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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
INCOME TAXES | NOTE I – INCOME TAXES Our Income (loss) before income taxes consisted of the following:
| Year Ended December 31,
(in millions) | 2019 |  | 2018 |  | 2017
Domestic | $ | (1,145 | ) |  | $ | 35 |  |  | $ | (408 | )
Foreign | 1,832 |  |  | 1,387 |  |  | 1,341 |
| $ | 687 |  |  | $ | 1,422 |  |  | $ | 933 |
The related benefit for income taxes consisted of the following:
| Year Ended December 31,
(in millions) | 2019 |  | 2018 |  | 2017
Current |  |  |  |  |
Federal | $ | 120 |  |  | $ | (221 | ) |  | $ | 320 |
State | 54 |  |  | (27 | ) |  | 9 |
Foreign | 101 |  |  | 160 |  |  | 255 |
| 275 |  |  | (87 | ) |  | 584 |
Deferred |  |  |  |  |
Federal | (146 | ) |  | (124 | ) |  | 272 |
State | (18 | ) |  | 4 |  |  | 1 |
Foreign | (4,124 | ) |  | (42 | ) |  | (28 | )
| (4,288 | ) |  | (162 | ) |  | 244 |
| $ | (4,013 | ) |  | $ | (249 | ) |  | $ | 828 |
The reconciliation of income taxes at the federal statutory rate to the actual benefit for income taxes is as follows:
| Year Ended December 31,
| 2019 |  | 2018 |  | 2017
|  |  |  |  | (reclassified)(1)
U.S. federal statutory income tax rate | 21.0 | % |  | 21.0 | % |  | 35.0 | %
State income taxes, net of federal benefit | 6.7 | % |  | 0.4 | % |  | (1.0 | )%
Domestic taxes on foreign earnings | 21.9 | % |  | 0.5 | % |  | 0.4 | %
Effect of foreign taxes | (47.6 | )% |  | (8.3 | )% |  | (38.9 | )%
Acquisition-related | 12.2 | % |  | 2.1 | % |  | (1.7 | )%
Research credit | (4.2 | )% |  | (2.6 | )% |  | (2.6 | )%
Valuation allowance | 1.1 | % |  | (5.2 | )% |  | (4.1 | )%
Compensation-related | (0.3 | )% |  | (1.0 | )% |  | (2.5 | )%
Non-deductible expenses | 3.3 | % |  | 0.3 | % |  | 2.2 | %
Uncertain tax positions | 1.4 | % |  | (22.0 | )% |  | 10.7 | %
TCJA net impact | — | % |  | (4.7 | )% |  | 91.4 | %
Intra-entity intangible asset transfers | (597.0 | )% |  | — | % |  | — | %
Other, net | (2.5 | )% |  | 1.8 | % |  | (0.2 | )%
| (584.0 | )% |  | (17.5 | )% |  | 88.8 | %
(1) | Due to the inclusion of new tax provisions in 2018 created by the TJCA, we have reclassified select items in prior years to align with the new categories established in 2018, domestic taxes on foreign earnings and uncertain tax positions.
