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INCOME TAXES | 6 Months Ended
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Jun. 30, 2021
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES The Company's effective income tax rates were 10.3% and 27.5% for the three months ended June 30, 2021 and 2020, respectively, and 11.5% and 3.9% for the six months ended June 30, 2021 and 2020, respectively. The fluctuation in the effective rates between the three and six months ended June 30, 2021 and the three and six months ended June 30, 2020 is primarily due to the impact of the litigation settlement agreement reached in 2020 with Abbott Laboratories and its direct and indirect subsidiaries to settle all outstanding patent disputes. In addition, the effective rates for the six months ended June 30, 2021 and 2020 were lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal and California research and development credits. The effective rates include a tax benefit from employee share-based compensation of $26.3 million and $20.2 million for the three months ended June 30, 2021 and 2020, respectively, and $37.8 million and $30.6 million for the six months ended June 30, 2021 and 2020, respectively. In the normal course of business, the Internal Revenue Service (“IRS”) and other taxing authorities are in different stages of examining various years of the Company's tax filings. During these audits the Company may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on the Company's results of operations and financial condition. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. As of June 30, 2021 and December 31, 2020, the gross liability for income taxes associated with uncertain tax positions was $318.7 million and $281.8 million, respectively. The Company estimates that these liabilities would be reduced by $115.3 million and $95.1 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of $203.4 million and $186.7 million, respectively, if not required, would favorably affect the Company's effective tax rate. The Company previously executed an Advance Pricing Agreement ("APA") in 2018 between the United States and Switzerland governments for tax years 2009 through 2020 covering various, but not all, transfer pricing matters. The unagreed transfer pricing matters, namely Surgical Structural Heart and Transcatheter Aortic Valve Replacement (collectively “Surgical/TAVR”) intercompany royalty transactions, then reverted to IRS Examination for further consideration as part of the respective years' regular tax audits. In addition, the Company executed other bilateral APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Japan and Singapore and between Switzerland and Japan covering tax years 2015 through 2019. The Company has filed to renew these APAs related to Japan for the years 2020 and forward. The execution of some or all of these APA renewals depends on many variables outside of the Company's control. As of June 30, 2021, all material state, local, and foreign income tax matters have been concluded for years through 2015. During the quarter, the Company completed a Wisconsin state income tax audit for tax years 2010 through 2016 which resulted in a tax benefit of approximately $2.0 million. While not material, the Company continues to address matters in India for years from 2010. The Company’s U.S. federal income tax returns through 2014 have been audited. The IRS began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and later added the 2017 tax year to this audit cycle during the first quarter of 2019. The IRS audit field work for the 2015-2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing and related matters. During the second quarter of 2021, the Company received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between the Company's U.S. and Switzerland subsidiaries. The NOPA proposes an increase to the Company's U.S. taxable income which could result in additional tax expense for this period of approximately $200 million. The Company has formally disagreed with the NOPA. The Company's analysis of the NOPA is ongoing as it represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions. The Company anticipates receiving the Revenue Agent’s Report prior to the end of the third quarter of 2021 and plans to submit a formal protest on the matter to the IRS Independent Office of Appeals. The Company continues to evaluate all possible remedies available to it, which could take several years to resolve. No payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed. The Company believes the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, has not accrued any additional amount based on the NOPA received. Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 through 2021 that were not resolved under the APA program remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of June 30, 2021. The Company has considered this information, as well as information regarding the NOPA described above, in its evaluation of its uncertain tax positions. These unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to the Company’s consolidated financial statements. Based on the information currently available and numerous possible outcomes, the Company cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and, therefore, has continued to record the gross uncertain tax positions as a long-term liability.

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