Note 8. INCOME TAXES

The provision/(benefit) for income taxes consisted of:



	Year Ended December 31,
Dollars in Millions	2013			2012			2011
Current:
U.S.	$	375		$	627		$	864
Non-U.S.	427			442			442
Total Current	802			1,069			1,306
Deferred:
U.S.	(390		)	(1,164		)	406
Non-U.S	(101		)	(66		)	9
Total Deferred	(491		)	(1,230		)	415
Total Provision/(Benefit)	$	311		$	(161	)	$	1,721

Effective Tax Rate

The reconciliation of the effective tax/(benefit) rate to the U.S. statutory Federal income tax rate was:



	% of Earnings Before Income Taxes
Dollars in Millions	2013					2012					2011
Earnings/(Loss) before income taxes:
U.S.	$	(135	)			$	(271	)			$	4,336
Non-U.S.	3,026					2,611					2,645
Total	$	2,891				$	2,340				$	6,981
U.S. statutory rate	1,012			35.0	%	819			35.0	%	2,443			35.0	%
Non-tax deductible annual pharmaceutical company fee	63			2.2	%	90			3.8	%	80			1.2	%
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(620		)	(21.4	)%	(688		)	(29.4	)%	(593		)	(8.5	)%
State and local taxes (net of valuation allowance)	25			0.9	%	20			0.9	%	33			0.5	%
U.S. Federal, state and foreign contingent tax matters	134			4.6	%	66			2.8	%	(161		)	(2.3	)%
U.S. Federal research and development tax credit	(181		)	(6.3	)%	—			—		(69		)	(1.0	)%
U.S. tax effect of capital losses	—			—		(392		)	(16.7	)%	—			—
Foreign and other	(122		)	(4.2	)%	(76		)	(3.3	)%	(12		)	(0.2	)%
	$	311		10.8	%	$	(161	)	(6.9	)%	$	1,721		24.7	%

The change in the 2013 effective tax rate from 2012 was due to:


•	A tax benefit in 2012 of $392 million attributable to a capital loss deduction resulting from the tax insolvency of Inhibitex;


•	Tax benefits attributable to higher impairment charges in 2012 (including an $1,830 million impairment charge for the BMS-986094 intangible asset in the U.S.); and


•	Higher charges from contingent tax matters ($134 million in 2013 and $66 million in 2012)

Partially offset by:


•	Favorable earnings mix between high and low tax jurisdictions primarily attributable to lower Plavix* revenues in 2013 and to a lesser extent the impact of an internal transfer of intellectual property in the fourth quarter of 2012; and


•	A favorable impact on the current year rate from the legal enactment of the 2012 and 2013 research and development tax credit during 2013. The retroactive reinstatement of the 2012 research and development tax credit recognized in 2013 was $82 million.

The change in the 2012 effective tax rate from 2011 was due to:


•	A tax benefit of $392 million attributable to a capital loss deduction resulting from the tax insolvency of Inhibitex; and


•	Favorable earnings mix between high and low tax jurisdictions primarily attributed to lower Plavix* revenues and a $1,830 million impairment charge for BMS-986094 intangible asset in the U.S. and to a lesser extent, an internal transfer of intellectual property.

Partially offset by:


•	Contingent tax matters which resulted in a $66 million charge in 2012 and $161 million benefit in 2011;


•	An unfavorable impact on the current year rate from the delay in the legal enactment of the research and development tax credit, which was not extended as of December 31, 2012; and


•	Changes in prior period estimates upon finalizing U.S. tax returns resulting in a $54 million benefit in 2011.

Deferred Taxes and Valuation Allowance

The components of current and non-current deferred income tax assets/(liabilities) were as follows:



	December 31,
Dollars in Millions	2013			2012
Deferred tax assets
Foreign net operating loss carryforwards	$	3,892		$	3,722
Milestone payments and license fees	483			550
Deferred income	2,168			2,083
U.S. capital losses	784			794
U.S. Federal net operating loss carryforwards	138			170
Pension and postretirement benefits	120			693
State net operating loss and credit carryforwards	377			346
Intercompany profit and other inventory items	495			288
U.S. Federal tax credit carryforwards	23			31
Other foreign deferred tax assets	187			197
Share-based compensation	107			111
Legal settlements	20			45
Repatriation of foreign earnings	49			86
Internal transfer of intellectual property	223			—
Other	357			344
Total deferred tax assets	9,423			9,460
Valuation allowance	(4,623		)	(4,404		)
Net deferred tax assets	4,800			5,056

Deferred tax liabilities
Depreciation	(148		)	(147		)
Acquired intangible assets	(2,567		)	(2,768		)
Other	(780		)	(734		)
Total deferred tax liabilities	(3,495		)	(3,649		)
Deferred tax assets, net	$	1,305		$	1,407

