INCOME TAXES

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



	Year Ended December 31,
Dollars in Millions	2014			2013			2012
Current:
U.S.	$	334		$	375		$	627
Non-U.S.	560			427			442
Total Current	894			802			1,069
Deferred:
U.S.	(403		)	(390		)	(1,164		)
Non-U.S	(139		)	(101		)	(66		)
Total Deferred	(542		)	(491		)	(1,230		)
Total Provision/(Benefit)	$	352		$	311		$	(161	)

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	2014					2013					2012
Earnings/(Loss) before income taxes:
U.S.	$	(349	)			$	(135	)			$	(271	)
Non-U.S.	2,730					3,026					2,611
Total	$	2,381				$	2,891				$	2,340
U.S. statutory rate	833			35.0	%	1,012			35.0	%	819			35.0	%
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(509		)	(21.4	)%	(620		)	(21.4	)%	(688		)	(29.4	)%
U.S. tax effect of capital losses	(361		)	(15.2	)%	—			—		(392		)	(16.7	)%
U.S. Federal, state and foreign contingent tax matters	228			9.6	%	134			4.6	%	66			2.8	%
U.S. Federal research based credits	(131		)	(5.4	)%	(220		)	(7.6	)%	(31		)	(1.4	)%
Goodwill related to diabetes divestiture	210			8.8	%	—			—		—			—
U.S. Branded Prescription Drug Fee	84			3.5	%	63			2.2	%	90			3.8	%
R&D charge	52			2.2	%	—			—		—			—
State and local taxes (net of valuation allowance)	20			0.8	%	25			0.9	%	20			0.9	%
Foreign and other	(74		)	(3.1	)%	(83		)	(2.9	)%	(45		)	(1.9	)%
	$	352		14.8	%	$	311		10.8	%	$	(161	)	(6.9	)%

The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries that have been considered or are expected to be indefinitely reinvested offshore. U.S. taxes have not been provided on approximately $24 billion of undistributed earnings of foreign subsidiaries as of December 31, 2014. These undistributed earnings primarily relate to operations in Ireland and Puerto Rico, which operate under favorable tax grants not scheduled to expire prior to 2023. If these undistributed earnings are repatriated to the U.S. in the future, or if it were determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required. 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. Reforms to U.S. tax laws related to foreign earnings have been proposed and if adopted, may increase taxes, which could reduce the results of operations and cash flows.

The divestiture of the diabetes business resulted in a $361 million capital loss tax benefit from the sale of Amylin shares in 2014. Additional reserves of $123 million were established in 2014 for certain transfer pricing matters related to tax periods from 2008 through 2014. Goodwill allocated to the diabetes business divestiture, U.S. Branded Prescription Drug Fee and the research and development charge from the acquisition of iPierian in 2014 were not deductible for tax purposes. The retroactive reinstatement of the 2012 U.S. Federal research and development credit in 2013 resulted in additional tax credits of $82 million in 2013. The tax insolvency of Inhibitex resulted in a $392 million capital loss tax benefit in 2012. Orphan drug credits are included in the U.S. Federal research based credits for all periods presented.

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	2014			2013
Deferred tax assets
Foreign net operating loss carryforwards	$	3,473		$	3,892
Milestone payments and license fees	440			483
Deferred income	1,163			2,168
U.S. capital loss carryforwards	562			784
U.S. Federal net operating loss carryforwards	135			138
Pension and postretirement benefits	467			120
State net operating loss and credit carryforwards	337			377
Intercompany profit and other inventory items	531			495
U.S. Federal tax credit carryforwards	26			23
Other foreign deferred tax assets	202			187
Share-based compensation	95			107
Legal settlements	14			20
Repatriation of foreign earnings	94			49
Internal transfer of intellectual property	247			223
Other	311			357
Total deferred tax assets	8,097			9,423
Valuation allowance	(4,259		)	(4,623		)
Net deferred tax assets	3,838			4,800

Deferred tax liabilities
Depreciation	(128		)	(148		)
Acquired intangible assets	(390		)	(2,567		)
Other	(832		)	(780		)
Total deferred tax liabilities	(1,350		)	(3,495		)
Deferred tax assets, net	$	2,488		$	1,305

Recognized as:
Assets held-for-sale	$	—		$	125
Deferred income taxes – current	1,644			1,701
Deferred income taxes – non-current	915			508
Income taxes payable – current	(11		)	(10		)
Liabilities related to assets held-for-sale	—			(946		)
Income taxes payable – non-current	(60		)	(73		)
Total	$	2,488		$	1,305

The U.S. Federal net operating loss carryforwards were $386 million at December 31, 2014. 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 $1,564 million can be carried back to 2009 and the carryforward amount expires in various amounts beginning in 2017. The foreign and state net operating loss carryforwards expire in varying amounts beginning in 2015 (certain amounts have unlimited lives).

At December 31, 2014, a valuation allowance of $4,259 million was established for the following items: $3,457 million primarily for foreign net operating loss and tax credit carryforwards, $354 million for state deferred tax assets including net operating loss and tax credit carryforwards, $12 million for U.S. Federal net operating loss carryforwards and $436 million for U.S. Federal and state capital losses.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2014			2013			2012
Balance at beginning of year	$	4,623		$	4,404		$	3,920
Provision	140			252			494
Utilization	(109		)	(68		)	(145		)
Foreign currency translation	(395		)	40			39
Acquisitions	—			(5		)	96
Balance at end of year	$	4,259		$	4,623		$	4,404

Income tax payments were $544 million in 2014, $478 million in 2013 and $676 million in 2012. The current tax benefit realized as a result of stock related compensation credited to capital in excess of par value of stock was $131 million in 2014, $129 million in 2013 and $71 million in 2012.

Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are 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	2014			2013			2012
Balance at beginning of year	$	756		$	642		$	628
Gross additions to tax positions related to current year	106			74			46
Gross additions to tax positions related to prior years	218			108			66
Gross additions to tax positions assumed in acquisitions	—			—			31
Gross reductions to tax positions related to prior years	(57		)	(87		)	(57		)
Settlements	(65		)	26			(54		)
Reductions to tax positions related to lapse of statute	(12		)	(8		)	(19		)
Cumulative translation adjustment	(12		)	1			1
Balance at end of year	$	934		$	756		$	642

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2014			2013		2012
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	668		$	508	$	633
Accrued interest	96			83		59
Accrued penalties	17			34		32
Interest expense	27			24		14
Penalty expense/(benefit)	(7		)	3		16

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.

Effective January 2014, BMS adopted an update from the FASB that clarified existing guidance on the presentation of unrecognized tax benefits when various qualifying tax benefit carryforwards exist, including when the unrecognized tax benefit should be presented as a reduction to deferred tax assets or as a liability. Non-current deferred tax assets and income tax liabilities were reduced by $236 million upon adoption.

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, 2014 will decrease in the range of approximately $310 million to $370 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. It is reasonably possible that new issues will be raised by tax authorities that may increase 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 2014
Canada		2006 to 2014
France		2012 to 2014
Germany		2007 to 2014
Italy		2003 to 2014
Mexico		2009 to 2014