INCOME TAXES

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



	Year Ended December 31,
Dollars in Millions	2017			2016			2015
Current:
U.S.	$	2,782		$	1,144		$	337
Non-U.S.	364			468			456
Total Current	3,146			1,612			793
Deferred:
U.S.	1,063			(101		)	(394		)
Non-U.S.	(53		)	(103		)	47
Total Deferred	1,010			(204		)	(347		)
Total Provision	$	4,156		$	1,408		$	446

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	2017					2016					2015
Earnings/(Loss) before income taxes:
U.S.	$	2,280				$	3,100				$	(1,329	)
Non-U.S.	2,851					2,815					3,406
Total	$	5,131				$	5,915				$	2,077
U.S. statutory rate	1,796			35.0	%	2,070			35.0	%	727			35.0	%
Deemed repatriation transition tax	2,611			50.9	%	—			—		—			—
Deferred tax remeasurement	285			5.6	%	—			—		—			—
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(561		)	(10.9	)%	(442		)	(7.5	)%	(535		)	(25.8	)%
U.S. Federal valuation allowance release	—			—		(29		)	(0.5	)%	(84		)	(4.0	)%
U.S. Federal, state and foreign contingent tax matters	72			1.4	%	87			1.5	%	56			2.7	%
U.S. Federal research based credits	(144		)	(2.8	)%	(144		)	(2.4	)%	(132		)	(6.4	)%
Goodwill allocated to divestitures	4			0.1	%	34			0.6	%	25			1.2	%
U.S. Branded Prescription Drug Fee	52			1.0	%	52			0.9	%	44			2.1	%
Non-deductible R&D charges	266			5.2	%	100			1.7	%	369			17.8	%
Puerto Rico excise tax	(131		)	(2.6	)%	(131		)	(2.2	)%	(55		)	(2.7	)%
Domestic manufacturing deduction	(78		)	(1.5	)%	(122		)	(2.1	)%	(17		)	(0.8	)%
State and local taxes (net of valuation allowance)	77			1.5	%	23			0.4	%	16			0.8	%
Foreign and other	(93		)	(1.9	)%	(90		)	(1.6	)%	32			1.6	%
	$	4,156		81.0	%	$	1,408		23.8	%	$	446		21.5	%

New tax reform legislation in the U.S. was enacted on December 22, 2017 known as the Tax Cuts and Jobs Act of 2017 (the Act). The Act moves from a worldwide tax system to a quasi-territorial tax system and comprises broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. tax rate from 35% to 21%; (2) adding a deemed repatriation transition tax on certain foreign earnings and profits; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) including certain income of controlled foreign companies in U.S. taxable income; (5) creating a new minimum tax referred to as a base erosion anti-abuse income tax; (6) limiting certain research-based credits; and (7) eliminating the domestic manufacturing deduction.

Although many aspects of the Act are not effective until 2018, additional tax expense of $2.9 billion was recognized in the fourth quarter of 2017 upon enactment of the Act. The additional expense included a $2.6 billion one-time deemed repatriation transition tax on previously untaxed post-1986 foreign earnings and profits (including related tax reserves). Those earnings were effectively taxed at a 15.5% rate to the extent that the specified foreign corporations held cash and certain other assets and an 8.0% rate on the remaining earnings and profits. The remaining additional tax expense included an adjustment to measure net deferred tax assets at the new U.S. tax rate of 21%.

The accounting for the reduction of deferred tax assets to the 21% tax rate is complete. The tax charge for the deemed repatriation tax is incomplete, but was recorded as a provisional amount as we were able to make a reasonable estimate of this tax. The provisional amounts may change when completed in 2018 upon finalizing untaxed post-1986 foreign earnings and profits and related cash and certain eligible assets of the specified foreign corporations. The provisional amounts may also change if additional guidance of the relevant tax code is released.

Earnings for certain of our manufacturing operations in low tax jurisdictions, such as Switzerland, Ireland and Puerto Rico, were indefinitely reinvested prior to the enactment of the Act. BMS operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

As a result of the transition tax under the Act, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability or foreign and state income and withholding tax that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable.

Valuation allowances attributed to capital loss carryforwards were released in 2015 following the divestiture of Recothrom*, Ixempra* and other mature brands. Goodwill allocated to business divestitures as well as the U.S. Branded Prescription Drug Fee are not deductible for tax purposes.

