Income Taxes

New U.S. Tax Legislation

New U.S. tax legislation, which is commonly referred to as the Tax Cuts and Job Act (the "Act") and which was enacted on December 22, 2017, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings. Under U.S. generally accepted accounting principles, companies must account for the effects of changes in income tax rates and laws in the period in which the legislation is enacted. However, the U.S. Securities and Exchange Commission (the "SEC") has provided guidance which allows companies to report financial results including provisional amounts that have been recorded for the income tax effects of the Act based upon a reasonable estimate of those effects. The SEC expects that accounting for the Act should be completed by companies by no later than one year from the enactment date of the Act.

As of September 30, 2018, the Company has not completed its accounting for the tax effects of enactment of the Act; however, the Company has made what it believes is a reasonable estimate of the effects on the remeasurement of U.S. deferred tax balances, the one-time transition tax, and the taxes accrued relating to the change in permanent reinvestment assertion for unremitted earnings of its foreign subsidiaries. As a result of these estimates, the Company recognized a provisional expense in the amount of $640 million, which is reflected in the Company's consolidated statement of income within Income tax provision. The Company also recorded a charge, which is further discussed below, relating to historic unremitted foreign earnings as of September 30, 2018.

The Company will continue to gather information and perform additional analysis on these estimates, including, but not limited to, the amount of earnings and profits subject to the transition tax, the calculation of foreign tax credits, the local tax treatment of future distributions of unremitted earnings and the remeasurement of U.S. deferred taxes. Any measurement period adjustments will be reported as a component of Income tax provision in the reporting period the amounts are determined. The final accounting will be completed no later than one year from the enactment of the Act.

The Company is currently in the process of evaluating the new Global Intangible Low-Taxed Income’s ("GILTI") provisions and has not yet elected an accounting policy regarding whether to record deferred taxes related to GILTI. Therefore, the Company has not made any adjustments related to the GILTI tax in its financial statements. Under the SEC guidance noted above, the Company will continue to analyze and assess the effects of the GILTI provisions of the Act.

Provisional Amounts

The Company believes that all provisional amounts reflected in its financial statements are based on the best estimates that can be made at this time. The Company will continue to analyze all impacts of the Act and will update provisional amounts as required.

Deferred tax assets and liabilities

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company recorded a provisional tax benefit of $182 million related to the re-measurement of the Company's deferred tax balances.

Foreign tax effects

The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P") that the Company previously deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability for all of its foreign subsidiaries, resulting in an increase in income tax expense of $822 million. However, the Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. As discussed in Note 9, the Company completed its acquisition of Bard on December 29, 2017. The net assets acquired included approximately $175 million of transition tax payable based on the Company's best estimate of its transition tax liability. The combined company's transition tax liability, 8% of which is payable per year over the next five years with the balance payable over the following three years, is approximately $1 billion. The anticipated payment of this tax is expected to begin on January 15, 2019.

The Company has historically asserted indefinite reinvestment of the earnings of certain non-U.S. subsidiaries outside the United States. The Act eliminated certain material tax effects on the repatriation of cash to the United States. Future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. As a result, after reevaluation of the permanent reinvestment assertion, the Company is no longer permanently reinvested with respect to its historic unremitted foreign earnings as of September 30, 2018. As a result of the change in the assertion, during fiscal 2018, the Company recorded a charge of $134 million to Income tax provision related to historic unremitted foreign earnings as of September 30, 2018.

Provision for Income Taxes

The provision for income taxes the years ended September 30 consisted of:



(Millions of dollars)	2018			2017			2016
Current:
Federal	$	665		$	(230	)	$	312
State and local, including Puerto Rico	73			(20		)	17
Foreign	387			200			286
	$	1,124		$	(50	)	$	616
Deferred:
Domestic	$	(201	)	$	(64	)	$	(441	)
Foreign	(61		)	(10		)	(78		)
	(262		)	(74		)	(519		)
Income tax provision (benefit)	$	862		$	(124	)	$	97

The components of Income Before Income Taxes for the years ended September 30 consisted of:



(Millions of dollars)	2018			2017			2016
Domestic, including Puerto Rico	$	(135	)	$	(386	)	$	(232	)
Foreign	1,308			1,362			1,306
Income Before Income Taxes	$	1,173		$	976		$	1,074

Unrecognized Tax Benefits

The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The Company believes it is reasonably possible that certain audits will close within the next twelve months but no significant increases or decreases in the amount of the unrecognized tax benefits are expected to result.



