Income taxes

12 Months Ended

Dec. 31, 2019

Income before income taxes included the following (in millions):



	Years ended December 31,
	2019		2018		2017
Domestic	$	4,371	$	4,856	$	4,436
Foreign	4,767		4,689		5,161
Total income before income taxes	$	9,138	$	9,545	$	9,597

The provision for income taxes included the following (in millions):



	Years ended December 31,
	2019			2018			2017
Current provision:
Federal	$	1,284		$	1,270		$	8,615
State	39			17			5
Foreign	277			227			275
Total current provision	1,600			1,514			8,895
Deferred (benefit) provision:
Federal	(276		)	(317		)	(1,120		)
State	(22		)	(7		)	—
Foreign	(6		)	(39		)	(157		)
Total deferred (benefit) provision	(304		)	(363		)	(1,277		)
Total provision for income taxes	$	1,296		$	1,151		$	7,618

Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax credit carryforwards and the tax effects of net operating loss (NOL) carryforwards. Significant components of our deferred tax assets and liabilities were as follows (in millions):



	December 31,
	2019			2018
Deferred income tax assets:
NOL and credit carryforwards	$	800		$	810
Accrued expenses	457			428
Expenses capitalized for tax	170			185
Stock-based compensation	91			95
Other	269			174
Total deferred income tax assets	1,787			1,692
Valuation allowance	(517		)	(509		)
Net deferred income tax assets	1,270			1,183

Deferred income tax liabilities:
Acquired intangible assets	(1,288		)	(1,509		)
Debt	(210		)	(184		)
Other	(286		)	(267		)
Total deferred income tax liabilities	(1,784		)	(1,960		)
Total deferred income taxes, net	$	(514	)	$	(777	)

Valuation allowances are provided to reduce the amounts of our deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.

The valuation allowance increased in 2019 due primarily to the Company’s expectation that some state R&D credits will not be utilized.

As of December 31, 2019, we had $20 million of federal tax credit carryforwards available to reduce future federal income taxes and have provided no valuation allowance for those federal tax credit carryforwards. The federal tax credit carryforwards expire between 2023 and 2035. We had $605 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $482 million of those state tax credit carryforwards. A portion of the state credits for which no valuation allowance has been provided will expire between 2022 and 2034.

As of December 31, 2019, we had $144 million of federal NOL carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $6 million of those federal NOL carryforwards. The federal NOL carryforwards, for which no valuation allowance has been provided, expire between 2020 and 2035. We had $196 million of state NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $196 million of those state NOL carryforwards. We had $2.0 billion of foreign NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $516 million of those foreign NOL carryforwards. For the foreign NOLs with no valuation allowance provided, $822 million has no expiry; and the remainder will expire between 2020 and 2024.

The reconciliations of the total gross amounts of UTBs were as follows (in millions):



	Years ended December 31,
	2019			2018			2017
Beginning balance	$	3,061		$	2,953		$	2,543
Additions based on tax positions related to the current year	215			173			447
Additions based on tax positions related to prior years	22			13			1
Reductions for tax positions of prior years	(11		)	(17		)	(5		)
Reductions for expiration of statute of limitations	—			—			(5		)
Settlements	—			(61		)	(28		)
Ending balance	$	3,287		$	3,061		$	2,953

Substantially all of the UTBs as of December 31, 2019, if recognized, would affect our effective tax rate.

Interest and penalties related to UTBs are included in our provision for income taxes. During the years ended December 31, 2019, 2018 and 2017, we recognized $198 million, $137 million and $56 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. As of December 31, 2019 and 2018, accrued interest and penalties associated with UTBs were $667 million and $469 million, respectively.

The reconciliations between the federal statutory tax rate applied to income before income taxes and our effective tax rate were as follows:



	Years ended December 31,
	2019		2018		2017
Federal statutory tax rate	21.0	%	21.0	%	35.0	%
2017 Tax Act, net repatriation tax	—	%	—	%	70.7	%
Foreign earnings	(4.5	)%	(4.3	)%	(15.8	)%
2017 Tax Act, net deferred tax remeasurement	—	%	—	%	(6.9	)%
Credits, Puerto Rico Excise Tax	(2.6	)%	(2.5	)%	(2.2	)%
2017 Tax Act, net impact on intercompany sales	—	%	(1.8	)%	—	%
Interest on uncertain tax positions	1.6	%	1.2	%	0.6	%
Credits, primarily federal R&D	(1.0	)%	(0.8	)%	(0.6	)%
Share-based payments	(0.3	)%	(0.2	)%	(0.7	)%
Other, net	—	%	(0.5	)%	(0.7	)%
Effective tax rate	14.2	%	12.1	%	79.4	%

The effective tax rates for the years ended December 31, 2019 and 2018 differ from the federal statutory rate due primarily to impacts of the jurisdictional mix of income and expenses. The effective tax rate for 2017 differs from the federal statutory rate primarily as a result of the Tax Cuts and Jobs Act (the 2017 Tax Act). Primarily all of the benefit to our effective tax rate from foreign earnings results from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and are subject to tax incentive grants through 2035. Additionally, the Company’s operations conducted in Singapore is subject to a tax incentive grant through 2034. These earnings are also subject to U.S. tax at a reduced rate of 10.5%.

The U.S. territory of Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate of 4% is effective through December 31, 2027. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.

Income taxes paid during the years ended December 31, 2019, 2018 and 2017, were $1.9 billion, $1.9 billion and $1.5 billion, respectively.

One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely examined by tax authorities in those jurisdictions. Significant disputes may arise with tax authorities involving issues regarding the timing and amount of deductions, the use of tax credits and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws, regulations and relevant facts. As previously disclosed, we received a Revenue Agent Report (RAR) from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments substantially greater or less than amounts accrued. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009. In addition, we are currently under examination by a number of state and foreign tax jurisdictions.