Significant components of our deferred tax assets and liabilities are as follows:
| As of December 31,
(in millions) | 2019 |  | 2018
Deferred Tax Assets: |  |  |
Inventory costs and related reserves | $ | — |  |  | $ | 18 |
Tax benefit of net operating loss and credits | 545 |  |  | 450 |
Reserves and accruals | 258 |  |  | 258 |
Restructuring-related charges | 20 |  |  | 12 |
Litigation and product liability reserves | 168 |  |  | 221 |
Investment write-down | 42 |  |  | 28 |
Compensation related | 121 |  |  | 106 |
Federal benefit of uncertain tax positions | 10 |  |  | 10 |
Intangible assets | 3,447 |  |  | — |
Other | — |  |  | 37 |
| 4,611 |  |  | 1,140 |
Less: valuation allowance | (915 | ) |  | (344 | )
| 3,696 |  |  | 796 |
Deferred Tax Liabilities: |  |  |
Property, plant and equipment | 16 |  |  | 25 |
Unrealized gains and losses on derivative financial instruments | 52 |  |  | 44 |
Intangible assets | — |  |  | 968 |
Inventory costs and related services | 2 |  |  | — |
Other | 25 |  |  | — |
| 95 |  |  | 1,037 |
Net Deferred Tax Assets / (Liabilities) | 3,601 |  |  | (241 | )
Prepaid on intercompany profit | 195 |  |  | 161 |
Net Deferred Tax Assets / (Liabilities) and Prepaid on Intercompany Profit | $ | 3,796 |  |  | $ | (80 | )
Our deferred tax assets, deferred tax liabilities and prepaid on intercompany profit, are included in the following locations within our accompanying consolidated balance sheets (in millions):
| Location on Consolidated Balance Sheets | As of December 31,
Component | 2019 |  | 2018
Prepaid on intercompany profit | Prepaid income taxes | $ | 195 |  |  | $ | 161 |
Non-current deferred tax asset | Deferred tax assets | 4,196 |  |  | 87 |
Deferred Tax Assets and Prepaid on Intercompany Profit |  | 4,391 |  |  | 249 |
Non-current deferred tax liability | Deferred income taxes | 595 |  |  | 328 |
Deferred Tax Liabilities |  | 595 |  |  | 328 |
Net Deferred Tax Assets (Liabilities) and Prepaid on Intercompany Profit | $ | 3,796 |  |  | $ | (80 | )
As of December 31, 2019, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $449 million. As of December 31, 2018, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $416 million. In addition, we had foreign tax net operating loss carryforwards and tax credits, the tax effect of which was $105 million as of December 31, 2019, as compared to $42 million as of December 31, 2018. These tax attributes expire periodically beginning in 2020. During the fourth quarter of 2019, we completed intra-entity asset transfers of certain intellectual property rights among various wholly-owned subsidiaries. These transactions occurred to more closely align the global economic ownership of our intellectual property rights with our current and future business operations. These transactions did not result in a taxable gain in any jurisdiction, however, some of the transactions did create a step-up in the tax-deductible basis in the transferred intellectual property rights in certain jurisdictions. As a result, we recorded deferred tax assets in the amount of $4.102 billion, which represents the book and tax basis differences measured at applicable statutory tax rates, net of a valuation allowance of $542 million. After consideration of all positive and negative evidence, we believe that it is more likely than not that a portion of our deferred tax assets will not be realized. As a result, we established a valuation allowance of $915 million as of December 31, 2019 and $344 million as of December 31, 2018, representing an increase of $571 million. The increase in the valuation allowance as of December 31, 2019, as compared to December 31, 2018, is primarily attributable to an intra-entity transfer of certain intellectual property. The income tax impact of the unrealized gain or loss component of other comprehensive income and stockholders' equity was a charge of $13 million in 2019, a charge of $37 million in 2018 and a benefit of $63 million in 2017. We obtain tax incentives through Free Trade Zone Regime offered in Costa Rica which allows 100.0 percent exemption from income tax in the first eight years of operations and 50.0 percent exemption in the following four years. This tax incentive resulted in income tax savings of $173 million for 2019, $146 million for 2018 and $127 million for 2017. The tax incentive for 100.0 percent exemption from income tax was renewed during 2019 and is expected to expire in 2027. The impact on per share earnings was $0.12 for 2019 and $0.10 for 2018 and $0.09 for 2017. Additionally, we benefit from tax incentives in Puerto Rico. The income tax savings from Puerto Rico were immaterial for 2019, 2018 and 2017. As of December 31, 2019, we had $455 million of gross unrecognized tax benefits, of which a net $355 million, if recognized, would affect our effective tax rate. As of December 31, 2018, we had $427 million of gross unrecognized tax benefits, of which a net $332 million, if recognized, would affect our effective tax rate. As of December 31, 2017, we had $1.238 billion of gross unrecognized tax benefits, of which a net $1.150 billion, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Year Ended December 31,
