v3.3.1.900
Income Taxes
 12 Months Ended
Jan. 03, 2016
Income Tax Disclosure [Abstract]  
INCOME TAXES
Income Taxes
The provision for taxes on income consists of:
(Dollars in Millions)
 
2015
 
2014
 
2013
Currently payable:
 
 
 
 
 
 
U.S. taxes
 
$
2,748

 
2,625

 
594

International taxes
 
1,309

 
1,174

 
1,653

Total currently payable
 
4,057

 
3,799

 
2,247

Deferred:
 
 
 
 
 
 
U.S. taxes
 
37

 
(258
)
 
(251
)
International taxes
 
(307
)
 
699

 
(356
)
Total deferred
 
(270
)
 
441

 
(607
)
Provision for taxes on income
 
$
3,787

 
4,240

 
1,640



A comparison of income tax expense at the U.S. statutory rate of 35% in 2015, 2014 and 2013, to the Company’s effective tax rate is as follows:
(Dollars in Millions)
 
2015
 
2014
 
2013
 
U.S. 
 
$
8,179

 
8,001

 
4,261

 
International
 
11,017

 
12,562

 
11,210

 
Earnings before taxes on income:
 
$
19,196

 
20,563

 
15,471

 
Tax rates:
 
 
 
 
 
 
 
U.S. statutory rate
 
35.0
 %
 
35.0

 
35.0

 
International operations excluding Ireland
 
(6.7
)
 
(7.0
)
 
(10.6
)
 
Ireland and Puerto Rico operations(1)
 
(8.7
)
 
(6.9
)
 
(9.0
)
 
Research and orphan drug tax credits
 
(0.2
)
 
(0.3
)
 
(0.8
)
 
U.S. state and local
 
0.4

 
1.0

 
0.4

 
U.S. manufacturing deduction
 
(0.6
)
 
(0.6
)
 
(0.8
)
 
U.S. tax on international income
 
0.2

 
1.4

 
1.7

 
U.S. tax benefit on asset/business disposals
 
—

 
(1.9
)
 
(5.1
)
 
All other
 
0.3

 
(0.1
)
 
(0.2
)
 
Effective tax rate
 
19.7
 %
 
20.6

 
10.6

 

(1)The Company has subsidiaries operating in Puerto Rico under various tax incentives.

The 2015 effective tax rate decrease as compared to 2014 was primarily attributable to the increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions and a tax benefit resulting from a restructuring of international affiliates. Additionally, the 2014 effective tax rate was affected by the items mentioned below.
The increase in the 2014 effective tax rate, as compared to 2013, was attributable to the following: the divestiture of the Ortho-Clinical Diagnostics business at an approximate 44% effective tax rate, litigation accruals at low tax rates, the mix of earnings into higher tax jurisdictions, primarily the U.S., the accrual of an additional year of the Branded Prescription Drug Fee, which is not tax deductible, and additional U.S. tax expense related to a planned increase in dividends from current year foreign earnings as compared to the prior year. These increases to the 2014 effective tax rate were partially offset by a tax benefit of $0.4 billion associated with the Conor Medsystems divestiture.
The 2013 effective tax rate was reduced by a tax benefit associated with the write-off of assets for tax purposes associated with Scios, Inc., and the inclusion of both the 2013 and 2012 benefit from the Research and Development tax credit and the Controlled Foreign Corporation look-through provisions, because those provisions were enacted into law in January 2013 and were retroactive to January 1, 2012.
The 2014 effective tax rate was also reduced as the Company adjusted its unrecognized tax benefits as a result of (i) the federal appeals court’s decision in OMJ Pharmaceuticals, Inc.’s litigation regarding credits under former Section 936 of the Internal Revenue Code (see Note 21 to the Consolidated Financial Statements for additional information), and (ii) a settlement of substantially all issues related to the Company’s U.S. Internal Revenue Service audit of tax years 2006 - 2009. The impact of the settlement is reflected in the U.S. tax on international income and the All other line items within the above reconciliation.
The items noted above reflect the key drivers of the rate reconciliation.
Temporary differences and carryforwards for 2015 and 2014 were as follows:
 
 
2015 Deferred Tax
 
2014 Deferred Tax
(Dollars in Millions)
 
Asset
 
Liability
 
Asset
 
Liability
Employee related obligations
 
$
2,863

 


 
3,426

 


Stock based compensation
 
790

 


 
799

 


Depreciation
 


 
(247
)
 


 
(564
)
Non-deductible intangibles
 


 
(6,663
)
 


 
(6,671
)
International R&D capitalized for tax
 
1,318

 


 
1,433

 


Reserves & liabilities
 
1,801

 


 
1,497

 


Income reported for tax purposes
 
960

 


 
1,067

 


Net operating loss carryforward international
 
997

 


 
949

 


Miscellaneous international
 
922

(1) 
(249
)
 
1,128

(1) 
(305
)
Miscellaneous U.S. 
 
436

 


 
996

 


Total deferred income taxes
 
$
10,087

 
(7,159
)
 
11,295

 
(7,540
)

(1) The $922 million in 2015 was net of a valuation allowance related to Belgium of $196 million. The $1,128 million in 2014 was net of a valuation allowance related to Belgium of $172 million.

The Company has wholly-owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will realize future taxable income sufficient to utilize these deferred tax assets.
The following table summarizes the activity related to unrecognized tax benefits:
(Dollars in Millions)
 
2015
 
2014
 
2013
Beginning of year
 
$
2,465

 
2,729

 
3,054

Increases related to current year tax positions
 
570

 
281

 
643

Increases related to prior period tax positions
 
182

 
295

 
80

Decreases related to prior period tax positions
 
(79
)
 
(288
)
 
(574
)
Settlements
 
(4
)
 
(477
)
 
(418
)
Lapse of statute of limitations
 
(54
)
 
(75
)
 
(56
)
End of year
 
$
3,080

 
2,465

 
2,729



The unrecognized tax benefits of $3.1 billion at January 3, 2016, if recognized, would affect the Company’s annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. The IRS has completed its audit for the tax years through 2009 and is currently auditing the tax years 2010-2012. In other major jurisdictions where the Company conducts business, the years remain open generally back to the year 2004. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months.  However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.
The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest expense of $44 million, $12 million and $40 million in 2015, 2014 and 2013, respectively. The total amount of accrued interest was $366 million and $298 million in 2015 and 2014, respectively.