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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Taxes | NOTE 15—INCOME TAXES:
a. | Income before income taxes:
|  | Year ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (U.S. $ in millions) |
Parent Company and its Israeli subsidiaries |  | $ | 1,022 |  |  | $ | 1,451 |  |  | $ | 1,516 |
Non-Israeli subsidiaries |  |  | (3,618 | ) |  |  | (19,830 | ) |  |  | (692 | )
|  | $ | (2,596 | ) |  | $ | (18,379 | ) |  | $ | 824 |
b. | Income taxes:
|  | Year ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (U.S. $ in millions) |
In Israel |  | $ | 131 |  |  | $ | 96 |  |  | $ | 209 |
Outside Israel |  |  | (326 | ) |  |  | (2,029 | ) |  |  | 312 |
|  | $ | (195 | ) |  | $ | (1,933 | ) |  | $ | 521 |
Current |  | $ | 700 |  |  | $ | 373 |  |  | $ | 481 |
Deferred |  |  | (895 | ) |  |  | (2,306 | ) |  |  | 40 |
|  | $ | (195 | ) |  | $ | (1,933 | ) |  | $ | 521 |
|  | Year ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (U.S. $ in millions) |
Income (loss) before income taxes |  | $ | (2,596 | ) |  | $ | (18,379 | ) |  | $ | 824 |
Statutory tax rate in Israel |  |  | 23.0 | % |  |  | 24.0 | % |  |  | 25.0 | %
Theoretical provision for income taxes |  | $ | (597 | ) |  | $ | (4,411 | ) |  | $ | 206 |
Increase (decrease) in effective tax rate due to: |  |  |  |  |  |  |  |  |  |  |  |
The Parent Company and its Israeli subsidiaries— |  |  |  |  |  |  |  |  |  |  |  |
Mainly tax benefits arising from reduced tax rates under benefit programs |  |  | (134 | ) |  |  | (253 | ) |  |  | (212 | )
Non-Israeli subsidiaries, including impairments (*) |  |  | 381 |  |  |  | 3,817 |  |  |  | 546 |
U.S. Tax Cuts and Jobs Act effect |  |  | 97 |  |  |  | (1,061 | ) |  |  | — |
Increase (decrease) in other uncertain tax positions—net |  |  | 58 |  |  |  | (25 | ) |  |  | (19 | )
Effective consolidated income taxes |  | $ | (195 | ) |  | $ | (1,933 | ) |  | $ | 521 |
* | Income before income taxes includes goodwill impairment in non-Israeli subsidiaries that did not have a corresponding tax effect.
The effective tax rate is the result of a variety of factors, including the geographic mix and type of products sold during the year, different effective tax rates applicable to non-Israeli subsidiaries that have tax rates above Teva’s average tax rates, the impact of impairment, restructuring and legal settlement charges and adjustments to valuation allowances on deferred tax assets on such subsidiaries.
c. | Deferred income taxes:
|  | December 31, |
|  | 2018 |  |  | 2017 |
|  | (U.S. $ in millions) |
Long-term deferred tax assets (liabilities)—net: |  |  |  |
Inventory related |  | $ | 113 |  |  | $ | 40 |
Sales reserves and allowances |  |  | 199 |  |  |  | 201 |
Provision for legal settlements |  |  | 42 |  |  |  | 171 |
Intangible assets (*) |  |  | (2,282 | ) |  |  | (3,132 | )
Carryforward losses and deductions and credits (**) |  |  | 1,340 |  |  |  | 1,485 |
Property, plant and equipment |  |  | (167 | ) |  |  | (231 | )
Deferred interest (***) |  |  | 391 |  |  |  | — |
Provisions for employee related obligations |  |  | 102 |  |  |  | 142 |
Other |  |  | 123 |  |  |  | 125 |
|  |  | (139 | ) |  |  | (1,199 | )
Valuation allowance—in respect of carryforward losses and deductions that may not be utilized (**) |  |  | (1,633 | ) |  |  | (1,504 | )
|  | $ | (1,772 | ) |  | $ | (2,703 | )
* | The decrease in deferred tax liability is mainly due to impairment and amortization.
