for taxes on income(a), (b)	$	7,497	$	11,485	$	3,594

(a)2020 v. 2019––The domestic loss in 2020 versus domestic income in 2019 was mainly related to the non-recurrence of the gain on the completion of the Consumer Healthcare JV transaction as well as higher certain asset impairments and higher R&D expenses. The increase in the international income was primarily related to the non-recurrence of the write off of assets contributed to the Consumer Healthcare JV as well as lower certain asset impairments and lower amortization of intangible assets.

(b)2019 v. 2018––The domestic income in 2019 versus domestic loss in 2018 was mainly related to the completion of the Consumer Healthcare JV transaction as well as lower certain asset impairments, partially offset by higher business and legal entity alignment costs as well as increased costs related to certain legal matters. The decrease in the international income was primarily related to higher certain asset impairments as well as the write off of assets contributed to the Consumer Healthcare JV.

Schedule of Provision for Taxes on Income


Components of Provision/(benefit) for taxes on income based on the location of the taxing authorities include:
	Year Ended December 31,
(MILLIONS OF DOLLARS)	2020		2019		2018
United States
Current income taxes:
Federal	$	371	$	(1,886)	$	388
State and local	58		(187)		(49)
Deferred income taxes:
Federal	(1,061)		1,193		(1,641)
State and local	(115)		266		15
Total U.S. tax benefit	(747)		(613)		(1,287)
TCJA(a)
Current income taxes	—		(135)		(3,035)
Deferred Income taxes	—		(187)		2,439
Total TCJA tax benefit	—		(323)		(596)
International
Current income taxes	1,517		2,418		2,195
Deferred income taxes	(292)		(863)		(579)
Total international tax provision	1,224		1,555		1,617
Provision/(benefit) for taxes on income	$	477	$	618	$	(266)

(a)The 2018 current tax benefit and deferred tax expense primarily relate to the utilization of tax credit carryforwards against the repatriation tax liability associated with the enactment of the TCJA. See discussion below.

Schedule of Effective Income Tax Rate Reconciliation


The reconciliation of the U.S. statutory income tax rate to our effective tax rate for Income from continuing operations follows:
	Year Ended December 31,
	2020		2019		2018
U.S. statutory income tax rate	21.0	%	21.0	%	21.0	%
TCJA impact(a)	—		(2.8)		(16.6)
Taxation of non-U.S. operations (b), (c)	(9.6)		(4.5)		1.2
Tax settlements and resolution of certain tax positions(d)	(2.5)		(13.8)		(19.3)
Completion of Consumer Healthcare JV transaction(d)	—		8.2		—
U.S. Healthcare Legislation(e)	0.1		—		(1.1)
U.S. R&D tax credit	(1.3)		(0.8)		(2.2)
Interest(f)	1.1		0.6		5.7

All other, net(g)	(2.4)		(2.5)		3.9
Effective tax rate for income from continuing operations	6.4	%	5.4	%	(7.4)	%

(a)See Note 5A.

(b)For taxation of non-U.S. operations, this rate impact reflects the income tax rates and relative earnings in the locations where we do business outside the U.S., together with the U.S. tax cost on our international operations, changes in uncertain tax positions not included in the reconciling item called “Tax settlements and resolution of certain tax positions,” as well as changes in valuation allowances. Specifically: (i) the jurisdictional location of earnings is a significant component of our effective tax rate each year, and the rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of such earnings as compared to our total earnings; (ii) the U.S. tax implications of our foreign operations is a significant component of our effective tax rate each year and generally offsets some of the reduction to our effective tax rate each year resulting from the jurisdictional location of earnings; (iii) the impact of certain tax initiatives; and (iv) the impact of changes in uncertain tax positions not included in the reconciling item called “Tax settlements and resolution of certain tax positions” is a component of our effective tax rate each year that can result in either an increase or decrease to our effective tax rate. The jurisdictional mix of earnings, which includes the impact of the location of earnings as well as the U.S. tax cost on our international operations, can vary as a result of operating fluctuations in the normal course of business and as a result of the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on strategic business decisions. See also Note 5A for the components of pre-tax income and Provision/(benefit) for taxes on income, which is based on the location of the taxing authorities, and for information about settlements and other items impacting Provision/(benefit) for taxes on income.

(c)In all years, the impact on our effective tax rate is the result of the jurisdictional location of earnings. In 2020 and 2019, the reduction in our effective tax rate resulting from the jurisdictional location of earnings is largely due to lower tax rates in certain jurisdictions, as well as manufacturing and other incentives for our subsidiaries in Singapore and to a lesser extent in Puerto Rico. We benefit from Puerto Rican tax incentives pursuant to a grant that expires during 2029. Under such grant, we are partially exempt from income, property and municipal taxes. In Singapore, we benefit from incentive tax rates effective through 2045 on income from manufacturing and other operations.

(d)For a discussion about tax settlements and resolution of certain tax positions and the impact of the gain on the completion of the Consumer Healthcare JV transaction, see Note 5A.

(e)The favorable rate impact in 2018 is a result of the updated 2017 invoice received from the federal government, which reflected a lower expense than what was previously estimated for invoiced periods, as well as certain tax initiatives.

(f)Includes changes in interest related to our uncertain tax positions not included in the reconciling item called “Tax settlements and resolution of certain tax positions”.

(g)All other, net is primarily due to routine business operations.

