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Income Taxes | 9 Months Ended
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Mar. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | 7. Income Taxes Fluctuations in our benefit from income taxes as a percentage of pretax earnings/(loss) (“effective tax rate”) are due to changes in international and U.S. state effective tax rates resulting from our business mix and discrete items. Effective Tax Rate During the three and nine months ended March 31, 2022, the effective tax rate was (916.5) percent and (44.4) percent, respectively, and reflects the impact of the tax effect of the year-to-date goodwill impairment charges recognized during the nine months ended March 31, 2022. During the three and nine months ended March 31, 2021, the effective tax rate was 72.8 percent and (143.3) percent, respectively, and included the impact related to the treatment of the tax effect of opioid litigation charges, the resolution of certain transfer pricing matters with the U.S. Internal Revenue Service ("IRS") and withholding taxes for planned distributions from foreign subsidiaries. During the nine months ended March 31, 2021, the effective tax rate included the benefit from a net operating loss carryback primarily related to a self-insurance pre-tax loss. Tax Effects of Goodwill Impairment Charge During the nine months ended March 31, 2022, we recognized year-to-date pre-tax charges of $1.8 billion for goodwill impairments related to the Medical Unit. The net tax benefit related to these charges is $126 million for fiscal 2022. Unless an item is considered discrete because it is unusual or infrequent, the tax impact of the item is included in our estimated annual effective tax rate. When items are recognized through our estimated annual effective tax rate, we apply our estimated annual effective tax rate to the earnings/(loss) before income taxes for the year-to-date period to compute our benefit from income taxes for the current quarter and year-to-date period. The tax impacts of discrete items are recognized in their entirety in the period in which they occur. The tax effect of the goodwill impairment charges during the nine months ended March 31, 2022 was included in our estimated annual effective tax rate because it was not considered unusual or infrequent, given that we recorded goodwill impairment in prior fiscal years. The impact of the non-deductible goodwill significantly decreased the estimated annual effective tax rate for fiscal 2022. Applying the lower tax rate to the year-to-date loss resulted in recognizing an interim tax expense of approximately $1.2 billion, which impacted the provision for income taxes in the condensed consolidated statements of earnings/(loss) during the three and nine months ended March 31, 2022 and prepaid expenses and other assets in the condensed consolidated balance sheet at March 31, 2022. Approximately $180 million of this interim tax expense will reverse in the fourth quarter of fiscal 2022. Cordis Divestiture During the nine months ended March 31, 2022, we completed the divestiture of the Cordis business. In connection with the closing, we recorded net tax expense of $9 million and $29 million during the three and nine months ended March 31, 2022, respectively. The tax effects of these matters during the nine months ended March 31, 2022 were included in our full year effective tax rate forecast. We currently estimate the tax expense associated with this matter for the full fiscal 2022 will be $38 million. Tax Effects of Self-Insurance Pre-tax Loss During the nine months ended March 31, 2021, our wholly-owned insurance subsidiary recorded a self-insurance pre-tax loss in its fiscal 2020 statutory financial statements primarily related to opioid litigation. This self-insurance pre-tax loss, which did not impact our pre-tax consolidated results, was deducted on our fiscal 2020 consolidated federal income tax return and contributed to a significant net operating loss for tax purposes. The net operating loss was carried back and applied to adjust our taxable income for fiscal 2015, 2016, 2017, and 2018 as permitted under the Coronavirus Aid, Relief and Economic Security ("CARES") Act enacted by the United States Congress in March 2020. Accordingly, our provision for income taxes during the nine months ended March 31, 2021 included a $419 million benefit from the net operating loss carryback primarily to reflect the difference between the federal statutory income tax rate during the fiscal years from 2015 to 2018 (35 percent for fiscal 2015, 2016, and 2017 and 28 percent for fiscal 2018) and the current federal statutory income tax rate of 21 percent. In fiscal 2021, we filed for a refund of $974 million, which we expect to receive within 12 months. Accordingly, we had a current asset for this amounts on our condensed consolidated balance sheets at both March 31, 2022 and June 30, 2021. In April 2022, we received a payment for $966 million, which is net of certain adjustments. We also increased our non-current deferred tax liability by approximately $700 million during the nine months ended March 31, 2021 related to this matter. We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of tax law; however, it is possible that the tax authorities could challenge these tax benefits. The actual amount of the tax benefit may differ materially from these estimates. Tax Effects of Opioid Litigation Charges In connection with the $1.02 billion pre-tax charges for the opioid litigation recorded during the nine months ended March 31, 2021, the net tax benefits were approximately $180 million for the nine months ended March 31, 2021 and $228 million for fiscal 2021. Our tax benefits are estimates, which reflect our current assessment of the estimated future deductibility of the amount that may be paid under the accrual taken in connection with the opioid litigation and are net of unrecognized tax benefits of $35 million during the nine months ended March 31, 2021, and $219 million for fiscal 2021. We have recognized no tax benefit associated with Opioid accruals made in fiscal 2022. We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the U.S. Tax Cuts and Jobs Act ("Tax Act"); however, these estimates require significant judgment since the U.S. tax law governing deductibility was changed by the Tax Act. Further, it is possible Congress or the tax authorities could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of the tax benefit may differ materially from these estimates. Unrecognized Tax Benefits We had $938 million and $932 million of unrecognized tax benefits, at March 31, 2022 and June 30, 2021 respectively. The March 31, 2022 and June 30, 2021 balances include $856 million and $849 million of unrecognized tax benefits, respectively, that if recognized, would have an impact on the effective tax rate. At March 31, 2022 and June 30, 2021, we had $46 million and $49 million, respectively, accrued for the payment of interest and penalties related to unrecognized tax benefits, which we recognize in the provision for/(benefit from) income taxes in the condensed consolidated statements of earnings/(loss). These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the condensed consolidated balance sheets. It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the IRS or other taxing authorities, possible settlement of IRS and other audit issues, reassessment of existing unrecognized tax benefits or the expiration of statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is between zero and a net decrease of up to $5 million, exclusive of penalties and interest. Other Tax Matters We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal years 2015 through 2020. Expiring or unusable loss and credit carryforwards and the required valuation allowances are adjusted quarterly based on available information. This information may support either an increase or a decrease in the required valuation allowance. After applying the valuation allowances, we do not anticipate any limitations on our use of any of the other net deferred income tax assets described above. We operate in a complex multinational tax environment and are subject to tax treaty arrangements and transfer pricing guidelines for intercompany transactions that are subject to interpretation. Uncertainty in a tax position may arise as tax laws are subject to interpretation. We are a party to a tax matters agreement with CareFusion Corporation ("CareFusion"), a subsidiary of Becton, Dickinson and Company. Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to our fiscal 2010 spin-off of CareFusion. The indemnification receivable was $73 million at March 31, 2022 and $72 million at June 30, 2021, and is included in other assets in the condensed consolidated balance sheets. As a result of the acquisition of the Patient Recovery Business, Medtronic plc is obligated to indemnify us for certain tax exposures and transaction taxes related to periods prior to the acquisition under the purchase agreement. The indemnification receivable was zero at March 31, 2022 and $12 million at June 30, 2021, respectively, and is included in other assets in the condensed consolidated balance sheets.

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