(in millions) | 2019 |  | 2018 |  | 2017
Beginning Balance | $ | 427 |  |  | $ | 1,238 |  |  | $ | 1,095 |
Additions based on positions related to the current year | 30 |  |  | 79 |  |  | 134 |
Additions based on positions related to prior years | 45 |  |  | 4 |  |  | 16 |
Reductions for tax positions of prior years | (34 | ) |  | (433 | ) |  | (3 | )
Settlements with taxing authorities | (4 | ) |  | (459 | ) |  | (2 | )
Statute of limitation expirations | (9 | ) |  | (3 | ) |  | (2 | )
Ending Balance | $ | 455 |  |  | $ | 427 |  |  | $ | 1,238 |
We are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters through 2013, with the exception of select issues in 2011 and substantially all material state and local income tax matters through 2010. We have concluded all foreign income tax matters through 2013, with the exception of issues for Italy, which have concluded through 2002. In the second quarter of 2018, a decision was entered by the U.S. Tax Court resolving all disputes for Guidant Corporation for its 2001 through 2006 tax years and our 2006 and 2007 tax years as well as the tax issues related to our 2006 transaction with Abbott Laboratories. Additionally, we resolved all issues with the IRS Office of Appeals for our 2008 through 2010 tax years. The final settlement calculation resulted in a final net tax payment of $303 million plus $307 million of estimated interest, which was remitted in the second quarter of 2018. Due to the final settlement of these disputes, we recorded a net tax benefit of $250 million in 2018 to remove a reserve related to these years. In the fourth quarter of 2018, we received a Revenue Agent Report (RAR) from the IRS for our 2011 through 2013 tax years. We remitted $93 million to the IRS in the fourth quarter of 2018 reflecting the net balance of tax and interest due for these years after consideration of amounts owed to us by the IRS. Due to the resolution of these tax years, we recorded a net tax benefit of $90 million to remove a reserve related to these years. We recognize interest and penalties related to income taxes as a component of income tax expense. We had $19 million accrued for gross interest and penalties as of December 31, 2019 and $11 million as of December 31, 2018. We recognized a benefit of $643 million of gross interest and penalties in our consolidated statements of operations in 2018 primarily related to reaching settlements with the taxing authorities. We recognized net tax benefit related to interest and penalties of $1 million in 2019, as compared to a net tax benefit of $498 million in 2018 and a net tax expense of $154 million in 2017. The decrease in our net tax benefit related to interest and penalties as of December 31, 2019, as compared to December 31, 2018, is related to reaching settlements with the taxing authorities. It is reasonably possible that within the next 12 months we will resolve transactional- related issues with foreign and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $98 million. During 2018, we completed our analysis and recording of all tax effects related to the Tax Cuts and Jobs Act, as required under SAB 118, and recorded a net benefit of $67 million, exclusive of the one-time transition tax adjustment described below. For the year ended December 31, 2017, we were required under the Tax Cuts and Jobs Act (TCJA) to calculate a one-time transition tax based on our total post-1986 foreign subsidiaries' earnings and profits (E&P) that we previously deferred from U.S. income taxes. As a result of settling our various tax audits, the revised amount of transition tax is approximately $856 million as of December 31, 2018 as compared to the preliminary amount recorded of approximately $1.044 billion as of December 31, 2017. We anticipate offsetting this liability against existing tax attributes reducing the required payment to approximately $499 million, which will be remitted over an eight-year period. We have begun remitting the required installment payments, with a balance remaining of $420 million as of December 31, 2019. In addition, we have provided for U.S. state income taxes of $18 million on all U.S. dollar-denominated E&P accumulated through December 31, 2017, which constitutes the preponderance of our foreign subsidiaries' accumulated E&P through December 31, 2017. We intend to indefinitely reinvest the unremitted foreign earnings of all other subsidiaries as of December 31, 2017, as well as all subsequent earnings generated by all of our foreign subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings and additional outside basis difference in these entities is not practicable. We are subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global Intangible Low Taxed Income (GILTI) earned by certain foreign subsidiaries. We have established an accounting policy election to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

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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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