Income taxes

12 Months Ended

Dec. 31, 2020

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


	Years ended December 31,
	2020		2019		2018
Domestic	$	4,087	$	4,371	$	4,856
Foreign	4,046		4,767		4,689
Total income before income taxes	$	8,133	$	9,138	$	9,545

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


	Years ended December 31,
	2020		2019		2018
Current provision:
Federal	$	921	$	1,284	$	1,270
State	34		39		17
Foreign	277		277		227
Total current provision	1,232		1,600		1,514
Deferred (benefit) provision:
Federal	(321)		(276)		(317)
State	9		(22)		(7)
Foreign	(51)		(6)		(39)
Total deferred benefit	(363)		(304)		(363)
Total provision for income taxes	$	869	$	1,296	$	1,151

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,
	2020		2019
Deferred income tax assets:
NOL and credit carryforwards	$	794	$	800
Accrued expenses	561		457
Expenses capitalized for tax	144		170
Stock-based compensation	92		91

Other	301		269
Total deferred income tax assets	1,892		1,787
Valuation allowance	(571)		(517)
Net deferred income tax assets	1,321		1,270

Deferred income tax liabilities:
Acquired intangible assets	(903)		(1,288)
Debt	(282)		(210)
Fixed assets	(148)		(53)
Other	(189)		(233)
Total deferred income tax liabilities	(1,522)		(1,784)
Total deferred income taxes, net	$	(201)	$	(514)

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 2020, primarily driven by the Company’s expectation that some state R&D credits will not be utilized and that certain foreign net operating losses will expire unused.

As of December 31, 2020, 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 $681 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $585 million of those state tax credit carryforwards.

As of December 31, 2020, we had $143 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 2021 and 2035. We had $167 million of state NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for all of the state NOL carryforwards. We had $1.9 billion of foreign NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $754 million of those foreign NOL carryforwards. For the foreign NOLs with no valuation allowance provided, $861 million has no expiry; and the remainder will expire between 2021 and 2030.

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


	Years ended December 31,
	2020		2019		2018
Beginning balance	$	3,287	$	3,061	$	2,953
Additions based on tax positions related to the current year	165		215		173
Additions based on tax positions related to prior years	3		22		13
Reductions for tax positions of prior years	(35)		(11)		(17)

Settlements	(68)		—		(61)
Ending balance	$	3,352	$	3,287	$	3,061

Substantially all of the UTBs as of December 31, 2020, if recognized, would affect our effective tax rate. During the year ended December 31, 2020, we effectively settled certain issues with the IRS. As a result, we remeasured our UTBs accordingly.

Interest and penalties related to UTBs are included in our provision for income taxes. During the years ended December 31, 2020, 2019 and 2018, we recognized $116 million, $198 million and $137 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. The decrease in interest expense for the year ended December 31, 2020 was primarily due to lower interest rates during 2020. As of December 31, 2020 and 2019, accrued interest and penalties associated with UTBs were $783 million and $667 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,
	2020		2019		2018
Federal statutory tax rate	21.0	%	21.0	%	21.0	%
Foreign earnings	(4.7)	%	(4.5)	%	(4.3)	%
Foreign-derived intangible income	(0.7)	%	(0.7)	%	(0.4)	%
Credits, Puerto Rico Excise Tax	(2.9)	%	(2.6)	%	(2.5)	%
2017 Tax Act, net impact on intercompany sales	—	%	—	%	(1.8)	%
Interest on uncertain tax positions	1.1	%	1.6	%	1.2	%
Credits, primarily federal R&D	(1.4)	%	(1.0)	%	(0.8)	%
Audit settlements	(1.0)	%	—	%	(0.3)	%
Other, net	(0.7)	%	0.4	%	—	%
Effective tax rate	10.7	%	14.2	%	12.1	%

The effective tax rates for the years ended December 31, 2020, 2019 and 2018 differ from the federal statutory rate primarily due to impacts of the jurisdictional mix of income and expenses. Substantially all of the benefit to our effective tax rate from foreign earnings results from the Company’s operations in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes. Our operations in Puerto Rico are subject to tax incentive grants through 2035. Additionally, the Company’s operations conducted in Singapore are subject to a tax incentive grant through 2034. Our foreign 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 manufacturing site 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, 2020, 2019 and 2018, were $1.4 billion, $1.9 billion and $1.9 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. In 2017, we received a Revenue Agent Report (RAR) and a modified RAR from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012 proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. We disagree with the proposed adjustments and calculations and have been pursuing resolution with the IRS administrative appeals office. However, we have been unable to reach resolution at the administrative appeals level, and we anticipate that we will receive a Notice of Deficiency, which we would expect to vigorously contest through the judicial process. In addition, in 2020, we received an RAR and a modified RAR from the IRS for the years 2013, 2014 and 2015 also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico similar to those proposed for the years 2010, 2011 and 2012. We disagree with the 2013, 2014 and 2015 proposed adjustments and calculations and are pursuing resolution with the IRS administrative appeals office. The IRS audit for years 2016, 2017 and 2018 is expected to start in the near term. We are also currently under examination by a number of other state and foreign tax jurisdictions.

Final resolution of these complex matters is not likely within the next 12 months. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, application of the tax law to our facts and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes and uncertain resolution of these matters, the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our consolidated financial statements.

We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009.

- 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.

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