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Income taxes | 12 Months Ended
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Dec. 31, 2021
Income Tax Disclosure [Abstract] |
Income taxes | Income taxes Income before income taxes included the following (in millions):
| Years ended December 31,
| 2021 |  | 2020 |  | 2019
Domestic | $ | 1,850 |  |  | $ | 4,087 |  |  | $ | 4,371 |
Foreign | 4,851 |  |  | 4,046 |  |  | 4,767 |
Total income before income taxes | $ | 6,701 |  |  | $ | 8,133 |  |  | $ | 9,138 |
The provision for income taxes included the following (in millions):
| Years ended December 31,
| 2021 |  | 2020 |  | 2019
Current provision: |  |  |  |  |
Federal | $ | 865 |  |  | $ | 921 |  |  | $ | 1,284 |
State | 18 |  |  | 34 |  |  | 39 |
Foreign | 359 |  |  | 277 |  |  | 277 |
Total current provision | 1,242 |  |  | 1,232 |  |  | 1,600 |
Deferred benefit: |  |  |  |  |
Federal | (308) |  |  | (321) |  |  | (276) |
State | (9) |  |  | 9 |  |  | (22) |
Foreign | (117) |  |  | (51) |  |  | (6) |
Total deferred benefit | (434) |  |  | (363) |  |  | (304) |
Total provision for income taxes | $ | 808 |  |  | $ | 869 |  |  | $ | 1,296 |
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 NOL carryforwards. Significant components of our deferred tax assets and liabilities were as follows (in millions):
| December 31,
| 2021 |  | 2020
Deferred income tax assets: |  |  |
NOL and credit carryforwards | $ | 1,065 |  |  | $ | 794 |
Accrued expenses | 600 |  |  | 561 |
Expenses capitalized for tax | 244 |  |  | 144 |
Stock-based compensation | 96 |  |  | 92 |
Other | 326 |  |  | 301 |
Total deferred income tax assets | 2,331 |  |  | 1,892 |
Valuation allowance | (663) |  |  | (571) |
Net deferred income tax assets | 1,668 |  |  | 1,321 |
Deferred income tax liabilities: |  |  |
Acquired intangible assets | (824) |  |  | (903) |
Debt | (275) |  |  | (282) |
Fixed assets | (129) |  |  | (148) |
Other | (221) |  |  | (189) |
Total deferred income tax liabilities | (1,449) |  |  | (1,522) |
Total deferred income taxes, net | $ | 219 |  |  | $ | (201) |
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 2021, primarily driven by the Company’s expectation that some state R&D credits will not be utilized and certain foreign and acquired net operating losses will expire unused. As of December 31, 2021, we had $75 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 2040. We had $798 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $709 million of those state tax credit carryforwards. As of December 31, 2021, we had $606 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. For the federal NOL carryforwards for which no valuation allowance has been provided, $426 million have no expiration; the remainder begin to expire between 2022 and 2037. We had $391 million of state NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $330 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 $561 million of those foreign NOL carryforwards. For the foreign NOLs with no valuation allowance provided, $800 million has no expiry; and the remainder will expire between 2022 and 2031. The reconciliations of the total gross amounts of UTBs were as follows (in millions):
| Years ended December 31,
| 2021 |  | 2020 |  | 2019
Beginning balance | $ | 3,352 |  |  | $ | 3,287 |  |  | $ | 3,061 |
Additions based on tax positions related to the current year | 171 |  |  | 165 |  |  | 215 |
Additions based on tax positions related to prior years | 35 |  |  | 3 |  |  | 22 |
Reductions for tax positions of prior years | (4) |  |  | (35) |  |  | (11) |
Settlements | (8) |  |  | (68) |  |  | — |
Ending balance | $ | 3,546 |  |  | $ | 3,352 |  |  | $ | 3,287 |
Substantially all of the UTBs as of December 31, 2021, 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, 2021, 2020 and 2019, we recognized $98 million, $116 million and $198 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, 2021, was primarily due to lower interest rates during 2021 and settlement of a prior year audit. As of December 31, 2021 and 2020, accrued interest and penalties associated with UTBs were $881 million and $783 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,
| 2021 |  | 2020 |  | 2019
Federal statutory tax rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Foreign earnings | (7.8) | % |  | (4.7) | % |  | (4.5) | %
Foreign-derived intangible income | (1.0) | % |  | (0.7) | % |  | (0.7) | %
Credits, Puerto Rico excise tax | (3.4) | % |  | (2.9) | % |  | (2.6) | %
Interest on uncertain tax positions | 1.1 | % |  | 1.1 | % |  | 1.6 | %
Credits, primarily federal R&D | (2.1) | % |  | (1.4) | % |  | (1.0) | %
Acquisition IPR&D | 4.9 | % |  | — | % |  | — | %
Audit settlements | — | % |  | (1.0) | % |  | — | %
Other, net | (0.6) | % |  | (0.7) | % |  | 0.4 | %
Effective tax rate | 12.1 | % |  | 10.7 | % |  | 14.2 | %
The effective tax rates for the years ended December 31, 2021, 2020 and 2019, 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 in 2021, 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, 2021, 2020 and 2019, were $1.9 billion, $1.4 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. Tax authorities (including the IRS) are becoming more aggressive and are particularly focused on such matters. In 2017, we received an RAR and a modified RAR from the 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 disagreed with the proposed adjustments and calculations and pursued resolution with the IRS appeals office but were unable to reach resolution. In July 2021, we filed a petition in the U.S. Tax Court to contest two duplicate Notices for 2010, 2011 and 2012 that we received in May and July 2021, which seek to increase our U.S. taxable income. The Notices seek to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $3.6 billion plus interest. Any additional tax that could be imposed would be reduced by up to approximately $900 million of repatriation tax previously accrued on our foreign earnings. We firmly believe that the IRS’s positions set forth in the Notices are without merit, and we are contesting the Notices through the judicial process. 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 disagreed with the proposed adjustments and calculations and pursued resolution with the IRS appeals office. We were unable to reach resolution at the administrative appeals level, and we anticipate that we will receive a statutory notice of deficiency for these years as well. We expect to contest any such notice related to 2013–15 through the judicial process. We are also currently under examination by the IRS for the years 2016, 2017 and 2018 and by a number of 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.

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