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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | NOTE H – INCOME TAXES Our Income (loss) before income taxes consisted of the following:
| Year Ended December 31,
(in millions) | 2022 |  | 2021 |  | 2020
Domestic | $ | (1,119) |  |  | $ | (648) |  |  | $ | (660) |
Foreign | 2,260 |  |  | 1,724 |  |  | 581 |
| $ | 1,141 |  |  | $ | 1,076 |  |  | $ | (79) |
The related expense (benefit) for income taxes consisted of the following:
| Year Ended December 31,
(in millions) | 2022 |  | 2021 |  | 2020
Current |  |  |  |  |
Federal | $ | 51 |  |  | $ | 18 |  |  | $ | (29) |
State | 19 |  |  | 33 |  |  | (35) |
Foreign | 381 |  |  | 127 |  |  | 151 |
| 451 |  |  | 178 |  |  | 87 |
Deferred |  |  |  |  |
Federal | (92) |  |  | (256) |  |  | (26) |
State | (32) |  |  | (3) |  |  | (6) |
Foreign | 117 |  |  | 117 |  |  | (53) |
| (7) |  |  | (142) |  |  | (85) |
| $ | 443 |  |  | $ | 36 |  |  | $ | 2 |
The reconciliation of income taxes at the federal statutory rate to the actual expense (benefit) for income taxes is as follows:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
U.S. federal statutory income tax rate | 21.0 | % |  | 21.0 | % |  | (21.0) | %
State income taxes, net of federal benefit | 0.7 | % |  | 2.5 | % |  | 16.6 | %
Domestic taxes on foreign earnings | 15.3 | % |  | 6.8 | % |  | 155.4 | %
Effect of foreign taxes | (3.8) | % |  | (14.3) | % |  | (40.7) | %
Acquisition-related | 4.4 | % |  | (8.1) | % |  | (16.7) | %
Research credit | (4.5) | % |  | (3.0) | % |  | (43.0) | %
Valuation allowance | (1.3) | % |  | 0.8 | % |  | (42.0) | %
Goodwill impairment charges | — | % |  | — | % |  | 3.7 | %
Compensation-related | 0.6 | % |  | (0.6) | % |  | (7.7) | %
Non-deductible expenses | 0.4 | % |  | 0.4 | % |  | 64.4 | %
Uncertain tax positions | 7.7 | % |  | 1.2 | % |  | (96.8) | %
Intra-entity asset transfers | — | % |  | — | % |  | 10.2 | %
Return to provision | (2.1) | % |  | (5.7) | % |  | (37.3) | %
Change in tax rates | (0.2) | % |  | 1.9 | % |  | 51.8 | %
Other, net | 0.7 | % |  | 0.4 | % |  | 6.0 | %
| 38.9 | % |  | 3.3 | % |  | 2.9 | %
Significant components of our deferred tax assets and liabilities are as follows:
| As of December 31,
(in millions) | 2022 |  | 2021
Deferred Tax Assets: |  |  |
Inventory costs and related reserves | $ | 19 |  |  | $ | 10 |
Tax benefit of net operating losses and credits | 511 |  |  | 620 |
Reserves and accruals | 304 |  |  | 324 |
Restructuring-related charges | 6 |  |  | 14 |
Litigation and product liability reserves | 103 |  |  | 127 |
Investment write-down | 38 |  |  | 31 |
Compensation related | 136 |  |  | 130 |
Federal benefit of uncertain tax positions | 9 |  |  | 8 |
Intangible assets | 3,668 |  |  | 3,546 |
Capitalized R&D | 160 |  |  | 67 |
Property, plant and equipment | 2 |  |  | 14 |
Other | — |  |  | 35 |
| 4,954 |  |  | 4,926 |
Less: valuation allowance | (1,004) |  |  | (1,014) |
| 3,950 |  |  | 3,912 |
Deferred Tax Liabilities: |  |  |
Unrealized gains and losses on derivative financial instruments | 117 |  |  | 79 |
Other | 34 |  |  | — |
| 151 |  |  | 79 |
Net Deferred Tax Assets | 3,799 |  |  | 3,833 |
Prepaid on intercompany profit | 264 |  |  | 205 |
Net Deferred Tax Assets and Prepaid on Intercompany Profit | $ | 4,062 |  |  | $ | 4,038 |
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 | 2022 |  | 2021
Prepaid on intercompany profit | Prepaid income taxes | $ | 264 |  |  | $ | 205 |
Non-current deferred tax asset | Deferred tax assets | 3,942 |  |  | 4,142 |
Deferred Tax Assets and Prepaid on Intercompany Profit |  | 4,206 |  |  | 4,348 |
Non-current deferred tax liability | Deferred tax liabilities | 144 |  |  | 310 |
Deferred Tax Liabilities |  | 144 |  |  | 310 |
Net Deferred Tax Assets and Prepaid on Intercompany Profit | $ | 4,062 |  |  | $ | 4,038 |
As of December 31, 2022, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $464 million. As of December 31, 2021, we had U.S. federal and state tax net operating loss carryforwards and tax credits, the tax effect of which was $560 million. In addition, we had foreign tax net operating loss carryforwards and tax credits, the tax effect of which was $47 million as of December 31, 2022, and $60 million as of December 31, 2021. These tax attributes expire periodically beginning in 2023. 