INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES

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



	Year Ended December 31,
Dollars in Millions	2019			2018			2017
Current:
U.S.	$	1,002		$	566		$	3,304
Non-U.S.	1,437			410			399
Total Current	2,439			976			3,703
Deferred:
U.S.	(113		)	(51		)	541
Non-U.S.	(811		)	96			(88		)
Total Deferred	(924		)	45			453
Total Provision	$	1,515		$	1,021		$	4,156

Effective Tax Rate

The reconciliation of the effective tax rate to the U.S. statutory Federal income tax rate was as follows:



	% of Earnings Before Income Taxes
Dollars in Millions	2019					2018					2017
Earnings before income taxes:
U.S.	$	542				$	2,338				$	2,280
Non-U.S.	4,433					3,630					2,851
Total	4,975					5,968					5,131
U.S. statutory rate	1,045			21.0	%	1,253			21.0	%	1,796			35.0	%
Deemed repatriation transition tax	—			—		(56		)	(0.9	)%	2,611			50.9	%
Deferred tax remeasurement	—			—		—			—		285			5.6	%
Global intangible low taxed income (GILTI)	849			17.1	%	94			1.6	%	—			—
Foreign tax effect of certain operations in Ireland, Puerto Rico and Switzerland	(68		)	(1.4	)%	(202		)	(3.4	)%	(561		)	(10.9	)%
U.S. Federal valuation allowance	25			0.5	%	119			2.0	%	—			—
U.S. Federal, state and foreign contingent tax matters	(13		)	(0.3	)%	(55		)	(0.9	)%	72			1.4	%
U.S. Federal research based credits	(138		)	(2.8	)%	(138		)	(2.3	)%	(144		)	(2.8	)%
Fair value adjustments for contingent value rights	110			2.2	%	—			—		—			—
Non-deductible R&D charges	5			0.1	%	17			0.3	%	266			5.2	%
Puerto Rico excise tax	(163		)	(3.3	)%	(152		)	(2.6	)%	(131		)	(2.6	)%
Domestic manufacturing deduction	—			—		—			—		(78		)	(1.5	)%
State and local taxes (net of valuation allowance)	(16		)	(0.3	)%	67			1.1	%	77			1.5	%
Foreign and other	(121		)	(2.3	)%	74			1.2	%	(37		)	(0.8	)%
Total	$	1,515		30.5	%	$	1,021		17.1	%	$	4,156		81.0	%

The effective tax rate in 2017 reflects the additional tax expense of $2.9 billion recognized upon enactment of the Act, increasing the effective tax rate by 56.7%. The effective tax rate in 2018 includes favorable measurement period adjustments to the provisional amounts recorded in 2017 associated with the Act of $56 million, or 0.9%. The accounting for the reduction of deferred tax assets to the 21% tax rate was complete as of December 31, 2017, and the tax charge for the deemed repatriation transition tax was complete as of December 31, 2018.

A GILTI tax associated with the Otezla* divestiture was $808 million in 2019.

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

A U.S. Federal valuation allowance was established in 2018 and 2019 as a result of the Nektar equity investment fair value losses that would be considered limited as a capital loss.

U.S. Federal, state and foreign contingent tax matters includes a $81 million tax benefit in 2019 and $119 million tax benefit in 2018 with respect to lapse of statutes.

Fair value adjustments for contingent value rights are not deductible for tax purposes.

Non deductible R&D charges primarily result from acquisition related and milestone payments to former shareholders including Flexus Biosciences, Inc., Cardioxyl Pharmaceuticals, Inc. and IFM Therapeutics, Inc. in 2017.

Puerto Rico imposes an excise tax on the gross company purchase price of goods sold from BMS’s 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 BMS’s provision for income taxes when the excise tax is incurred.

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	2019			2018
Deferred tax assets
Foreign net operating loss carryforwards	$	2,480		$	2,978
State net operating loss and credit carryforwards	263			121
U.S. Federal net operating loss and credit carryforwards	88			67
Deferred income	160			188
Milestone payments and license fees	558			552
Inventory	56			114
Other foreign deferred tax assets	370			327
Share-based compensation	521			54
Other	434			377
Total deferred tax assets	4,930			4,778
Valuation allowance	(2,844		)	(3,193		)
Deferred tax assets net of valuation allowance	$	2,086		$	1,585

Deferred tax liabilities
Depreciation	$	(113	)	$	(61	)
Acquired intangible assets	(7,387		)	(220		)
Goodwill and other	(530		)	(533		)
Total deferred tax liabilities	$	(8,030	)	$	(814	)

Deferred tax (liabilities)/assets, net	$	(5,944	)	$	771

Recognized as:
Deferred income taxes assets – non-current	$	510		$	815
Deferred income taxes liabilities – non-current	(6,454		)	(19		)
Liabilities related to assets held-for-sale	—			(25		)
Total	$	(5,944	)	$	771

The U.S. Federal net operating loss carryforwards were $216 million at December 31, 2019. 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 2019 (certain amounts have unlimited lives).

At December 31, 2019, a valuation allowance of $2.8 billion was established for the following items: $2.4 billion primarily for foreign net operating loss and tax credit carryforwards, $206 million for state deferred tax assets including net operating loss and tax credit carryforwards and $218 million for U.S. Federal deferred tax assets including equity fair value adjustments and U.S. Federal net operating loss carryforwards.

Changes in the valuation allowance were as follows:



	Year Ended December 31,
Dollars in Millions	2019			2018			2017
Balance at beginning of year	$	3,193		$	2,827		$	3,078
Provision	75			458			50
Utilization	(423		)	(43		)	(335		)
Foreign currency translation	(132		)	(48		)	341
Acquisitions	228			—			2
Non U.S. rate change	(97		)	(1		)	(309		)
Balance at end of year	$	2,844		$	3,193		$	2,827

Income tax payments were $1,503 million in 2019, $747 million in 2018 and $546 million in 2017.

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 (excluding interest and penalties):



	Year Ended December 31,
Dollars in Millions	2019			2018			2017
Balance at beginning of year	$	995		$	1,155		$	995
Gross additions to tax positions related to current year	170			48			173
Gross additions to tax positions related to prior years	19			21			30
Gross additions to tax positions assumed in acquisitions	852			—			—
Gross reductions to tax positions related to prior years	(35		)	(106		)	(22		)
Settlements	(23		)	2			(20		)
Reductions to tax positions related to lapse of statute	(72		)	(119		)	(13		)
Cumulative translation adjustment	(1		)	(6		)	12
Balance at end of year	$	1,905		$	995		$	1,155

Additional information regarding unrecognized tax benefits is as follows:



	Year Ended December 31,
Dollars in Millions	2019		2018		2017
Unrecognized tax benefits that if recognized would impact the effective tax rate	$	1,809	$	853	$	1,002
Accrued interest	292		167		148
Accrued penalties	10		11		15

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, 2019 could decrease in the range of approximately $290 million to $330 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. 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 2019
Canada	2012 to 2019
France	2016 to 2019
Germany	2008 to 2019
Italy	2015 to 2019
Japan	2014 to 2019
Switzerland	2015 to 2019
UK	2012 to 2019