R&D charges primarily from acquisition related and milestone payments to former shareholders are not deductible for tax purposes. These include Flexus, Cardioxyl and IFM in 2017; Flexus, Padlock and Cormorant in 2016; and Flexus and Cardioxyl in 2015.

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 compared to 2015.

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	2017			2016
Deferred tax assets
Foreign net operating loss carryforwards	$	2,872		$	2,945
State net operating loss and credit carryforwards	143			114
U.S. Federal net operating loss and credit carryforwards	99			156
Deferred income	212			764
Milestone payments and license fees	386			534
Pension and postretirement benefits	131			358
Intercompany profit and other inventory items	651			1,241
Other foreign deferred tax assets	312			188
Share-based compensation	60			114
Internal transfer of intellectual property	—			629
Other	280			308
Total deferred tax assets	5,146			7,351
Valuation allowance	(2,827		)	(3,078		)
Deferred tax assets net of valuation allowance	2,319			4,273

Deferred tax liabilities
Depreciation	(11		)	(125		)
Acquired intangible assets	(216		)	(344		)
Goodwill and other	(527		)	(855		)
Total deferred tax liabilities	(754		)	(1,324		)
Deferred tax assets, net	$	1,565		$	2,949

Recognized as:
Deferred income taxes – non-current	$	1,610		$	2,996
Income taxes payable – non-current	(45		)	(47		)
Total	$	1,565		$	2,949

The adoption of amended guidance for intra-entity transfers of assets other than inventory resulted in net reductions to prepaid and deferred tax assets pertaining to pre-2017 internal transfers of intellectual property of $787 million and were adjusted through retained earnings as a cumulative effect of an accounting change. Additionally, amended guidance for share-based payment transactions was adopted in 2017 and net excess tax benefits of $39 million were recognized prospectively as a reduction of tax expense rather than capital in excess of par value of stock. The 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 and $147 million in 2015. The adoption of amended guidance for both items reduced the effective tax rate by 2.4% in the year ended December 31, 2017. Refer to "—Note 1. Basis of Presentation and Recently Issued Accounting Standards" for more information.

The U.S. Federal net operating loss carryforwards were $317 million at December 31, 2017. 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 2018 (certain amounts have unlimited lives).

At December 31, 2017, a valuation allowance of $2,827 million was established for the following items: $2,654 million primarily for foreign net operating loss and tax credit carryforwards, $129 million for state deferred tax assets including net operating loss and tax credit carryforwards, $10 million for U.S. Federal net operating loss carryforwards and $34 million for other U.S. Federal deferred tax assets.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2017			2016			2015
Balance at beginning of year	$	3,078		$	3,534		$	4,259
Provision	50			39			71
Utilization	(335		)	(355		)	(436		)
Foreign currency translation	341			(142		)	(366		)
Acquisitions	2			2			6
Non U.S. rate change	(309		)	—			—
Balance at end of year	$	2,827		$	3,078		$	3,534

Income tax payments were $546 million in 2017, $2.0 billion in 2016 and $577 million in 2015.

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 credit deductibility of certain expenses, and deemed repatriation transition tax. 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	2017			2016			2015
Balance at beginning of year	$	995		$	944		$	934
Gross additions to tax positions related to current year	173			49			52
Gross additions to tax positions related to prior years	30			49			56
Gross additions to tax positions assumed in acquisitions	—			1			1
Gross reductions to tax positions related to prior years	(22		)	(22		)	(34		)
Settlements	(20		)	(13		)	(46		)
Reductions to tax positions related to lapse of statute	(13		)	(4		)	(9		)
Cumulative translation adjustment	12			(9		)	(10		)
Balance at end of year	$	1,155		$	995		$	944

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2017		2016		2015
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	1,002	$	854	$	671
Accrued interest	148		112		93
Accrued penalties	15		17		16

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 which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time.

It is also reasonably possible that the total amount of unrecognized tax benefits at December 31, 2017 could 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 may result in the payment of additional taxes, adjustment of certain deferred taxes and/or 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 2017
Canada		2006 to 2017
France		2014 to 2017
Germany		2007 to 2017
Italy		2016 to 2017
Mexico		2011 to 2017