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Income taxes
 12 Months Ended
Dec. 31, 2023
Income taxes
NOTE 13—Income taxes:
 
a.
Income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Year ended December 31,
  
    
2023
     
2022
     
2021
  
    
(U.S. $ in millions)
  
Parent Company and its Israeli subsidiaries
    $ (767 )     $ (119 )     $ 126  
Non-Israeli
subsidiaries
      143        (3,044 )       532  
    
 
 
     
 
 
     
 
 
  
     $ (624 )     $ (3,163 )     $ 658  
    
 
 
     
 
 
     
 
 
  
The financial data presented in the table above for the year ended December 31, 2022 have been revised as discussed in note 1b.
 
b.
Income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Year ended December 31,
  
    
2023
     
2022
     
2021
  
    
(U.S. $ in millions)
  
In Israel
    $ (402 )     $ 33      $ 124  
Outside Israel
      395        (676 )       87  
    
 
 
     
 
 
     
 
 
  
     $ (7 )     $ (643 )     $ 211  
    
 
 
     
 
 
     
 
 
  
Current
    $ 333      $ 430      $ 270  
Deferred
      (340 )       (1,073 )       (59 ) 
    
 
 
     
 
 
     
 
 
  
     $ (7 )     $ (643 )     $ 211  
    
 
 
     
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
2023
    
2022
    
2021
  
    
(U.S. $ in millions)
  
Income (loss) before income taxes (***)
    $ (624 )    $ (3,163 )    $ 658  
Statutory tax rate in Israel
      23 %      23 %      23 % 
    
 
 
    
 
 
    
 
 
  
Theoretical provision for income taxes (***)
    $ (144 )    $ (727 )    $ 151  
Increase (decrease) in the provision for income taxes due to:
                         
The Parent Company and its Israeli subsidiaries - Tax benefits arising from net deferred taxes, resulting from intellectual property related integration plans, including carryforward losses
      (272)
    —        —   
Tax benefits arising from reduced tax rates under benefit programs
      14       15       (12)  
Mainly nondeductible items and prior year tax
      —        35       20  
Non-Israeli
subsidiaries, including impairments (*)
      372       941       117  
Worthless stock deduction (**)
      —        (909)       —   
Increase (decrease) in other uncertain tax positions - net
      23       2       (65)  
    
 
 
    
 
 
    
 
 
  
Effective consolidated income taxes (***)
    $ (7)     $ (643)     $ 211  
    
 
 
    
 
 
    
 
 
  
 
*
In 2023 and 2022, income before income taxes includes goodwill impairment in
non-Israeli
subsidiaries that did not have a corresponding tax effect.
**
In 2022, one of Teva’s U.S. subsidiaries was determined to be insolvent for tax purposes (i.e., its liabilities exceeded the fair market value of its assets), mainly in light of its accumulated operational losses. Consequently, Teva recognized on its 2022 tax return, a worthless stock deduction of approximately $4.2 billion, with related tax benefit of approximately $909 million.
***
The financial data presented in the tables above for the year ended December 31, 2022 have been revised as discussed in note 1b.
Teva’s 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 different than Teva’s average tax rates, net deferred tax benefits from intellectual property related integration plans, impairments, legal settlements, and interest expense disallowances. Such intellectual property related integration plans have been adopted to, among other things, address the global adoption of the OECD Pillar Two minimum effective corporate tax, commencing in 2024. Additionally, the effective tax rate includes adjustments to valuation allowances on deferred tax assets and adjustments to uncertain tax positions.
 
c.
Deferred income taxes:
 
 
 
 
 
 
 
 
 
 
    
December 31,
  
    
2023
     
2022
  
    
(U.S. $ in millions)
  
Deferred tax assets (liabilities), net:
         
Inventory related
    $ 76      $ 125  
Sales reserves and allowances
      81        89  
Provision for legal settlements
      702        703  
Intangible assets (*)
      (118 )       (567 ) 
Carryforward losses and deductions and credits (**)
      2,463        2,850  
Property, plant and equipment
      (225 )       (238 ) 
Deferred interest
      799        800  
Provisions for employee related obligations
      80        82  
Other (***)
      357        138  
    
