Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income before income taxes consists of the following:

	Year Ended December 31,
(in millions)	2021		2020		2019
Domestic	$	8,587	$	2,505	$	4,112
Foreign	(309)		(836)		1,048
Income before income taxes	$	8,278	$	1,669	$	5,160

The Income tax (expense) benefit consists of the following:

	Year Ended December 31,
(in millions)	2021		2020		2019
Federal:
Current	$	(1,776)	$	(1,450)	$	(1,646)
Deferred	250		164		843
	(1,526)		(1,286)		(803)
State:
Current	(228)		(198)		(135)
Deferred	(185)		97		42
	(413)		(101)		(93)
Foreign:
Current	(185)		(155)		(124)
Deferred	47		(38)		1,224
	(138)		(193)		1,100
Income tax (expense) benefit	$	(2,077)	$	(1,580)	$	204

The 2019 income tax benefit included a $1.2 billion deferred tax benefit related to intangible asset transfers from a foreign subsidiary to Ireland and the United States. In the fourth quarter of 2019, we completed an intra-entity asset transfer of certain intangible assets from a foreign subsidiary to Ireland. The transaction resulted in a step-up of the Irish tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets. As a result, we recognized a deferred tax asset of $1.2 billion on our Consolidated Financial Statements. We expect to be able to realize the deferred tax asset resulting from this intra-entity asset transfer. The impact of the intangible asset transfer from a foreign subsidiary to the United States was not material.

The reconciliation between the federal statutory tax rate applied to income before income taxes and our effective tax rate is summarized as follows:

	Year Ended December 31,
	2021		2020		2019
Federal statutory rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal benefit	2.5	%	4.2	%	0.4	%
Foreign earnings at different rates	(0.3)	%	(10.0)	%	2.5	%
Research and other credits	(1.6)	%	(6.9)	%	(1.9)	%
US tax on foreign earnings	1.1	%	7.2	%	4.3	%
Foreign-derived intangible income deduction	(1.6)	%	(8.0)	%	(3.2)	%
Deferred tax - intra-entity transfer of intangible assets	(0.7)	%	0.6	%	(24.0)	%
Settlement of tax examinations	(0.7)	%	(10.2)	%	(2.4)	%
Acquired IPR&D and related charges	—	%	56.2	%	—	%
Changes in valuation allowance	1.5	%	6.7	%	—	%
Non-taxable unrealized (gain) loss on investment	1.8	%	23.0	%	(5.0)	%
Other	2.1	%	10.9	%	4.3	%
Effective tax rate	25.1	%	94.7	%	(4.0)	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

	December 31,
(in millions)	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	413	$	587
Stock-based compensation	117		113
Reserves and accruals not currently deductible	700		444
Excess of tax basis over book basis of intangible assets	1,157		1,177
Upfront and milestone payments	1,310		1,144
Research and other credit carryforwards	249		219
Equity investments	117		116
Liability related to future royalties	274		247
Other, net	292		311
Total deferred tax assets before valuation allowance	4,629		4,358
Valuation allowance	(520)		(398)
Total deferred tax assets	4,109		3,960
Deferred tax liabilities:
Property, plant and equipment	(227)		(202)
Excess of book basis over tax basis of intangible assets	(6,719)		(6,168)
Other	(180)		(202)
Total deferred tax liabilities	(7,126)		(6,572)
Net deferred tax assets (liabilities)	$	(3,017)	$	(2,612)

The valuation allowance was $520 million and $398 million as of December 31, 2021 and 2020, respectively. The increase of our valuation allowance in 2021 was primarily related to California research and development tax credits.

The valuation allowance was $398 million and $217 million as of December 31, 2020 and 2019, respectively. The increase of our valuation allowance in 2020 was primarily related to acquired attributes related to Forty Seven and Immunomedics acquisitions, and capital losses related to our equity method investments.

As of December 31, 2021, we had U.S. federal net operating loss and tax credit carryforwards of approximately $250 million and $8 million, respectively, which will start to expire in 2022, if not utilized. In addition, we had state net operating loss and tax credit carryforwards of approximately $2.8 billion and $768 million, respectively. The state net operating loss and state tax credit carryforwards will start to expire in 2022 if not utilized.

Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization.

We file federal, state and foreign income tax returns in the United States and in many foreign jurisdictions. For federal income tax purposes, the statute of limitations is open for 2016 and onwards and 2013 and onwards for California income tax purposes. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years.

Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service and Irish tax authorities for our 2016 to 2018 tax years. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.

Of the total unrecognized tax benefits, $800 million and $1.2 billion as of December 31, 2021 and 2020, respectively, if recognized, would reduce our effective tax rate in the period of recognition. Interest and penalties related to unrecognized tax benefits included income tax expense of $41 million, income tax benefit of $82 million and income tax expense of $105 million on our Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 respectively. Accrued interest and penalties related to unrecognized tax benefits were $218 million and $177 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately $100 million in the next 12 months due to potential settlements with various taxing authorities.

The following is a rollforward of our total gross unrecognized tax benefits:

	Year Ended December 31,
(in millions)	2021		2020		2019
Balance, beginning of period	$	1,614	$	2,031	$	1,595
Tax positions related to current year:
Additions	147		121		138
Reductions	—		—		—
Tax positions related to prior years:
Additions	161		398		405
Reductions	(179)		(481)		—
Settlements	(28)		(454)		(104)
Lapse of statute of limitations	(2)		(1)		(3)
Balance, end of period	$	1,713	$	1,614	$	2,031

In connection with the Tax Cuts and Jobs Act, we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that is payable over an eight-year period. As of December 31, 2021 and 2020, we have accrued $4.0 billion and $4.5 billion, respectively, for transition tax. Of the amounts accrued as of December 31, 2021, approximately $473 million is expected to be paid within one year.