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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Tax Disclosure | INCOME TAXES Income before provision for income taxes consists of the following (in millions):
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Domestic |  | $ | 4,112 |  |  | $ | 7,074 |  |  | $ | 8,099 |
Foreign |  | 1,048 |  |  | 725 |  |  | 5,430 |
Income before provision for income taxes |  | $ | 5,160 |  |  | $ | 7,799 |  |  | $ | 13,529 |
The provision for income taxes consists of the following (in millions):
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Federal: |  |  |  |  |  |
Current |  | $ | 1,646 |  |  | $ | 1,716 |  |  | $ | 8,817 |
Deferred |  | (843 | ) |  | 324 |  |  | (123 | )
|  | 803 |  |  | 2,040 |  |  | 8,694 |
State: |  |  |  |  |  |  |  |  |
Current |  | 135 |  |  | 162 |  |  | 97 |
Deferred |  | (42 | ) |  | (17 | ) |  | (20 | )
|  | 93 |  |  | 145 |  |  | 77 |
Foreign: |  |  |  |  |  |
Current |  | 124 |  |  | 175 |  |  | 54 |
Deferred |  | (1,224 | ) |  | (21 | ) |  | 60 |
|  | (1,100 | ) |  | 154 |  |  | 114 |
Provision for income taxes |  | $ | (204 | ) |  | $ | 2,339 |  |  | $ | 8,885 |
The 2019 provision for income taxes included a $1.2 billion deferred tax benefit related to intangible asset transfers from a foreign subsidiary to Ireland and the United States. In the fourth quarter of 2019, we completed an intra-entity asset transfer of certain intangible assets from a foreign subsidiary to Ireland. The transaction resulted in a step-up of the Irish tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the book basis of such intangible assets. As a result, we recognized a deferred tax asset of $1.2 billion on our consolidated financial statements. The tax deductions for amortization of the assets will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. We expect to be able to realize the deferred tax asset resulting from this intra-entity asset transfer. The impact of the intangible asset transfer from a foreign subsidiary to the United States was not material. The 2018 provision for income taxes included a $588 million deferred tax charge related to a transfer of acquired intangible assets from a foreign subsidiary to the United States. This transaction did not result in a step-up of the U.S. tax-deductible basis; and as a result, we recognized a deferred tax liability of $588 million for the temporary difference where the book basis exceeded the tax basis of these acquired intangible assets. The 2017 provision for income taxes included a $5.5 billion provisional charge to income tax expense related to Tax Reform enacted in December 2017. Tax reform made significant changes to the Internal Revenue Code of 1986, as amended, which include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a repatriation tax on deemed repatriated earnings of foreign subsidiaries, implementation of a modified territorial tax system, which has the effect of subjecting earnings of our foreign subsidiaries to U.S. taxation on GILTI. We elected to account for the tax on GILTI under the period cost method. The reconciliation between the federal statutory tax rate applied to income before taxes and our effective tax rate is summarized as follows:
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 35.0 | %
State taxes, net of federal benefit |  | 0.4 | % |  | 0.6 | % |  | 0.1 | %
Foreign earnings at different rates |  | (2.5 | )% |  | (0.9 | )% |  | (11.2 | )%
Research and other credits |  | (1.9 | )% |  | (1.1 | )% |  | (0.6 | )%
US tax on foreign earnings |  | 4.3 | % |  | 2.1 | % |  | 1.2 | %
Deferred tax - intra-entity transfer of intangible assets |  | (24.0 | )% |  | 7.5 | % |  | — | %
Transition tax |  | — | % |  | (0.7 | )% |  | 42.9 | %
Deferred tax revaluation |  | — | % |  | 0.8 | % |  | (2.3 | )%
Settlement of tax examinations |  | (2.4 | )% |  | (1.9 | )% |  | — | %
Other |  | 1.1 | % |  | 2.6 | % |  | 0.6 | %
Effective tax rate |  | (4.0 | )% |  | 30.0 | % |  | 65.7 | %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in millions):
|  | December 31,
|  | 2019 |  | 2018
Deferred tax assets: |  |  |  |
Net operating loss carryforwards |  | $ | 184 |  |  | $ | 344 |
Stock-based compensation |  | 113 |  |  | 163 |
Reserves and accruals not currently deductible |  | 423 |  |  | 426 |
Excess of tax basis over book basis of intangible assets |  | 1,232 |  |  | — |
Up-front and milestone payments |  | 988 |  |  | 97 |
Research and other credit carryforwards |  | 247 |  |  | 363 |
Other, net |  | 168 |  |  | 183 |