 
 
     
 
 
  
       4,215        3,982  
Valuation allowance—in respect of carryforward losses and deductions that may not be utilized
      (3,009 )       (3,072 ) 
    
 
 
     
 
 
  
     $ 1,206      $ 910  
    
 
 
     
 
 
  
 
(*)
The increase in deferred tax is mainly due to intellectual property related integration.
(**)
The amounts are shown following a reduction for unrecognized tax benefits of $2 million and $1 million as of December 31, 2023 and 2022, respectively.
The amount as of December 31, 2023 represents the tax effect of gross carryforward losses and deductions with the following expirations:
2024
-
2025
$50 million;
2026
-
2033
$924 million;
2034
and thereafter $291 million. The remaining balance—$1,196 million—can be utilized with no expiration date.
 
(***)
The amounts shown are primarily comprised of Capitalization of R&D Expenses. Other deferred income taxes presented in the table above as of December 31, 2022, have been revised as discussed in note 1b.
The deferred income taxes are reflected in the balance sheets among:
 
 
 
 
 
 
 
 
 
 
    
December 31,
  
    
2023
     
2022
  
    
(U.S. $ in millions)
  
Long-term assets—deferred income taxes (*)
      1,812        1,458  
Long-term liabilities—deferred income taxes
      (606 )       (548 ) 
    
 
 
     
 
 
  
     $ 1,206      $ 910  
    
 
 
     
 
 
  
 
(*)
Long-term assets—deferred income taxes presented in the tables above as of December 31, 2022, have been revised as discussed in note 1b.
 
d.
Uncertain tax positions:
The following table summarizes the activity of Teva’s gross unrecognized tax benefits:
 
    
Year ended December 31,
  
    
2023
     
2022
     
2021
  
    
(U.S. $ in millions)
  
Balance at the beginning of the year
    $ 638      $ 672      $ 888  
Increase (decrease) related to prior year tax positions, net
      (1 )       (46 )       (106 ) 
Increase related to current year tax positions
      15        42        7  
Decrease related to settlements with tax authorities and lapse of applicable statutes of limitations
      (15 )       (31 )       (115 ) 
Other
      14        1        (2 ) 
  
 
 
     
 
 
     
 
 
  
Balance at the end of the year
    $ 651      $ 638      $ 672  
  
 
 
     
 
 
     
 
 
  
Uncertain tax positions, mainly of a long-term nature, include accrued potential penalties and interest of $224 million, $212 million and $210 million as of December 31, 2023, 2022 and 2021, respectively. The total amount of interest and penalties reflected in the consolidated statements of income was a net increase of $12 million, $2 million and $37 million for the years ended December 31, 2023, 2022 and 2021, respectively. 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 or court decisions, 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. Teva and its subsidiaries in Israel have received final tax assessments through tax year 2011.
The Israeli tax authorities (“ITA”) issued tax assessment decrees for 2008-2011, 2012 and 2013-2016, challenging the Company’s positions on several issues. Teva has protested the 2008-2011, 2012 and 2013-2016 decrees before the Central District Court in Israel. On April 17, 2023, the ITA issued a tax assessment for 2017-2020 challenging the Company’s positions on several issues, which the Company intends to challenge.
In October 2021, the Central District Court in Israel held in favor of the ITA with respect to 2008-2011 decrees. Teva appealed this decision to the Israeli Supreme Court and the appeal hearing is expected to begin in March 2024. On December 6, 2023, the Central District Court issued a partial judgment on the 2012-2016 decrees, to apply the court’s findings in the judgment for the 2008-2011 decrees on the overlapping issues. The case with respect to the other issues under dispute for the 2012-2016 decrees remains pending. The next court hearing is scheduled for September 18, 2024. The tax liability resulting from the October 2021 and the December 2023 Central District Court decisions, with respect to the decrees for 2008-2011 and 2012-2016 was approximately $350 million, of which a portion has been paid during 2022 and 2023, with the remainder to be paid during 2024 and 2025.
Teva believes it has adequately provided for all of its uncertain tax positions, including those items currently under dispute, however, adverse results could be material.
In the U.S., Teva is subject to ongoing examination of its U.S. subsidiaries by federal and state tax authorities. The years 2015 to 2019 are open years, currently under IRS examination. Additionally, Teva is currently under examination by various state tax authorities for open years from 2014 to 2021. In addition to ongoing audits, Teva and its subsidiaries have tax years 2009 to 2014 that are in administrative suspense for one open matter, pending the outcome of the court cases discussed further below.
 
