INCOME TAXES

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



	Year Ended December 31,
Dollars in Millions	2016			2015			2014
Current:
U.S.	$	1,144		$	337		$	334
Non-U.S.	468			456			560
Total Current	1,612			793			894
Deferred:
U.S.	(101		)	(394		)	(403		)
Non-U.S.	(103		)	47			(139		)
Total Deferred	(204		)	(347		)	(542		)
Total Provision	$	1,408		$	446		$	352

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	2016					2015					2014
Earnings/(Loss) before income taxes:
U.S.	$	3,100				$	(1,329	)			$	(349	)
Non-U.S.	2,815					3,406					2,730
Total	$	5,915				$	2,077				$	2,381
U.S. statutory rate	2,070			35.0	%	727			35.0	%	833			35.0	%
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(442		)	(7.5	)%	(535		)	(25.8	)%	(509		)	(21.4	)%
U.S. tax effect of capital losses	—			—		—			—		(361		)	(15.2	)%
U.S. Federal valuation allowance release	(29		)	(0.5	)%	(84		)	(4.0	)%	—			—
U.S. Federal, state and foreign contingent tax matters	87			1.5	%	56			2.7	%	228			9.6	%
U.S. Federal research based credits	(144		)	(2.4	)%	(132		)	(6.4	)%	(131		)	(5.4	)%
Goodwill allocated to divestitures	34			0.6	%	25			1.2	%	210			8.8	%
U.S. Branded Prescription Drug Fee	52			0.9	%	44			2.1	%	84			3.5	%
R&D charges	100			1.7	%	369			17.8	%	52			2.2	%
Puerto Rico excise tax	(131		)	(2.2	)%	(55		)	(2.7	)%	(28		)	(1.2	)%
Domestic manufacturing deduction	(122		)	(2.1	)%	(17		)	(0.8	)%	—			—
State and local taxes (net of valuation allowance)	23			0.4	%	16			0.8	%	20			0.8	%
Foreign and other	(90		)	(1.6	)%	32			1.6	%	(46		)	(1.9	)%
	$	1,408		23.8	%	$	446		21.5	%	$	352		14.8	%

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 $25.7 billion of undistributed earnings of foreign subsidiaries as of December 31, 2016. These undistributed earnings primarily relate to operations in Switzerland, Ireland and Puerto Rico. 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. BMS operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

The divestiture of certain businesses resulted in capital loss tax benefits including $361 million from the sale of Amylin shares in 2014. Valuation allowances attributed to capital loss carryforwards were released in 2015 following the divestiture of Recothrom*, Ixempra* and other mature brands. Additional reserves of $123 million were established in 2014 for certain transfer pricing matters related to tax periods from 2008 through 2014. Orphan drug credits are included in the U.S. Federal research based credits for all periods presented. Goodwill allocated to business divestitures (including the diabetes business in 2014) was not deductible for tax purposes as well as the U.S. Branded Prescription Drug Fee in all periods. R&D charges resulting primarily from a milestone payment to the former shareholders of Flexus and the acquisitions of Padlock and Cormorant in 2016, Flexus and Cardioxyl in 2015 and iPierian in 2014 were also not deductible for tax purposes. Puerto Rico imposes an excise tax on the gross company purchase price of goods sold from our manufacturer in Puerto Rico. The excise tax is recognized in cost of products sold when the intra-entity sale occurs. For U.S. income tax purposes, the excise tax is not deductible but results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred. Increased manufacturing activities for Opdivo resulted in the higher domestic manufacturing deduction in 2016.

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	2016			2015
Deferred tax assets
Foreign net operating loss carryforwards	$	2,945		$	3,090
U.S. capital loss carryforwards	4			39
State net operating loss and credit carryforwards	114			324
U.S. Federal net operating loss and credit carryforwards	156			173
Deferred income	764			1,009
Milestone payments and license fees	534			560
Pension and postretirement benefits	358			462
Intercompany profit and other inventory items	1,241			607
Other foreign deferred tax assets	188			172
Share-based compensation	114			122
Legal and other settlements	5			63
Repatriation of foreign earnings	12			(1		)
Internal transfer of intellectual property	629			635
Other	287			337
Total deferred tax assets	7,351			7,592
Valuation allowance	(3,078		)	(3,534		)
Deferred tax assets net of valuation allowance	4,273			4,058

Deferred tax liabilities
Depreciation	(125		)	(105		)
Acquired intangible assets	(344		)	(338		)
Goodwill and other	(855		)	(802		)
Total deferred tax liabilities	(1,324		)	(1,245		)
Deferred tax assets, net	$	2,949		$	2,813

Recognized as:
Deferred income taxes – non-current	$	2,996		$	2,844
Income taxes payable – non-current	(47		)	(31		)
Total	$	2,949		$	2,813

Internal transfers of intellectual property resulted in the deferred tax assets included above and prepaid taxes of $372 million at December 31, 2016 and $484 million of prepaid taxes at December 31, 2015. These assets are being amortized over their expected lives. Refer to Recently Issued Accounting Standards in "—Note 1. Accounting Policies" for information regarding the impact of amended guidance that the Company expects to adopt in 2017.

The U.S. Federal net operating loss carryforwards were $368 million at December 31, 2016. 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 foreign and state net operating loss carryforwards expire in varying amounts beginning in 2017 (certain amounts have unlimited lives).

At December 31, 2016, a valuation allowance of $3,078 million was established for the following items: $2,894 million primarily for foreign net operating loss and tax credit carryforwards, $101 million for state deferred tax assets including net operating loss and tax credit carryforwards, $11 million for U.S. Federal net operating loss carryforwards and $72 million for other U.S. Federal deferred tax assets.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2016			2015			2014
Balance at beginning of year	$	3,534		$	4,259		$	4,623
Provision	39			71			140
Utilization	(355		)	(436		)	(109		)
Foreign currency translation	(142		)	(366		)	(395		)
Acquisitions	2			6			—
Balance at end of year	$	3,078		$	3,534		$	4,259

Income tax payments were $2,041 million in 2016, $577 million in 2015 and $544 million in 2014. The current tax benefit realized as a result of stock related compensation credited to capital in excess of par value of stock was $92 million in 2016, $147 million in 2015 and $131 million in 2014.

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	2016			2015			2014
Balance at beginning of year	$	944		$	934		$	756
Gross additions to tax positions related to current year	49			52			106
Gross additions to tax positions related to prior years	49			56			218
Gross additions to tax positions assumed in acquisitions	1			1			—
Gross reductions to tax positions related to prior years	(22		)	(34		)	(57		)
Settlements	(13		)	(46		)	(65		)
Reductions to tax positions related to lapse of statute	(4		)	(9		)	(12		)
Cumulative translation adjustment	(9		)	(10		)	(12		)
Balance at end of year	$	995		$	944		$	934

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2016		2015		2014
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	854	$	671	$	668
Accrued interest	112		93		96
Accrued penalties	17		16		17
Interest expense	22		2		27
Penalty expense/(benefit)	4		1		(7		)

Accrued interest and penalties payable for unrecognized tax benefits are included in either current or non-current 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 or are considering proposing material 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, 2016 will decrease in the range of approximately $255 million to $315 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 2016
Canada		2006 to 2016
France		2013 to 2016
Germany		2007 to 2016
Italy		2011 to 2016
Mexico		2011 to 2016