Taxes on Earnings from Continuing Operations

12 Months Ended

Dec. 31, 2020

Taxes on Earnings from Continuing Operations

Taxes on Earnings from Continuing Operations

Note 15 — Taxes on Earnings from Continuing Operations

Taxes on earnings from continuing operations reflect the annual effective rates, including charges for interest and penalties. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts.

In 2020, taxes on earnings from continuing operations include the recognition of approximately $170 million of tax benefits associated with the impairment of certain assets, approximately $140 million of net tax benefits as a result of the resolution of various tax positions related to prior years, and approximately $100 million in excess tax benefits associated with share-based compensation.  In 2020, taxes on earnings from continuing operations also include a $26 million increase to the transition tax associated with the 2017 TCJA.  The $26 million increase to the transition tax liability was the result of the resolution of various tax positions related to prior years.  This adjustment increased the cumulative net tax expense related to the TCJA to $1.53 billion.  The one-time transition tax is based on Abbott’s total post-1986 earnings and profits (E&P) that were previously deferred from U.S. income taxes.  The tax computation also requires the determination of the amount of post-1986 E&P considered held in cash and other specified assets.  As of December 31, 2020, the remaining balance of Abbott’s transition tax obligation is approximately $805 million, which will be paid over the next six years as allowed by the TCJA.

In 2019, taxes on earnings from continuing operations included an $86 million reduction of the transition tax and $68 million of tax expense resulting from tax legislation enacted in the fourth quarter of 2019 in India.  The $86 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by the U.S. Department of Treasury in 2019.  In 2018, taxes on earnings from continuing operations included $98 million of net tax expense related to the settlement of Abbott’s 2014-2016 federal income tax audit in the U.S., partial settlement of the former St. Jude Medical consolidated group’s 2014 and 2015 federal income tax returns in the U.S. and audit settlements in various countries.  In 2018, Abbott also recorded $130 million of additional tax expense related to the TCJA; the $130 million reflected a $120 million increase in the transition tax from $2.89 billion to $3.01 billion and a $10 million reduction in the net benefit related to the remeasurement of deferred tax assets and liabilities.

Undistributed foreign earnings remain indefinitely reinvested in foreign operations.  Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in its foreign entities is not practicable.  In the U.S., Abbott’s federal income tax returns through 2016 are settled.  There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant.  Reserves for interest and penalties are not significant.

Note 15 — Taxes on Earnings from Continuing Operations (Continued)

Earnings from continuing operations before taxes, and the related provisions for taxes on earnings from continuing operations, were as follows:

(in millions)	2020		2019		2018
Earnings From Continuing Operations Before Taxes:
Domestic	$	1,588	$	889	$	(430)
Foreign		3,380		3,188		3,303
Total	$	4,968	$	4,077	$	2,873

(in millions)	2020		2019		2018
Taxes on Earnings From Continuing Operations:
Current:
Domestic	$	39	$	291	$	(812)
Foreign		566		590		606
Total current		605		881		(206)
Deferred:
Domestic		(18)		(305)		832
Foreign		(90)		(186)		(87)
Total deferred		(108)		(491)		745
Total	$	497	$	390	$	539

Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:

	2020		2019		2018
Statutory tax rate on earnings from continuing operations	21.0	%	21.0	%	21.0	%
Impact of foreign operations	(3.3)		(5.0)		(5.4)
Impact of TCJA and other related items	0.5		(2.1)		6.3
Foreign-derived intangible income benefit	(1.0)		(2.0)		(1.9)
Domestic impairment loss	(2.7)		—		(2.1)
Excess tax benefits related to stock compensation	(1.9)		(2.5)		(3.1)
Research tax credit	(1.0)		(1.2)		(1.8)
Resolution of certain tax positions pertaining to prior years	(2.8)		—		3.4
Intercompany restructurings and integration	0.5		—		—
State taxes, net of federal benefit	0.5		0.8		0.4
All other, net	0.2		0.6		2.0
Effective tax rate on earnings from continuing operations	10.0	%	9.6	%	18.8	%

Impact of foreign operations is primarily derived from operations in Puerto Rico, Switzerland, Ireland, the Netherlands, Costa Rica, Singapore, and Malta.

Note 15 — Taxes on Earnings from Continuing Operations (Continued)

The tax effect of the differences that give rise to deferred tax assets and liabilities were as follows:

(in millions)	2020		2019
Deferred tax assets:
Compensation and employee benefits	$	1,003	$	982
Other, primarily reserves not currently deductible, and NOL’s and credit carryforwards		2,383		2,378
Trade receivable reserves		196		190
Inventory reserves		146		110
Lease liabilities		259		209
Deferred intercompany profit		254		259
Total deferred tax assets before valuation allowance		4,241		4,128
Valuation allowance		(1,060)		(978)
Total deferred tax assets		3,181		3,150
Deferred tax liabilities:
Depreciation		(297)		(219)
Right of Use lease assets		(251)		(209)
Other, primarily the excess of book basis over tax basis of intangible assets		(2,876)		(3,258)
Total deferred tax liabilities		(3,424)		(3,686)
Total net deferred tax assets (liabilities)	$	(243)	$	(536)

Abbott has incurred losses in a foreign jurisdiction where realization of the future economic benefit is so remote that the benefit is not reflected as a deferred tax asset.

The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled:

(in millions)	2020		2019
January 1	$	1,175	$	1,120
Increase due to current year tax positions		190		137
Increase due to prior year tax positions		97		75
Decrease due to prior year tax positions		(144)		(117)
Settlements		(27)		(32)
Lapse of statute		(81)		(8)
December 31	$	1,210	$	1,175

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $1.08 billion. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease within a range of $70 million to $430 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters.