Taxes on Income

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Taxes on Income

Taxes on Income

A reconciliation between the effective tax rate for income from continuing operations and the U.S. statutory rate is as follows:

	2021				2020				2019
	Amount		Tax Rate		Amount		Tax Rate		Amount		Tax Rate
U.S. statutory rate applied to income from continuing operations before taxes	$	2,915	21.0	%	$	1,231	21.0	%	$	1,506	21.0	%
Differential arising from:
Foreign earnings	(1,446)		(10.4)		(965)		(16.5)		(461)		(6.4)
GILTI and the foreign-derived intangible income deduction	(75)		(0.5)		349		6.0		323		4.5
Tax settlements	(275)		(2.0)		(13)		(0.2)		(139)		(1.9)
R&D tax credit	(81)		(0.6)		(108)		(1.8)		(116)		(1.6)
Acquisition of VelosBio	(9)		(0.1)		559		9.5		—		—
Acquisition of Pandion	356		2.6		—		—		—		—
Valuation allowances	102		0.7		37		0.6		115		1.6
Restructuring	61		0.4		105		1.8		39		0.5
Acquisition-related costs, including amortization	8		0.1		38		0.6		70		1.0
State taxes	2		—		57		1.0		(12)		(0.2)
Acquisition of OncoImmune	—		—		97		1.7		—		—
Acquisition of Peloton	—		—		—		—		209		2.9
Tax Cuts and Jobs Act of 2017	—		—		—		—		117		1.6
Other	(37)		(0.2)		(47)		(0.8)		(86)		(1.2)
	$	1,521	11.0	%	$	1,340	22.9	%	$	1,565	21.8	%

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017 and the Company reflected the impact of the TCJA in its 2017 financial statements. However, since application of certain provisions of the TCJA

remained subject to further interpretation, in certain instances the Company made reasonable estimates of the effects of the TCJA, which were since finalized and resulted in additional income tax expense in 2018 and 2019. The Company’s remaining transition tax liability under the TCJA, which has been reduced by payments and the utilization of foreign tax credits, was $2.6 billion at December 31, 2021, of which $390 million is included in Income taxes payable and the remainder of $2.2 billion is included in Other Noncurrent Liabilities. As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes 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.

The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the U.S., particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2022), thereby yielding a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. Beginning in 2021, the Company has an additional tax incentive in the form of a tax holiday in Switzerland for a newly active legal entity which is effective through 2030.

Income from continuing operations before taxes consisted of:

Years Ended December 31	2021		2020		2019
Domestic	$	1,854	$	(3,814)	$	(66)
Foreign	12,025		9,677		7,237
	$	13,879	$	5,863	$	7,171

Taxes on income from continuing operations consisted of:

Years Ended December 31	2021		2020		2019
Current provision
Federal	$	74	$	893	$	642
Foreign	1,273		969		1,523
State	(13)		44		(40)
	1,334		1,906		2,125
Deferred provision
Federal	240		(605)		(328)
Foreign	(77)		64		(228)
State	24		(25)		(4)
	187		(566)		(560)
	$	1,521	$	1,340	$	1,565

Deferred income taxes at December 31 consisted of:

	2021				2020
	Assets		Liabilities		Assets		Liabilities
Product intangibles and licenses	$	—	$	2,933	$	109	$	1,250
Inventory related	119		370		43		315
Accelerated depreciation	—		589		—		587
Equity investments	—		335		—		175
Pensions and other postretirement benefits	487		338		826		248
Compensation related	301		—		235		—
Unrecognized tax benefits	75		—		117		—
Net operating losses and other tax credit carryforwards	867		—		764		—
Other	434		180		743		81
Subtotal	2,283		4,745		2,837		2,656
Valuation allowance	(287)				(404)
Total deferred taxes	$	1,996	$	4,745	$	2,433	$	2,656
Net deferred income taxes			$	2,749			$	223
Recognized as:
Other Assets	$	692			$	782
Deferred Income Taxes			$	3,441			$	1,005

The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2021, $181 million of deferred tax assets on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $164 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $686 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards. Valuation allowances of $123 million have been established on these U.S. tax credit carryforwards and NOL carryforwards.

Income taxes paid in 2021, 2020 and 2019 (including amounts attributable to discontinued operations) were $2.4 billion, $2.7 billion and $4.5 billion, respectively. Tax benefits relating to stock option exercises were $21 million in 2021, $12 million in 2020 and $65 million in 2019.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2021		2020		2019
Balance January 1	$	1,537	$	1,225	$	1,893
Additions related to current year positions	306		298		199
Additions related to prior year positions	63		110		46
Reductions for tax positions of prior years (1)	(230)		(4)		(454)
Settlements (1)	(46)		(70)		(356)
Lapse of statute of limitations (2)	(58)		(22)		(103)
Spin-off of Organon	(43)		—		—
Balance December 31	$	1,529	$	1,537	$	1,225

(1)    Amounts in 2021 and 2019 reflect settlements with the IRS discussed below.

(2) Amount in 2019 includes $78 million related to the divestiture of Merck’s Consumer Care business in 2014.

If the Company were to recognize the unrecognized tax benefits of $1.5 billion at December 31, 2021, the income tax provision would reflect a favorable net impact of $1.5 billion.

The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2021 could decrease by up to approximately $11 million in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s

examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures.

Interest and penalties associated with uncertain tax positions amounted to a (benefit) expense of $(37) million in 2021, $16 million in 2020 and $(53) million in 2019. These amounts reflect the beneficial impacts of various tax settlements, including the settlements discussed below. Liabilities for accrued interest and penalties were $192 million and $205 million as of December 31, 2021 and 2020, respectively.

In 2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of $190 million (of which $172 million related to continuing operations and $18 million related to discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $236 million net tax benefit in 2021 (of which $207 million related to continuing operations and $29 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.

In 2019, the IRS concluded its examinations of Merck’s 2012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of $107 million (of which $142 million related to discontinued operations with an offsetting credit of $35 million related to continuing operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $364 million net tax benefit in 2019 (of which $106 million related to continuing operations and $258 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for.

The IRS is currently conducting examinations of the Company’s tax returns for the years 2017 and 2018. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2003 through 2021.