(Millions of dollars)	2018			2017			2016
Balance at October 1	$	349		$	469		$	593
Increase due to acquisitions	140			—			—
Increase due to current year tax positions	43			41			81
Increase due to prior year tax positions	43			19			10
Decreases due to prior year tax positions	—			(30		)	(3		)
Decrease due to settlements with tax authorities	(29		)	(145		)	(147		)
Decrease due to lapse of statute of limitations	(3		)	(5		)	(65		)
Balance at September 30	$	543		$	349		$	469

Upon the Company's acquisition of CareFusion in 2015, the Company became a party to a tax matters agreement with Cardinal Health resulting from Cardinal Health's spin-off of CareFusion in fiscal year 2010. Under the tax matters agreement, the Company is obligated to indemnify Cardinal Health for certain tax exposures and transaction taxes prior to CareFusion’s spin-off from Cardinal Health. The indemnification payable is approximately $140 million at September 30, 2018 and is included in Deferred Income Taxes and Other on the consolidated balance sheet.

At September 30, 2018, 2017 and 2016, there are $632 million, $415 million and $478 million of unrecognized tax benefits that if recognized, would affect the effective tax rate. During the fiscal years ended September 30, 2018, 2017 and 2016, the Company reported interest and penalties associated with unrecognized tax benefits of $20 million, $57 million and $(38) million on the consolidated statements of income as a component of Income tax provision. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. The IRS has completed its audit for the BD Legacy fiscal year 2014 and combined company fiscal years 2016 and 2017. For the BD legacy business, all years are effectively settled with the exception of 2015 for which the Company believes it is adequately reserved for any potential exposures. The IRS is currently examining the CareFusion legacy fiscal year 2014 and short period 2015. With the exception of the CareFusion legacy fiscal year 2010 audit, all other periods are at various stages of appeals or protests. With regard to Bard, all examinations have been completed through calendar year 2014. The IRS has commenced the examination of calendar years 2015 and 2016. For the other major tax jurisdictions where the Company conducts business, tax years are generally open after 2012.

Deferred Income Taxes

Deferred income taxes at September 30 consisted of:



	2018					2017
(Millions of dollars)	Assets			Liabilities		Assets			Liabilities
Compensation and benefits	$	458		$	—	$	618		$	—
Property and equipment	—			253		—			244
Intangibles	—			2,948		—			1,584
Loss and credit carryforwards	1,290			—		1,098			—
Other	707			384		531			164
	2,455			3,585		2,247			1,992
Valuation allowance	(1,181		)	—		(1,032		)	—
Net (a)	$	1,275		$	3,585	$	1,216		$	1,992


(a)	Net deferred tax assets are included in Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other on the consolidated balance sheets.

Deferred tax assets and liabilities are netted on the balance sheet by separate tax jurisdictions. Deferred taxes have been provided on undistributed earnings of foreign subsidiaries as of September 30, 2018.

Generally, deferred tax assets have been established as a result of net operating losses and credit carryforwards with expiration dates from 2019 to an unlimited expiration date. Valuation allowances have been established as a result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets on these losses and credit carryforwards. The valuation allowance for 2018 is primarily the result of foreign losses due to the Company’s global re-organization of its foreign entities and these generally have no expiration date. Valuation allowances are also maintained with respect to deferred tax assets for certain federal and state carryforwards that may not be realized and that principally expire in 2038.

Tax Rate Reconciliation

A reconciliation of the federal statutory tax rate to the Company’s effective income tax rate was as follows:



	2018		2017		2016
Federal statutory tax rate	24.5	%	35.0	%	35.0	%
New U.S. tax legislation (see discussion above)	54.6		—		—
State and local income taxes, net of federal tax benefit	0.8		(2.6	)	1.5
Effect of foreign and Puerto Rico earnings and foreign tax credits	7.3		(40.8	)	(23.7	)
Effect of Research Credits and Domestic Production Activities	(2.8	)	(2.7	)	(4.4	)
Effect of change in accounting for excess tax benefit relating to share-based compensation (see Note 2)	(6.7	)	(7.9	)	—
Effect of gain on divestitures	1.3		—		—
Effect of uncertain tax position	3.3		—		—
Effect of valuation allowance release	(4.8	)	—		—
Effect of application for change in accounting method	(4.5	)	—		—
Effect of nondeductible compensation	1.6		—		—
Other, net	(1.1	)	6.3		0.7
Effective income tax rate	73.5	%	(12.7	)%	9.1	%

Tax Holidays and Payments

The approximate amounts of tax reductions related to tax holidays in various countries in which the Company does business were $101 million, $144 million and $121 million, in 2018, 2017 and 2016, respectively. The benefit of the tax holiday on diluted earnings per share was approximately $0.38, $0.64 and $0.56 for fiscal years 2018, 2017 and 2016, respectively. The tax holidays expire at various dates through 2028.

The Company made income tax payments, net of refunds, of $235 million in 2018, $265 million in 2017 and $218 million in 2016.