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Income Taxes | 12 Months Ended
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Jan. 03, 2021
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The provision for taxes on income consists of:
(Dollars in Millions) |  | 2020 |  | 2019 |  | 2018 |
Currently payable: |  |  |  |  |  |  |
U.S. taxes |  | $ | 1,026 |  |  | 1,941 |  |  | 1,284 |  |
International taxes |  | 1,898 |  |  | 2,744 |  |  | 2,434 |  |
Total currently payable |  | 2,924 |  |  | 4,685 |  |  | 3,718 |  |
Deferred: |  |  |  |  |  |  |
U.S. taxes |  | (76) |  |  | (814) |  |  | 1,210 |  | (1)
International taxes |  | (1,065) |  |  | (1,662) |  |  | (2,226) |  |
Total deferred |  | (1,141) |  |  | (2,476) |  |  | (1,016) |  |
Provision for taxes on income |  | $ | 1,783 |  |  | 2,209 |  |  | 2,702 |  |
(1) Includes $1.4 billion of deferred tax expense for the adoption of the deferred method to account for GILTI. A comparison of income tax expense at the U.S. statutory rate of 21% in fiscal years 2020, 2019 and 2018, to the Company’s effective tax rate is as follows:
(Dollars in Millions) |  | 2020 |  | 2019 |  | 2018 |
U.S. |  | $ | 4,312 |  |  | 3,543 |  |  | 5,575 |  |
International |  | 12,185 |  |  | 13,785 |  |  | 12,424 |  |
Earnings before taxes on income: |  | $ | 16,497 |  |  | 17,328 |  |  | 17,999 |  |
Tax rates: |  |  |  |  |  |  |
U.S. statutory rate |  | 21.0 | % |  | 21.0 |  |  | 21.0 |  |
International operations (1) |  | (9.9) |  |  | (5.9) |  |  | (3.7) |  |
U.S. taxes on international income (2) |  | 2.7 |  |  | 1.8 |  |  | 1.4 |  |
Tax benefits on Capital Loss |  | (1.2) |  |  | (0.3) |  | (4) | — |  |
Tax benefits on share-based compensation |  | (1.5) |  |  | (0.5) |  |  | (1.5) |  |
TCJA and related impacts |  | 0.7 |  |  | (3.9) |  | (3) | (1.9) |  | (3)
All other |  | (1.0) |  |  | 0.5 |  | (4) | (0.3) |  |
Effective Rate |  | 10.8 | % |  | 12.7 |  |  | 15.0 |  |
(1) For all periods presented the Company has subsidiaries operating in Puerto Rico under various tax incentives. International operations reflects the impacts of operations in jurisdictions with statutory tax rates different than the U.S., particularly Ireland, Switzerland and Puerto Rico, which is a favorable impact on the effective tax rate as compared with the U.S. statutory rate. The 2020 and 2019 amounts include the impact of the new tax legislation enactment in Switzerland, which is further described below. (2) Includes the impact of the GILTI tax, the Foreign-Derived Intangible Income deduction and other foreign income that is taxable under the U.S. tax code. (3) Represents impact of adjustments to balances originally recorded as part of the 2017 TCJA provisional tax charge. Further information provided below. (4) Certain prior year amounts have been reclassified to conform to current year presentation. The fiscal year 2020 tax rate decreased by 1.9% compared to the fiscal year 2019 tax rate, which was primarily driven by the following items. In fiscal year 2019, Switzerland enacted the Federal Act on Tax Reform and AHV Financing (TRAF) which became effective on January 1, 2020. The Federal transitional provisions of TRAF allow companies, under certain conditions, to adjust the tax basis in certain assets to fair value (i.e., “step-up”) to be depreciated and amortized resulting in an incremental Swiss tax deduction over the transitional period. TRAF also provides for parameters which enable the Swiss cantons to establish localized tax rates and regulations for companies. The new cantonal tax parameters include favorable tax benefits for patents and additional research and development tax deductions. The cantonal transitional provisions of TRAF allowed companies to elect either 1) tax basis step-up similar to the Federal transition benefit or 2) alternative statutory tax rate for a period not to exceed 5 years. The Company currently has operations located in various Swiss cantons. During the fiscal year 2019, as described in further detail below, the Company recorded the impacts of the TRAF that were enacted in that period. During the fiscal year 2020, the final canton where the Company maintains significant operations enacted TRAF legislation. Additionally, the Company received rulings from the Swiss Federal and cantonal tax authorities in the remaining jurisdictions where it has significant operations. These rulings resulted in the Company revising its estimate on the tax basis adjustment (i.e., “step-up”) for its assets and as a result, the Company recorded additional deferred tax benefits in 2020. The Company recognized a net benefit in the fiscal year 2020 for Swiss Tax Reform of approximately $0.4 billion or 2.6% benefit to the Company’s annual effective tax rate, comprised of the following items: •approximately $0.3 billion tax benefit relating to the remeasurement of Swiss deferred tax assets and liabilities for the change in the Federal and cantonal tax rates, where enactment occurred in the fiscal year 2020; this benefit has been reflected as “International Operations” on the Company’s effective tax rate reconciliation. •a $450 million deferred tax asset related to the estimated value of a Federal tax basis step-up of the Company’s Swiss subsidiaries’ assets as described above; this benefit has been reflected as “International Operations” on the Company’s effective tax rate reconciliation. •approximately $0.3 billion of U.S. deferred tax expense relating to the GILTI deferred tax liability resulting from the remeasurement of