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Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

 

16. Income Taxes

The components of income before income taxes and equity in earnings (losses) of unconsolidated affiliates are as follows:

 

 

Year Ended December 31,

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

Domestic

 

$

(504

)

 

$

(521

)

 

$

(527

)

Foreign

 

 

856

 

 

 

849

 

 

 

821

 

 

 

$

352

 

 

$

328

 

 

$

294

 

 

The components of income tax expense attributable to continuing operations are as follows:

 

 

Year Ended December 31,

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

Current expense:

 

 

 

 

 

 

 

 

 

 

 

 

Federal and state

 

$

11

 

 

$

17

 

 

$

(3

)

Foreign

 

 

248

 

 

 

233

 

 

 

222

 

 

 

 

259

 

 

 

250

 

 

 

219

 

Deferred (benefit) expense:

 

 

 

 

 

 

 

 

 

 

 

 

Federal and state

 

 

(109

)

 

 

(170

)

 

 

(1,167

)

Foreign

 

 

(34

)

 

 

(21

)

 

 

(44

)

 

 

 

(143

)

 

 

(191

)

 

 

(1,211

)

 

 

$

116

 

 

$

59

 

 

$

(992

)

    

The differences between the Company’s consolidated income tax expense attributable to continuing operations and the expense computed at the United States statutory income tax rate of 21% in 2019, 21% in 2018 and 35% in 2017 were as follows:

 

 

Year Ended December 31,

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

Federal income tax expense at statutory rate

 

$

74

 

 

$

69

 

 

$

103

 

State and local income taxes, net of federal effect

 

 

 

 

 

(2

)

 

 

(14

)

Research and development

 

 

(21

)

 

 

(20

)

 

 

(9

)

Foreign nontaxable interest income

 

 

 

 

 

 

 

 

(7

)

United States taxes recorded on foreign earnings(*)

 

 

9

 

 

 

40

 

 

 

6

 

Tax contingencies

 

 

27

 

 

 

16

 

 

 

17

 

Foreign Derived Intangible Income (“FDII”)

 

 

20

 

 

 

(25

)

 

 

 

Foreign rate differential

 

 

26

 

 

 

27

 

 

 

(97

)

Equity compensation

 

 

(14

)

 

 

(8

)

 

 

(19

)

Non-taxable gain on acquisition

 

 

(5

)

 

 

 

 

 

 

Non-controlling interest

 

 

(6

)

 

 

(3

)

 

 

(5

)

Tax Act impact

 

 

 

 

 

(35

)

 

 

(966

)

Other

 

 

6

 

 

 

 

 

 

(1

)

 

 

$

116

 

 

$

59

 

 

$

(992

)

(*) Includes impact of GILTI, and other U.S. taxes on foreign earnings.

In 2019 the U.S. Treasury Department issued final regulations on the transition tax and proposed regulations on FDII, which was introduced by the Tax Act described below.  While the final regulations related to the transition tax did not have a material impact on the Company, the proposed guidance for FDII had an unfavorable impact. Although the proposed guidance for FDII is not authoritative and subject to change in the regulatory review process, the company reversed the tax benefit recorded in 2018 by recording a tax expense of $25 million for this impact. It is expected that during 2020 the U.S. Treasury Department will issue final regulations on FDII.

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act is comprehensive legislation that includes provisions that lower the federal corporate income tax rate from 35% to 21% beginning in 2018 and imposes a one-time transition tax on undistributed foreign earnings. ASC 740 “Income Taxes” generally requires the effects of the tax law change to be recorded in the

period of enactment. Staff Accounting Bulletin No. 118 (“SAB 118”) addresses situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete an accounting assessment and allows companies to record provisional amounts during a measurement period not to extend beyond one year.  Subsequent changes to provisional amounts are reported in the period in which they are determined.

In 2018 the Company recorded a $35 million benefit related to finalizing the accounting related to the Tax Act. Additionally, in 2018 the Company recorded a benefit of $25 million related to FDII, as well as a tax expense of $35 million related to GILTI, as a result of the new provisions of the Tax Act.

In 2017, due to the Tax Act, the Company revalued its U.S. deferred tax assets and liabilities and recorded a benefit to deferred income taxes of $966 million.  

