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Taxes on Income
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Taxes on Income Taxes on Income
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
 202020192018
  
AmountTax RateAmountTax RateAmountTax Rate
U.S. statutory rate applied to income before taxes
$1,846 21.0 %$2,408 21.0 %$1,827 21.0 %
Differential arising from:
Foreign earnings(1,242)(14.1)(1,020)(8.9)(245)(2.8)
GILTI and the foreign-derived intangible income deduction
364 4.1 336 2.9 (25)(0.3)
R&D tax credit(110)(1.3)(118)(1.0)(96)(1.1)
Tax settlements(13)(0.2)(403)(3.5)(22)(0.3)
Acquisition of VelosBio559 6.3 — — — — 
Restructuring105 1.2 39 0.3 56 0.6 
Acquisition of OncoImmune97 1.1 — — — — 
State taxes67 0.8 (2)— 201 2.3 
Acquisition-related costs, including amortization
46 0.5 95 0.8 267 3.1 
Valuation allowances
42 0.5 113 1.0 269 3.1 
Acquisition of Peloton— — 209 1.8 — — 
Tax Cuts and Jobs Act of 2017— — 117 1.0 289 3.3 
Other(52)(0.5)(87)(0.7)(13)(0.1)
 $1,709 19.4 %$1,687 14.7 %$2,508 28.8 %
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 $3.0 billion at December 31, 2020, of which $390 million is included in Income taxes payable and the remainder of $2.6 billion is included in Other Noncurrent Liabilities. As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable.
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the United States, particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2022), thereby yielding a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. Towards the end of 2020, a new reduced tax rate arrangement was agreed to in Switzerland for certain newly active legal entities.
Income before taxes consisted of:
Years Ended December 31202020192018
Domestic$(3,492)$439 $3,717 
Foreign12,283 11,025 4,984 
 $8,791 $11,464 $8,701 
Taxes on income consisted of:
Years Ended December 31202020192018
Current provision
Federal$962 $514 $536 
Foreign1,362 1,806 2,281 
State53 (77)200 
 2,377 2,243 3,017 
Deferred provision
Federal(605)(330)(402)
Foreign(40)(240)(64)
State(23)14 (43)
 (668)(556)(509)
 $1,709 $1,687 $2,508 
Deferred income taxes at December 31 consisted of:
 20202019
  
AssetsLiabilitiesAssetsLiabilities
Product intangibles and licenses$141 $1,250 $442 $1,778 
Inventory related43 335 32 354 
Accelerated depreciation— 588 — 594 
Equity investments— 175 — — 
Pensions and other postretirement benefits834 248 785 191 
Compensation related252 — 322 — 
Unrecognized tax benefits117 — 109 — 
Net operating losses and other tax credit carryforwards794 — 897 — 
Other808 81 764 84 
Subtotal2,989 2,677 3,351 3,001 
Valuation allowance(433) (1,100) 
Total deferred taxes$2,556 $2,677 $2,251 $3,001 
Net deferred income taxes $121  $750 
Recognized as:
Other Assets$894 $719 
Deferred Income Taxes $1,015  $1,470 
The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2020, $464 million of deferred taxes on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $433 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $330 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards, all of which are expected to be fully utilized prior to expiry.
Income taxes paid in 2020, 2019 and 2018 were $2.7 billion, $4.5 billion and $1.5 billion, respectively. Tax benefits relating to stock option exercises were $55 million in 2020, $65 million in 2019 and $77 million in 2018.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
202020192018
Balance January 1$1,225 $1,893 $1,723 
Additions related to current year positions298 199 221 
Additions related to prior year positions110 46 142 
Reductions for tax positions of prior years (1)
(4)(454)(73)
Settlements (1)
(70)(356)(91)
Lapse of statute of limitations (2)
(22)(103)(29)
Balance December 31$1,537 $1,225 $1,893 
(1)    Amounts in 2019 reflects the settlement 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, 2020, 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, 2020 could decrease by up to approximately $160 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 an expense (benefit) of $27 million in 2020, $(101) million in 2019 and $51 million in 2018. These amounts reflect the beneficial impacts of various tax settlements, including the settlement discussed below. Liabilities for accrued interest and penalties were $268 million and $243 million as of December 31, 2020 and 2019, respectively.
In 2019, the Internal Revenue Service (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. 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. 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 2015 and 2016. 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 2020.