Notes to Consolidated Financial Statements
Note 5 — Taxes on Earnings
Taxes on earnings reflect the annual effective rates, including charges for interest and penalties. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. U.S. income taxes are provided on those earnings of foreign subsidiaries which are intended to be remitted to the parent company. Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries. Undistributed earnings reinvested indefinitely in foreign subsidiaries as working capital and plant and equipment aggregated $31.9 billion at December 31, 2011. It is not practicable to determine the amount of deferred income taxes not provided on these earnings. In the U.S., Abbott’s federal income tax returns through 2008 are settled except for one item, and the income tax returns for years after 2008 are open. There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant. Reserves for interest and penalties are not significant.
Earnings before taxes, and the related provisions for taxes on earnings, were as follows:
(dollars in millions) |
|||
Earnings Before Taxes: |
2011 |
2010 |
2009 |
Domestic |
$364 |
$(275) |
$1,502 |
Foreign |
4,835 |
5,988 |
5,692 |
Total |
$5,199 |
$5,713 |
$7,194 |
Taxes on Earnings: |
2011 |
2010 |
2009 |
Current: |
|||
Domestic |
$(586) |
$1,462 |
$194 |
Foreign |
1,187 |
835 |
521 |
Total current |
601 |
2,297 |
715 |
Deferred: |
|||
Domestic |
162 |
(1,068) |
905 |
Foreign |
(293) |
(142) |
(172) |
Total deferred |
(131) |
(1,210) |
733 |
Total |
$470 |
$1,087 |
$1,448 |
Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:
2011 |
2010 |
2009 |
|
Statutory tax rate on earnings |
35.0% |
35.0% |
35.0% |
Benefit of lower foreign tax rates and tax exemptions |
(22.9) |
(19.4) |
(16.4) |
Resolution of certain tax positions pertaining to prior years |
(11.2) |
— |
— |
Effect of non-deductible litigation reserve |
9.1 |
— |
— |
State taxes, net of federal benefit |
(0.4) |
0.4 |
1.0 |
All other, net |
(0.6) |
3.0 |
0.5 |
Effective tax rate on earnings |
9.0% |
19.0% |
20.1% |
As of December 31, 2011, 2010 and 2009, total deferred tax assets were $6.3 billion, $6.1 billion and $4.4 billion, respectively, and total deferred tax liabilities were $2.9 billion, $3.0 billion and $1.8 billion, respectively. Abbott has incurred losses in a foreign jurisdiction where realization of the future economic benefit is so remote that the benefit is not reflected as a deferred tax asset. Valuation allowances for recorded deferred tax assets were not significant. The tax effect of the differences that give rise to deferred tax assets and liabilities were as follows:
(dollars in millions) |
2011 |
2010 |
2009 |
Compensation and employee benefits |
$1,658 |
$1,327 |
$1,332 |
Trade receivable reserves |
492 |
525 |
369 |
Inventory reserves |
212 |
293 |
251 |
Deferred intercompany profit |
711 |
255 |
232 |
State income taxes |
227 |
233 |
187 |
Depreciation |
(164) |
(64) |
(93) |
Acquired in-process research and development and other accruals and reserves not currently deductible |
2,886 |
3,401 |
1,889 |
Other, primarily the excess of book basis over tax basis of intangible assets |
(2,636) |
(2,905) |
(1,593) |
Total |
$3,386 |
$3,065 |
$2,574 |
The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled.
(dollars in millions) |
2011 |
2010 |
2009 |
January 1 |
$2,724 |
$2,172 |
$1,523 |
Increase due to current year tax positions |
588 |
635 |
544 |
Increase due to prior year tax positions |
282 |
171 |
234 |
Decrease due to prior year tax positions |
(824) |
(94) |
(90) |
Settlements |
(647) |
(160) |
(39) |
December 31 |
$2,123 |
$2,724 |
$2,172 |
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $1.9 billion. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by up to $550 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters.