Total deferred tax assets before valuation allowance |  | 3,355 |  |  | 1,576 |
Valuation allowance |  | (217 | ) |  | (331 | )
Total deferred tax assets |  | 3,138 |  |  | 1,245 |
Deferred tax liabilities: |  |  |  |  |  |
Property, plant and equipment |  | (88 | ) |  | (47 | )
Excess of book basis over tax basis of intangible assets |  | (1,401 | ) |  | (1,656 | )
Other |  | (93 | ) |  | (80 | )
Total deferred tax liabilities |  | (1,582 | ) |  | (1,783 | )
Net deferred tax assets (liabilities) |  | $ | 1,556 |  |  | $ | (538 | )
The valuation allowance was $217 million and $331 million at December 31, 2019 and 2018, respectively. The decrease of our valuation allowance in 2019 was primarily related to a reduction in net operating loss carryforwards under the asset recognition framework and the corresponding valuation allowance with respect to certain foreign jurisdictions. At December 31, 2019, we had U.S. federal net operating loss carryforwards of approximately $231 million. The federal net operating loss carryforwards will start to expire in 2021, if not utilized. We also had federal tax credit carryforwards of approximately $88 million which will start to expire in 2020, if not utilized. In addition, we had state net operating loss and tax credit carryforwards of approximately $1.4 billion and $543 million, respectively. The state net operating loss will start to expire in 2021 if not utilized and state tax credit carryforwards is carried forward indefinitely. Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization. We file federal, state and foreign income tax returns in the United States and in many foreign jurisdictions. For federal income tax purposes, the statute of limitations is open for 2013 and onwards and 2010 and onwards for California income tax purposes. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years. Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the IRS for the tax years from 2013 to 2015 and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. Of the total unrecognized tax benefits, $1.6 billion and $1.3 billion at December 31, 2019 and 2018, if recognized, would reduce our effective tax rate in the period of recognition. Interest and penalties related to unrecognized tax benefits included as part of provision for income taxes on our Consolidated Statements of Income were $105 million for the year ended December 31, 2019. Interest and penalties related to unrecognized tax benefits for the years ended December 31, 2018 and 2017, respectively, were not material. Accrued interest and penalties related to unrecognized tax benefits were $259 million and $154 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, we believe that it is reasonably possible that our unrecognized tax benefits may materially change in the next 12 months due to potential resolutions with a tax authority. An estimate of the range of the reasonably possible change cannot be determined at this time. In June 2019, the Ninth Circuit Court of Appeals (Ninth Circuit) issued an opinion in Altera Corp. v. Commissioner reversing the prior decision of the United States Tax Court and requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. In July 2019, the taxpayer requested a rehearing before the full Ninth Circuit and the request was denied in November 2019. As a result, we recorded a cumulative income tax expense of $114 million in the fourth quarter of 2019. On February 10, 2020, the taxpayer requested a hearing before the Supreme Court of the United States; and as such, although the final outcome of the case is still uncertain, we recorded income tax expense in the fourth quarter of 2019 based on the Ninth Circuit’s denial. The following is a rollforward of our total gross unrecognized tax benefits (in millions):
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Balance, beginning of period |  | $ | 1,595 |  |  | $ | 2,181 |  |  | $ | 1,852 |
Tax positions related to current year: |  |  |  |  |  |  |  |  |
Additions |  | 138 |  |  | 64 |  |  | 299 |
Reductions |  | — |  |  | — |  |  | — |
Tax positions related to prior years: |  |  |  |  |  |  |  |
Additions |  | 405 |  |  | 125 |  |  | 67 |
Reductions |  | — |  |  | — |  |  | (16 | )
Settlements |  | (104 | ) |  | (774 | ) |  | (12 | )
Lapse of statute of limitations |  | (3 | ) |  | (1 | ) |  | (9 | )
Balance, end of period |  | $ | 2,031 |  |  | $ | 1,595 |  |  | $ | 2,181 |

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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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