** | The amounts are shown after reduction for unrecognized tax benefits of $35 million and $26 million as of December 31, 2018 and 2017, respectively.
This amount represents the tax effect of gross carryforward losses and deductions with the following expirations: 2019-2021—$206 million; 2022-2028—$448 million; 2029 and thereafter—$280 million. The remaining balance—$441 million—can be utilized with no expiration date.
*** | The increase in deferred tax asset is mainly due to the interest expense limitation following the enactment of the Tax Cuts and Jobs Act.
The deferred income taxes are reflected in the balance sheets among:
|  | December 31, |
|  | 2018 |  |  | 2017 |
|  | (U.S. $ in millions) |
Long-term assets—deferred income taxes |  |  | 368 |  |  |  | 574 |
Long-term liabilities—deferred income taxes |  |  | (2,140 | ) |  |  | (3,277 | )
|  | $ | (1,772 | ) |  | $ | (2,703 | )
Balances are presented under long term deferred taxes, due to the implementation of ASU 2015-17.
d. | Uncertain tax positions:
The following table summarizes the activity of Teva’s gross unrecognized tax benefits:
|  | Year ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (U.S. $ in millions) |
Balance at the beginning of the year |  | $ | 1,034 |  |  | $ | 734 |  |  | $ | 648 |
Increase related to prior year tax positions, net |  |  | 76 |  |  |  | 56 |  |  |  | 23 |
Increase related to current year tax positions |  |  | 11 |  |  |  | 26 |  |  |  | 71 |
Decrease related to settlements with tax authorities and lapse of applicable statutes of limitations |  |  | (49 | ) |  |  | (56 | ) |  |  | (103 | )
Liabilities assumed in acquisitions |  |  | — |  |  |  | 273 |  |  |  | 101 |
Other |  |  | — |  |  |  | 1 |  |  |  | (6 | )
Balance at the end of the year |  | $ | 1,072 |  |  | $ | 1,034 |  |  | $ | 734 |
Uncertain tax positions, mainly of a long-term nature, included accrued potential penalties and interest of $131 million, $112 million and $83 million as of December 31, 2018, 2017 and 2016, respectively. The total amount of interest and penalties reflected in the consolidated statements of income was a net increase of $19 million for the year ended December 31, 2018, a net increase of $29 million for the year ended December 31, 2017 and a net decrease of $18 million for the year ended December 31, 2016. Substantially all the above uncertain tax benefits, if recognized, would reduce Teva’s annual effective tax rate. Teva does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which is difficult to estimate.
e. | Tax assessments:
Teva files income tax returns in various jurisdictions with varying statutes of limitations. The Parent Company and its subsidiaries in Israel have received final tax assessments through tax year 2007. In 2013, Teva settled the 2005-2007 income tax assessment with the Israeli tax authorities, paying $213 million. No further taxes are due in relation to these years. Certain guidelines which were set pursuant to the agreement reached in relation to the 2005-2007 assessment have been implemented in the audit of tax years 2008-2011, and are reflected in the provisions. The Israeli tax authorities issued tax assessment decrees for 2008-2012 and a tax assessment for 2013-2016, challenging the Company’s positions on several issues. Teva has protested the 2008-2012 decrees before the Central District Court in Israel and intends to challenge the tax assessment for 2013-2016 as well. The Company believes it has adequately provided for these items and that any adverse results would have an immaterial impact on Teva’s financial statements. The Company’s subsidiaries in North America and Europe have received final tax assessments mainly through tax year 2008.