the Swiss deferred tax assets and liabilities in the fiscal year 2020. This benefit has been reflected as “U.S. tax on international income” on the Company’s effective tax rate reconciliation. The Company does not expect to receive future rulings regarding the transitional provisions of TRAF. Also, in the fiscal fourth quarter of 2020, the Company recognized a capital loss on certain U.S. affiliates related to the previously impaired book value of certain intangibles, which reduced the 2020 tax rate by approximately 1.2% which is reflected as a “Tax Benefits on Capital Loss” on the effective tax rate reconciliation. In addition in the fiscal year 2020, the Company had lower income in higher tax jurisdictions, primarily driven by: •the impact of the accrual of litigation costs related to Talc for $4.0 billion which reduced the U.S. earnings before taxes at an effective tax rate of 23.5%; •the accrual of additional legal costs, including an additional $1.0 billion associated with a revised agreement in principle to settle opioid litigation at an effective tax rate of 21.4% The Company also generated additional tax benefits from stock-based compensation that were either exercised or vested; reduced the contingent consideration liability related to the Auris Health acquisition (see Note 18); and reversal of some of its unrecognized tax benefits due to the completion of several years of tax examinations in certain jurisdictions during the fiscal year 2020. The fiscal year 2019 tax rate decreased by 2.3% compared to the fiscal year 2018 tax rate. In addition to the impact of TRAF discussed in more detail below, the primary drivers of the net decrease were as follows: •The Company reorganized the ownership structure of certain wholly-owned international subsidiaries in the fiscal fourth quarter of 2019, which resulted in a reduction of certain withholding and local taxes that it had previously recognized as part of the provisional Tax Cuts and Jobs Act (TCJA) tax charge in the fiscal year 2017 and finalized in the fiscal year 2018. Following the completion of this restructuring and approval by the applicable local authorities, the Company reversed a deferred tax liability of $0.6 billion and a related deferred tax asset of $0.2 billion for U.S. foreign tax credits, for a net deferred tax benefit of $0.4 billion decreasing the annual effective tax rate by 2.2%. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation. •The impact of the agreement in principle to settle opioid litigation for $4 billion (see Note 19 to the Consolidated Financial Statements) which reduced the U.S. earnings before taxes at an effective tax rate of 23.5% and decreased the Company’s annual effective tax rate by approximately 2.1%. •In December of fiscal year 2019, the U.S. Treasury issued final foreign tax credit regulations, which resulted in the Company revising the amount of foreign tax credits that were initially recorded in the fiscal year 2017 as part of the provisional TCJA tax charge. As a result, the Company recorded an increased deferred tax asset related to these foreign tax credits of approximately $0.3 billion or 1.7% to the annual effective tax rate. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation. •The Company reassessed its uncertain tax positions related to the current IRS audit and increased its unrecognized tax benefit by $0.3 billion liability which increased the annual effective tax rate by approximately 1.5% (see section on Unrecognized Tax Benefits for additional information). As these positions were related to uncertain tax regarding international transfer pricing, this expense has been classified as “International Operations” on the Company’s effective tax rate reconciliation. Subsequent to December 29, 2019, the Company received and agreed to Notices of Proposed Adjustments (NOPAs) from the IRS. The Company believes it is adequately reserved for potential exposures. •There were several one-time tax impacts that resulted in a cumulative net tax benefit to the 2018 annual effective tax rate of 1.2%. These items included the LifeScan divestiture, the adjustment to the 2017 provisional TCJA tax charge and the acceleration of certain tax deductions as part of the 2017 tax return. •More income in higher tax jurisdictions relative to lower tax jurisdictions as compared to 2018. As described above for the Swiss tax legislation, in the fiscal year 2019, the Company recorded a net tax expense of $0.1 billion which increased the effective tax rate for the fiscal year 2019 by approximately 0.6%. This net tax expense related to federal and certain cantonal enactments in the fiscal year 2019 consisting of the following provisions: •approximately $0.6 billion tax expense relating to the remeasurement of Swiss deferred tax assets and liabilities for the change in the Federal and cantonal tax rates, where enactment occurred by December 29, 2019; this expense has been reflected as “International Operations” on the Company’s effective tax rate reconciliation. •a $0.9 billion deferred tax asset related to the estimated value of a Federal tax basis step-up of the Company’s Swiss subsidiaries’ assets; this benefit has been reflected as “International Operations” on the Company’s effective tax rate reconciliation. •approximately $450 million of U.S. deferred tax expense relating to the GILTI deferred tax liability resulting from the remeasurement of the Swiss deferred tax assets and liabilities and the new deferred tax asset for the Federal step-up. This benefit has