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 recorded a valuation allowance of $1.004 billion as of December 31, 2022, and $1.014 billion as of December 31, 2021. The decrease in the valuation allowance as of December 31, 2022, compared to December 31, 2021, is primarily due to the release of valuation allowances on certain U.S. state net operating losses and tax credit carryforwards due to the repatriation of foreign earnings, offset by the concurrent build of the valuation allowance on other state attributes. The income tax impact of the unrealized gain or loss component of other comprehensive income and stockholders' equity was a charge of $56 million in 2022, a charge of $81 million in 2021 and a benefit of $78 million in 2020. We obtain tax incentives through Free Trade Zone Regime offered in Costa Rica which allows 100 percent exemption from income tax in the first eight years of operations and 50 percent exemption in the following four years. This tax incentive resulted in income tax savings of $162 million in 2022, $149 million in 2021 and $64 million in 2020. The tax incentive for 100 percent exemption from income tax is expected to expire in 2027, with the 50 percent exemption to expire in 2031. The impact on Net income (loss) per common share - assuming dilution was $0.11 for 2022, $0.10 for 2021 and $0.04 for 2020. We also benefit from tax incentives in Puerto Rico through a Grant of Industrial Tax Exemption (Grant) which applies a reduced tax rate to our taxable profits, resulting in income tax savings of $21 million in 2022, $27 million in 2021 and $30 million in 2020. This Grant expires in 2034, with an option to extend for an additional 15 years. The impact on Net income (loss) per common share - assuming dilution was $0.02 in each of the years 2022, 2021 and 2020. Additionally, we benefit from tax incentives in Malaysia which allow a full tax exemption on manufacturing of specific medical device products, which will expire in 2029, with an option to renew for an additional five-year term. This incentive has resulted in income tax savings of $17 million in 2022 and $0 in 2021 and 2020. The impact on Net income (loss) per common share - assuming dilution was $0.01 in 2022 and de minimis in 2021 and 2020. As of December 31, 2022, we had $492 million of gross unrecognized tax benefits, of which a net $410 million, if recognized, would affect our effective tax rate. As of December 31, 2021, we had $255 million of gross unrecognized tax benefits, of which a net $177 million, if recognized, would affect our effective tax rate. As of December 31, 2020, we had $261 million of gross unrecognized tax benefits, of which a net $183 million, 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) | 2022 |  | 2021 |  | 2020
Beginning Balance | $ | 255 |  |  | $ | 261 |  |  | $ | 455 |
Additions based on positions related to the current year | 88 |  |  | 8 |  |  | 28 |
Additions based on positions related to prior years | 177 |  |  | 41 |  |  | 6 |
Reductions for tax positions of prior years | (20) |  |  | (36) |  |  | (186) |
Settlements with taxing authorities | (1) |  |  | (2) |  |  | (27) |
Statute of limitation expirations | (8) |  |  | (17) |  |  | (15) |
Ending Balance | $ | 492 |  |  | $ | 255 |  |  | $ | 261 |
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 2016 and substantially all material state and local income tax matters through 2014. We have concluded substantially all foreign income tax matters through 2015. In 2020, we received notification from the IRS regarding the examination of our 2014 through 2016 tax years stating that the Joint Committee on Taxation completed its review, and the IRS examination was resolved. Due to the resolution of these tax years, we recorded a net tax benefit of $91 million to release the reserves related to these years. We received a refund of $62 million from the IRS reflecting the net balance of amounts owed to us by the IRS after consideration of tax and interest due for these years. We recognize interest and penalties related to income taxes as a component of income tax expense. We had $77 million accrued for gross interest and penalties as of December 31, 2022, $43 million as of December 31, 2021, and $41 million as of December 31, 2020. Net tax expense related to interest and penalties was immaterial in 2022, 2021 and 2020. The increase in our net tax expense related to interest and penalties as of December 31, 2022, compared to December 31, 2021, is related to reaching settlements with taxing authorities. It is reasonably possible that within the next 12 months we will resolve multiple issues with foreign, federal and state taxing authorities, resulting in a reduction in our balance of unrecognized tax benefits of up to $75 million. For the year ended December 31, 2017, we were required under the 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 various audit activities, the revised amount of transition tax was approximately $937 million as of December 31, 2022, as compared to $938 million as of December 31, 2021. We anticipate offsetting this liability against existing tax attributes, reducing the required payment to approximately $586 million, which will be remitted over an eight-year period. We have begun remitting the required installment payments, with a balance remaining of $386 million as of December 31, 2022. In addition, we have provided for U.S. state income taxes of $14 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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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