f. | Basis of taxation:
The Company and its subsidiaries are subject to tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. The Company believes that its accruals for tax liabilities are adequate for all open years. The Company considers various factors in making these assessments, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these assessments can involve a series of complex judgments regarding future events. Incentives Applicable until 2013 Under the incentives regime applicable to the Company until 2013, industrial projects of Teva and certain of its Israeli subsidiaries were eligible for “Approved Enterprise” status. Most of the projects in Israel have been granted Approved Enterprise status under the “alternative” tax benefit track which offered tax exemption on undistributed income for a period of two to ten years, depending on the location of the enterprise. Upon distribution of such exempt income, the distributing company is subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s income. Amendment 69 to the Investment Law Pursuant to Amendment 69 to the Investment Law (“Amendment 69”), a company that elected by November 11, 2013 to pay a corporate tax rate as set forth in that amendment (rather than the tax rate applicable to Approved Enterprise income) with respect to undistributed exempt income accumulated by the company up until December 31, 2011 is entitled to distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investments in Israel over the five-year period commencing in 2013. Teva invested the entire required amount in 2013. During 2013, Teva applied the provisions of Amendment 69 to certain exempt profits Teva accrued prior to 2012. Consequently, Teva paid $577 million in corporate tax on exempt income of $9.4 billion. Part of this income was distributed as dividends during 2013-2018, while the remainder is available to be distributed as dividends in future years with no additional corporate tax liability. Incentives Applicable starting 2014: The Incentives Regime—Amendment 68 to the Investment Law Under Amendment 68 to the Investment Law, which Teva started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all qualifying industrial income of such company (“Preferred Enterprise”), as opposed to the previous law’s incentives, which were limited to income from Approved Enterprises during the benefits period. Under the law, when the election is made, the uniform tax rate for 2014 until 2016 was 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The uniform tax rate for Development Zone A, as of January 1, 2017, is 7.5% (as part of changes enacted in Amendment 73, as described below). The profits of these “Preferred Enterprise” will be freely distributable as dividends, subject to a 20% or lower withholding tax, under an applicable tax treaty. Certain “Special Preferred Enterprises” that meet more stringent criteria (significant investment, R&D or employment thresholds) will enjoy further reduced tax rates of 5% in Zone A and 8% elsewhere. In order to be classified as a “Special Preferred Enterprises,” the approval of three governmental authorities in Israel is required. The New Technological Enterprise Incentives Regime—Amendment 73 to the Investment Law Starting 2017, part of the Company taxable income in Israel is entitled to a preferred 6% tax rate under Amendment 73 to the Investment Law. The new incentives regime applies to “Preferred Technological Enterprises” or “Special Preferred Technological Enterprises”. A “Preferred Technological Enterprise” is an enterprise that meet certain conditions, including, inter alia:
| 1. | Investment of at least 7% of income, or at least NIS 75 million (approximately $19 million) in R&D activities; and
| 2. | One of the following:
| a. | At least 20% of the workforce (or at least 200 employees) are employed in R&D;
| b. | A venture capital investment approximately equivalent to at least $2 million was previously made in the company; or
| c. | Growth in sales or workforce by an average of 25% over the three years preceding the tax year.
A “Special Preferred Technological Enterprise” is an enterprise that meets, inter alia conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.8 billion). Preferred Technological Enterprises are subject to a corporate tax rate of 7.5% on their income derived from intellectual property in areas in Israel designated as Zone A and 12% elsewhere, while Special Preferred Technological Enterprises are subject to 6% on such income. The withholding tax on dividends from these enterprises is 4% to foreign companies (or a lower rate under a tax treaty, if applicable). Income not eligible for Preferred Technological Enterprise benefits is taxed at the regular corporate tax rate, which is 23%, or the preferred tax rate, as the case may be. The Parent Company and its Israeli subsidiaries elected to compute their taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of U.S. dollar – NIS exchange rate on the Company’s Israeli taxable income. Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. Certain manufacturing subsidiaries operate in several jurisdictions outside Israel, some of which benefit from tax incentives such as reduced tax rates, investment tax credits and accelerated deductions. U.S. Tax reform On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018, and imposed a one-time deemed repatriation tax based on the post-1986 earnings and profits of the Company’s U.S. owned foreign subsidiaries. The year ended December 31, 2017 includes a one-time benefit of $1.2 billion recorded to re-measure certain of the Company’s U.S. deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The one-time deemed repatriation tax is based on the post-1986 earnings and profits for which the Company has previously deferred from U.S. income taxes and is payable over 8 years. The year ended December 31, 2017 included a $112 million provisional estimate for Teva’s one-time deemed repatriation taxes liability. During 2018, Teva completed its analysis of the impacts of the Act and recorded an additional expense of $97 million, pursuant to guidance issued by the U.S. Department of Treasury and revisions to the Company’s estimates since the assessment date. Other provisions of the Act did not have a material effect on our effective tax rate for 2018.

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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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