Recognized as:
Assets held-for-sale	$	125		$	—
Deferred income taxes – current	1,701			1,597
Deferred income taxes – non-current	508			203
U.S. and foreign income taxes payable – current	(10		)	(10		)
Liabilities related to assets held-for-sale	(946		)	—
Deferred income taxes – non-current	(73		)	(383		)
Total	$	1,305		$	1,407

The U.S. Federal net operating loss carryforwards were $396 million at December 31, 2013. These carryforwards were acquired as a result of certain acquisitions and are subject to limitations under Section 382 of the Internal Revenue Code. The net operating loss carryforwards expire in varying amounts beginning in 2022. The U.S. Federal tax credit carryforwards expire in varying amounts beginning in 2017. The realization of the U.S. Federal tax credit carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. The capital loss available of $2,196 million can be carried back to 2009 and carried forward to 2017. The foreign and state net operating loss carryforwards expire in varying amounts beginning in 2014 (certain amounts have unlimited lives).

Management has established a valuation allowance when a deferred tax asset is more likely than not to be realized. At December 31, 2013, a valuation allowance of $4,623 million was established for the following items: $3,849 million primarily for foreign net operating loss and tax credit carryforwards, $378 million for state deferred tax assets including net operating loss and tax credit carryforwards, $13 million for U.S. Federal net operating loss carryforwards and $383 million for U.S. Federal capital losses.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2013			2012			2011
Balance at beginning of year	$	4,404		$	3,920		$	1,863
Provision	252			494			2,410
Utilization	(68		)	(145		)	(135		)
Foreign currency translation	40			39			(222		)
Acquisitions	(5		)	96			4
Balance at end of year	$	4,623		$	4,404		$	3,920

Income tax payments were $478 million in 2013, $676 million in 2012 and $597 million in 2011. The current tax benefit realized as a result of stock related compensation credited to capital in excess of par value of stock was $129 million in 2013, $71 million in 2012 and $47 million in 2011.

U.S. taxes have not been provided on approximately $24 billion of undistributed earnings of foreign subsidiaries as these undistributed earnings are indefinitely invested offshore at December 31, 2013. Additional tax provisions will be required if these earnings are repatriated in the future to the U.S. or if such earnings are determined to be remitted in the foreseeable future. Due to complexities in the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that will have to be provided. As a result, BMS has favorable tax rates in Ireland and Puerto Rico under grants not scheduled to expire prior to 2023.

Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns are filed and subject to examination by various Federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. Liabilities are established for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, transfer pricing matters, tax credits and deductibility of certain expenses. Such liabilities represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes known. The effect of changes in estimates related to contingent tax liabilities is included in the effective tax rate reconciliation above.

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



	Year Ended December 31,
Dollars in Millions	2013			2012			2011
Balance at beginning of year	$	642		$	628		$	845
Gross additions to tax positions related to current year	74			46			44
Gross additions to tax positions related to prior years	108			66			105
Gross additions to tax positions assumed in acquisitions	—			31			1
Gross reductions to tax positions related to prior years	(87		)	(57		)	(325		)
Settlements	26			(54		)	(30		)
Reductions to tax positions related to lapse of statute	(8		)	(19		)	(7		)
Cumulative translation adjustment	1			1			(5		)
Balance at end of year	$	756		$	642		$	628

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2013		2012		2011
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	508	$	633	$	570
Accrued interest	83		59		51
Accrued penalties	34		32		25
Interest expense	24		14		10
Penalty expense	3		16		7

Uncertain tax benefits reduce deferred tax assets to the extent the uncertainty directly related to that asset; otherwise, they are recognized as either current or non-current U.S. and foreign income taxes payable. Accrued interest and penalties payable for unrecognized tax benefits are included in either current or non-current U.S. and foreign income taxes payable. Interest and penalties related to unrecognized tax benefits are included in income tax expense.

BMS is currently under examination by a number of tax authorities, including but not limited to the major tax jurisdictions listed in the table below, which have proposed adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. BMS estimates that it is reasonably possible that the total amount of unrecognized tax benefits at December 31, 2013 will decrease in the range of approximately $350 million to $400 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits, primarily settlement related, will involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. BMS also anticipates that it is reasonably possible that new issues will be raised by tax authorities which may require increases to the balance of unrecognized tax benefits; however, an estimate of such increases cannot reasonably be made at this time. BMS believes that it has adequately provided for all open tax years by tax jurisdiction.

The following is a summary of major tax jurisdictions for which tax authorities may assert additional taxes based upon tax years currently under audit and subsequent years that will likely be audited:



U.S.		2008 to 2013
Canada		2006 to 2013
France		2011 to 2013
Germany		2007 to 2013
Italy		2003 to 2013
Mexico		2006 to 2013