been reflected as “U.S. tax on international income” on the Company’s effective tax rate reconciliation. In the fiscal year 2018, the Company completed its full assessment and finalized the accounting for the impact of the TCJA. The Company recorded net adjustments to the above components of the provisional charge of approximately $0.2 billion. These revisions were based on updated estimates and additional analysis by management as well as applying interpretative guidance issued by the U.S. Department of Treasury to the facts and circumstances that existed as of the TCJA enactment date. This charge was primarily related to additional deferred tax liabilities for foreign local and withholding taxes for the remaining balance of undistributed foreign earnings as of December 31, 2017 that were not provided for in the 2017 provisional charge. As described in Note 1, in the fiscal year 2018, the Company elected to treat GILTI as a period expense under the deferred method and recorded a deferred tax cost of approximately $1.4 billion in the fiscal year 2018 related to facts and circumstances that existed on the date of TCJA enactment. During 2018, the Company reorganized the ownership structure of certain foreign subsidiaries which resulted in a reduction of certain foreign withholding taxes that it had recognized as part of the provisional TCJA tax charge in the fourth quarter of 2017. Following the completion of this restructuring and as a result of clarification by Swiss tax authorities regarding the applicability of withholding tax to repatriation of certain earnings, the Company reversed a deferred tax liability of $2.8 billion and a related deferred tax asset of $0.9 billion for U.S. foreign tax credits, for a net deferred tax benefit of $1.9 billion. This benefit has been reflected as “TCJA and related impacts” on the Company’s effective tax rate reconciliation. Temporary differences and carryforwards at the end of fiscal years 2020 and 2019 were as follows:
|  | 2020 Deferred Tax |  | 2019 Deferred Tax*
(Dollars in Millions) |  | Asset |  | Liability |  | Asset |  | Liability
Employee related obligations |  | $ | 2,434 |  |  |  |  | 2,473 |  |  |
Stock based compensation |  | 627 |  |  |  |  | 595 |  |  |
Depreciation & amortization |  | 721 |  |  |  |  | 1,122 |  |  |
Non-deductible intangibles |  |  |  | (6,567) |  |  |  |  | (5,835) |
International R&D capitalized for tax |  | 1,517 |  |  |  |  | 1,189 |  |  |
Reserves & liabilities |  | 3,466 |  |  |  |  | 2,337 |  |  |
Income reported for tax purposes |  | 1,705 |  |  |  |  | 1,605 |  |  |
Net operating loss carryforward international |  | 990 |  |  |  |  | 838 |  |  |
Undistributed foreign earnings |  | 812 |  |  | (1,435) |  |  | 765 |  |  | (1,289) |
Global intangible low-taxed income |  |  |  | (3,606) |  |  |  |  | (2,965) |
Miscellaneous international |  | 854 |  |  | (211) |  |  | 696 |  |  | (81) |
Miscellaneous U.S. |  | 12 |  |  |  |  | 411 |  |  |
Total deferred income taxes |  | $ | 13,138 |  |  | (11,819) |  |  | 12,031 |  |  | (10,170) |
*Certain prior year amounts have been reclassified to conform to current year presentation The Company has wholly-owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will generate future taxable income sufficient to utilize these deferred tax assets. The following table summarizes the activity related to unrecognized tax benefits:
(Dollars in Millions) |  | 2020 |  | 2019 |  | 2018 |
Beginning of year |  | $ | 3,853 |  |  | 3,326 |  |  | 3,151 |  |
Increases related to current year tax positions |  | 265 |  |  | 249 |  |  | 242 |  |
Increases related to prior period tax positions |  | 668 |  |  | 408 |  |  | 145 |  |
Decreases related to prior period tax positions |  | (551) |  |  | (105) |  |  | (137) |  |
Settlements |  | (839) |  |  | (9) |  |  | (40) |  |
Lapse of statute of limitations |  | (23) |  |  | (16) |  |  | (35) |  |
End of year |  | $ | 3,373 |  |  | 3,853 |  |  | 3,326 |  |
The unrecognized tax benefits of $3.4 billion at January 3, 2021, if recognized, would affect the Company’s annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. With respect to the United States, the Internal Revenue Service (IRS) has completed its audit for the tax years through 2012. As of December 29, 2019, the Company classified unrecognized tax benefits and related interest of approximately $0.9 billion as a current liability on the “Accrued taxes on Income” line of the Consolidated Balance Sheet. In the fiscal year 2020, the Company made its final payments for approximately $0.7 billion to the U.S. Treasury related to the final settlement of 2010-2012 tax audit liability. In other major jurisdictions where the Company conducts business, the years that remain open to tax audit go back to the year 2006. The Company believes it is possible that tax audits may be completed over the next twelve months by taxing authorities in some jurisdictions outside of the United States. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions. The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities, except as previously noted on amounts related to the current United States IRS audit. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest expense of $32 million, $50 million and $53 million in fiscal years 2020, 2019 and 2018, respectively. The total amount of accrued interest was $468 million and $559 million in fiscal years 2020 and 2019, respectively.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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