Schedule of Deferred Tax Assets and Liabilities


Components of our deferred tax assets and liabilities, shown before jurisdictional netting, follow:
	2020 Deferred Tax*				2019 Deferred Tax*
(MILLIONS OF DOLLARS)	Assets		(Liabilities)		Assets		(Liabilities)
Prepaid/deferred items(a)	$	3,094	$	(352)	$	1,918	$	(204)
Inventories	276		(25)		267		(10)
Intangible assets(b)	793		(5,355)		718		(6,784)
Property, plant and equipment	211		(1,219)		177		(1,204)
Employee benefits	1,981		(127)		2,115		(37)
Restructurings and other charges	291		—		212		—
Legal and product liability reserves	382		—		469		—
Net operating loss/tax credit carryforwards(c)	1,761		—		2,003		—
Unremitted earnings	—		(46)		—		(77)
State and local tax adjustments	171		—		152		—
Investments(d)	128		(3,545)		11		(3,318)
All other	102		(57)		167		(9)
	9,189		(10,726)		8,208		(11,643)
Valuation allowances	(1,586)		—		(1,526)		—
Total deferred taxes	$	7,603	$	(10,726)	$	6,682	$	(11,643)
Net deferred tax liability(e)			$	(3,123)			$	(4,961)

*The deferred tax assets and liabilities associated with global intangible low-taxed income are included in the relevant categories. See Note 5A.

(a)The increase in 2020 is primarily related to the capitalization of certain R&D-related expenses.

(b)The decrease in 2020 is primarily the result of amortization of intangible assets and certain impairment charges.

(c)The amounts in 2020 and 2019 are reduced for unrecognized tax benefits of $3.0 billion and $2.9 billion, respectively, where we have net operating loss carryforwards, similar tax losses, and/or tax credit carryforwards that are available, under the tax law of the applicable jurisdiction, to settle any additional income taxes that would result from the disallowance of a tax position.

(d)The amounts in 2020 and 2019 are primarily related to the Consumer Healthcare JV. See Note 2C.

(e)In 2020, Noncurrent deferred tax assets and other noncurrent tax assets ($0.9 billion), and Noncurrent deferred tax liabilities ($4.1 billion). In 2019, Noncurrent deferred tax assets and other noncurrent tax assets ($0.7 billion), and Noncurrent deferred tax liabilities ($5.7 billion).

Schedule of Unrecognized Tax Benefits Roll Forward


The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
(MILLIONS OF DOLLARS)	2020		2019		2018
Balance, beginning	$	(5,381)	$	(6,259)	$	(6,558)
Acquisitions(a)	37		(44)		—
Divestitures(b)	265		—		—
Increases based on tax positions taken during a prior period(c)	(232)		(36)		(192)
Decreases based on tax positions taken during a prior period(c), (d)	64		1,109		561
Decreases based on settlements for a prior period(e)	15		100		123
Increases based on tax positions taken during the current period(c)	(411)		(383)		(370)
Impact of foreign exchange	(72)		25		56
Other, net(c), (f)	120		107		121
Balance, ending(g)	$	(5,595)	$	(5,381)	$	(6,259)

(a)For 2020 and 2019, primarily related to the acquisition of Array (goodwill adjustment made within the measurement period). See Note 2A.

(b)For 2020, related to the separation of Upjohn. See Note 2B.

(c)Primarily included in Provision/(benefit) for taxes on income.

(d)Primarily related to effectively settling certain issues with the U.S. and foreign tax authorities. See Note 5A.

(e)Primarily related to cash payments and reductions of tax attributes.

(f)Primarily related to decreases as a result of a lapse of applicable statutes of limitations.

(g)In 2020, included in Income taxes payable ($34 million), Noncurrent deferred tax assets and other noncurrent tax assets ($18 million), Noncurrent deferred tax liabilities ($3.0 billion) and Other taxes payable ($2.5 billion). In 2019, included in Income taxes payable ($108 million), Current tax assets ($2 million), Noncurrent deferred tax assets and other noncurrent tax assets ($51 million), Noncurrent deferred tax liabilities ($2.8 billion) and Other taxes payable ($2.4 billion).

Schedule of Other Comprehensive Income (Loss), Components of Income Tax Expense (Benefit)


Components of the Tax provision/(benefit) on other comprehensive income/(loss) include:
	Year Ended December 31,
(MILLIONS OF DOLLARS)		2020		2019		2018
Foreign currency translation adjustments, net(a)		$	(79)	$	254	$	94

Unrealized holding gains/(losses) on derivative financial instruments, net		(88)		83		21
Reclassification adjustments for (gains)/losses included in net income		(25)		(125)		27
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)		—		—		1
		(113)		(42)		50
Unrealized holding gains/(losses) on available-for-sale securities, net		45		—		(23)
Reclassification adjustments for (gains)/losses included in net income		(24)		5		16
Reclassification adjustments for tax on unrealized gains from AOCI to Retained earnings(c)		—		—		(45)
		22		5		(53)
Benefit plans: actuarial gains/(losses), net		(281)		(169)		(141)
Reclassification adjustments related to amortization		62		55		55
Reclassification adjustments related to settlements, net		65		65		33
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)		—		—		637
Other		(8)		(10)		29
		(161)		(58)		612
Benefit plans: prior service (costs)/credits and other, net		12		(1)		2
Reclassification adjustments related to amortization of prior service costs and other, net		(31)		(43)		(39)
Reclassification adjustments related to curtailments of prior service costs and other, net		—		(1)		(4)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)		—		—		(144)
Other		1		—		—
		(17)		(45)		(185)
Tax provision/(benefit) on other comprehensive income/(loss)		$	(349)	$	115	$	518

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

(b)For additional information on the adoption of a new accounting standard related to reclassification of certain tax effects from AOCI, see Note 1B in our 2018 Financial Report.

(c)For additional information on the adoption of a new accounting standard related to financial assets and liabilities, see Note 1B in our 2018 Financial Report.