Teva believes it has adequately provided for all uncertain tax positions for open years, and that any other adverse results of examinations or litigation would have an immaterial impact on the Company’s financial statements.
Teva currently has a legal proceeding in the U.S. Tax Court, one on appeal to the Third Circuit, which has ruled favorably for another taxpayer on a substantially similar matter, and one on appeal to the U.S. District Court of Appeals for the Federal Circuit. Each dispute with the IRS addresses the question of whether certain legal fees incurred related to Abbreviated New Drug Applications (“ANDAs”) were eligible to be deducted in the year incurred for tax purposes or were required to be amortized over longer periods under U.S. tax law. Teva received a favorable ruling in the Court of Federal Claims in August 2022, and the Department of Justice filed a notice of appeal in December 2022. The U.S. Tax Court case remains in the
pre-trial
phase. While Teva continues to vigorously defend itself in these cases, and believes it is
more-likely-than-not
to prevail, there is uncertainty in the outcome and an adverse ruling could materially affect the Company’s financial statements.
Teva filed a claim seeking the refund of withholding taxes paid to the Indian tax authorities in 2012. Trial in this case is ongoing. A final and binding decision against Teva in this case may lead to an impairment in an amount up to $126 million.
The Company’s subsidiaries in Europe have received final tax assessments mainly through tax year 2015.
 
f.
Basis of taxation:
The Company and its subsidiaries are subject to tax in many jurisdictions, and 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.
An assessment of the tax that would have been payable had the Company’s foreign subsidiaries distributed their income to the Company is not practicable because of the multiple levels of corporate ownership and multiple tax jurisdictions involved in each hypothetical dividend distribution.
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
Since 2017, a portion of the Company’s taxable income in Israel is entitled to a preferred 6% tax rate under Amendment 73 to the Investment Law as it pertains to Special Preferred Technological Enterprises.
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:
 
  •  
Investment of at least 7% of income, or at least NIS 75 million (approximately $22 million) in R&D activities; and
 
  •  
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 $2.9 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.
The 2021 Budget Law
On November 15, 2021, the Israeli Parliament released its 2021-2022 Budget Law (“2021 Budget Law”). The 2021 Budget Law introduces a new dividend ordering rule that apportions every dividend between previously
tax-exempt
and previously taxed income. Consequently, distributions (including deemed distributions as per Section 51(h)/51B of the Investment Law) may entail additional corporate tax liability to the distributing company. The new dividend ordering rule may have an adverse effect on Teva’s financial condition and results of operations in future years, as the Company still has
tax-exempt
profits in its retained earnings. Income taxes have not been recognized for amounts of
tax-exempt
income generated from the Company’s current Approved Enterprises retained for reinvestment.
Pillar Two Taxation
The OECD introduced Base Erosion and Profit Shifting (“BEPS”) Pillar Two rules that impose a global minimum tax rate
of 15% for large multinational corporations. On December 12, 2022, the EU Council announced that EU member states had reached an agreement to implement the minimum taxation component of 15% of the OECD’s reform of international taxation. Other countries have also enacted or are expected to enact legislation to be effective as early as January 1, 2024, with general implementation of a global minimum tax by January 1, 2025. The OECD continues to release additional guidance and the Company is monitoring the new rules and country agreements. The Company is currently evaluating the potential impact on its consolidated financial statements and related disclosures and does not expect Pillar
Two
to have a material impact on its effective tax rate or consolidated financial statements
 in the foreseeable future
.