v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Earnings Before Income Tax Expense
years ended December 31 (in millions)202220212020
Domestic$(4,608)$(1,644)$(4,467)
Foreign18,085 14,633 7,865 
Total earnings before income tax expense$13,477 $12,989 $3,398 
Income Tax Expense
years ended December 31 (in millions)202220212020
Current
Domestic$2,647 $1,987 $907 
Foreign916 351 194 
Total current taxes$3,563 $2,338 $1,101 
Deferred
Domestic$(1,512)$(839)$(58)
Foreign(419)(59)(2,267)
Total deferred taxes$(1,931)$(898)$(2,325)
Total income tax expense (benefit)$1,632 $1,440 $(1,224)
Effective Tax Rate Reconciliation
years ended December 31202220212020
Statutory tax rate21.0 %21.0 %21.0 %
Effect of foreign operations(4.4)(5.4)2.4 
U.S. tax credits(2.8)(2.8)(10.6)
Impacts related to U.S. tax reform— — (1.1)
Non-deductible expenses0.6 0.3 7.2 
Tax law changes and related restructuring(2.4)(2.0)(48.5)
Tax audits and settlements0.9 (0.4)(5.1)
All other, net(0.8)0.4 (1.3)
Effective tax rate12.1 %11.1 %(36.0)%
The effective income tax rate fluctuates year to year due to the allocation of the company's taxable earnings among jurisdictions, as well as certain discrete factors and events in each year, including changes in tax law, acquisitions and collaborations. The effective income tax rates in 2022, 2021 and 2020 differed from the statutory tax rate principally due to the impact of foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions, business development activities, changes in enacted tax rates and laws and related restructuring, tax audits and settlements and changes in fair value of contingent consideration. The effective tax rates for these periods also reflected the benefit from U.S. tax credits principally related to research and development credits, the orphan drug tax credit and Puerto Rico excise tax credits. The Puerto Rico tax credits relate to excise tax on certain products manufactured in Puerto Rico. The tax is levied on gross inventory purchases from entities in Puerto Rico and is included in cost of products sold in the consolidated statements of earnings. The majority of the tax is creditable for U.S. income tax purposes.
In 2022, Puerto Rico enacted Act 52-2002 (the Puerto Rico Act) allowing for a transition from a Puerto Rico excise tax levied on gross inventory purchases to an income-based tax beginning in 2023. The company completed the transition requirements of the Puerto Rico Act in 2022, resulting in the remeasurement of certain deferred tax assets and liabilities based on income tax rates at which they are expected to reverse in the future. The net tax benefit from the remeasurement of deferred taxes related to the Puerto Rico Act was $323 million.
The 2020 effective income tax rate included the recognition of a net tax benefit of $1.7 billion related to changes in tax laws and related restructuring, including certain intra-group transfers of intellectual property and deferred tax remeasurement.
The Tax Cuts and Jobs Act (the Act) was signed into law in December 2017, resulting in significant changes to the U.S. corporate tax system, including a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed. The Act also created a minimum tax on certain foreign sourced earnings. The company’s accounting policy for the minimum tax on foreign sourced earnings is to report the tax effects on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.
Deferred Tax Assets and Liabilities
as of December 31 (in millions)20222021
Deferred tax assets
Compensation and employee benefits$497 $937 
Accruals and reserves1,023 667 
Chargebacks and rebates991 837 
Advance payments547 809 
Net operating losses and other carryforwards10,391 10,095 
Other1,710 1,234 
Total deferred tax assets15,159 14,579 
Valuation allowances(9,627)(9,391)
Total net deferred tax assets5,532 5,188 
Deferred tax liabilities
Excess of book basis over tax basis of intangible assets(3,590)(4,711)
Excess of book basis over tax basis in investments(340)(308)
Other(772)(904)
Total deferred tax liabilities(4,702)(5,923)
Net deferred tax assets (liabilities)$830 $(735)
The increase in net deferred tax assets is primarily related to capitalization of R&D expense and increases in accruals and reserves, offset by a decrease in advance payments. The decrease in deferred tax liabilities is primarily related to amortization of intangible assets.
In connection with the Allergan acquisition, the company recorded adjustments within the measurement period in 2021 related to foreign net operating losses and other credit carryforwards that are not expected to be realized. The adjustments reflected an increase of $8.2 billion to deferred tax assets and an offsetting increase to valuation allowances, resulting in no net impact to deferred tax assets.
The company had valuation allowances of $9.6 billion as of December 31, 2022 and $9.4 billion as of December 31, 2021. These were principally related to foreign and state net operating losses and other credit carryforwards that are not expected to be realized.
As of December 31, 2022, the company had U.S. federal, state and foreign credit carryforwards of $355 million as well as U.S. federal, state and foreign net operating loss carryforwards of $33.2 billion, which will expire at various times through 2042. The remaining U.S. federal and foreign loss carryforwards of $6.0 billion have no expiration.
The Act significantly changed the timing and manner in which earnings of foreign subsidiaries are subject to U.S. tax. Therefore, unremitted foreign earnings subject to the Act’s transition tax are not considered indefinitely reinvested. Post-2017 earnings subject to the U.S. minimum tax on foreign sourced earnings or eligible for the 100 percent foreign dividends received deduction are also not considered indefinitely reinvested earnings. However, the company generally considers instances of outside basis differences in foreign subsidiaries that would incur additional U.S. tax upon reversal (e.g., capital gain distribution) to be permanent in duration. The unrecognized tax liability is not practicable to determine.
Unrecognized Tax Benefits
years ended December 31 (in millions)202220212020
Beginning balance$5,489 $5,264 $2,661 
Increase due to acquisition— — 2,674 
Increase due to current year tax positions88 208 91 
Increase due to prior year tax positions243 137 59 
Decrease due to prior year tax positions(33)(62)(7)
Settlements(7)(24)(141)
Lapse of statutes of limitations(110)(34)(73)
Ending balance$5,670 $5,489 $5,264 
If recognized, the net amount of potential tax benefits that would impact the company's effective tax rate is $5.5 billion in 2022 and $5.2 billion in 2021. The "Increase due to current year tax positions" and "Increase due to prior year tax positions" in the table above include amounts related to federal, state and international tax items. "Increase due to acquisition" in the table above includes amounts related to federal, state and international tax items recorded in acquisition accounting related to the Allergan acquisition.
AbbVie recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statements of earnings. AbbVie recognized gross income tax expense of $339 million in 2022, $161 million in 2021 and $142 million in 2020, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross interest and penalties of $1.1 billion at December 31, 2022, $803 million at December 31, 2021 and $642 million at December 31, 2020.
The company is routinely audited by the tax authorities in significant jurisdictions and a number of audits are currently underway. It is reasonably possible during the next 12 months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitation, the company's gross unrecognized tax benefits balance may change within the next 12 months up to $162 million. All significant federal, state, local and international matters have been concluded for years through 2009. The company believes adequate provision has been made for all income tax uncertainties.