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $2,997 million at December 31, 2019. With the enactment of the Tax Act, the Company does not consider any of its foreign earnings as indefinitely reinvested.

The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below:

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Deferred income tax assets:

 

 

 

 

 

 

 

 

Net operating loss and capital loss carryforwards

 

$

246

 

 

$

244

 

Tax credit carryforwards

 

 

332

 

 

 

300

 

Accrued expenses and unearned income

 

 

55

 

 

 

70

 

Employee benefits

 

 

168

 

 

 

181

 

Operating lease liability

 

 

119

 

 

 

 

Other

 

 

79

 

 

 

51

 

 

 

 

999

 

 

 

846

 

Valuation allowance for deferred income tax assets

 

 

(266

)

 

 

(226

)

Total deferred income tax assets

 

 

733

 

 

 

620

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

(1,105

)

 

 

(1,209

)

Operating lease right-of-use assets

 

 

(119

)

 

 

 

Other

 

 

(36

)

 

 

(38

)

Total deferred income tax liabilities

 

 

(1,260

)

 

 

(1,247

)

Net deferred income tax liabilities

 

$

(527

)

 

$

(627

)

During 2019 the net deferred tax liabilities decreased mainly due to amortization of intangibles related to the merger between Quintiles and IMS health (“Merger”).

The Company had federal, state and local, and foreign tax loss carryforwards and tax credits, the tax effect of which was $622 million as of December 31, 2019. Of this amount, $31 million has an indefinite carryforward period, and the remaining $591 million expires at various times beginning in 2020. Some of the federal losses are subject to limitations under the Internal Revenue Code, however, management expects these losses to be utilized during the carryforward periods.

In 2019, the Company increased its valuation allowance by $40 million to $266 million at December 31, 2019 from $226 million at December 31, 2018. The valuation allowance increased primarily due to current year branch basket foreign tax credits that the Company has determined are not more likely than not to be used before their expiration. The valuation allowance also increased due to an increase in the value of the U.S. state net operating losses.

A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below:

 

 

Year Ended December 31,

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

Balance at January 1

 

$

94

 

 

$

82

 

 

$

64

 

Additions based on tax positions related to the current year

 

 

5

 

 

 

4

 

 

 

11

 

Additions for income tax positions of prior years

 

 

33

 

 

 

26

 

 

 

13

 

Impact of changes in exchange rates

 

 

 

 

 

(2

)

 

 

4

 

Settlements with tax authorities

 

 

(1

)

 

 

(2

)

 

 

(2

)

Reductions for income tax positions of prior years

 

 

(6

)

 

 

 

 

 

(2

)

Reductions due to the lapse of the applicable statute of limitations

 

 

(5

)

 

 

(14

)

 

 

(6

)

Balance at December 31

 

$

120

 

 

$

94

 

 

$

82

 

As of December 31, 2019, the Company had total gross unrecognized income tax benefits of $120 million associated with over 100 jurisdictions in which the Company conducts business that, if recognized, would reduce the Company’s effective income tax rate.

The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of income. In 2019, 2018 and 2017, the amount of interest and penalties recorded as an addition to income tax expense in the accompanying consolidated statements of income was $2 million, $0 million and $3 million, respectively. As of December 31, 2019 and 2018, the Company had accrued approximately $18 million and $16 million, respectively, of interest and penalties.

The Company believes that it is reasonably possible that a decrease of up to $13 million in gross unrecognized income tax benefits for federal, state and foreign exposure items may be necessary within the next 12 months due to lapse of statutes of limitations or uncertain tax positions being effectively settled. The Company believes that it is reasonably possible that a decrease of up to $23 million in gross unrecognized income tax benefits for foreign items may be necessary within the next 12 months due to payments. For the remaining uncertain income tax positions, it is difficult at this time to estimate the timing of the resolution.

The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the tax years that remain open for examination by tax authorities in the most significant jurisdictions in which the Company operates:

United States

 

2015-2018

India

 

2006-2019

Japan

 

2013-2018

United Kingdom

 

2018

Switzerland

 

2014-2018

In certain of the jurisdictions noted above, the Company operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that tax years are technically not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.

Due to the geographic breadth of the Company’s operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes that may be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of income tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, the Company will record additional income tax expense or income tax benefit in the period in which such resolution occurs.