BAXTER INTERNATIONAL INCBAX
BAXTER INTERNATIONAL INC Income Taxes Disclosure
| INCOME TAXES | ||
Income (Loss) Before Income Tax Expense (Benefit) by Category
| years ended December 31 (in millions) | 2025 | 2024 | 2023 | ||||||||
| United States | $ | (1,345) | $ | (1,499) | $ | (1,057) | |||||
| Foreign | 840 | 1,210 | 1,299 | ||||||||
| Income (loss) from continuing operations before income taxes | $ | (505) | $ | (289) | $ | 242 | |||||
Income Tax Expense (Benefit)
| years ended December 31 (in millions) | 2025 | 2024 | 2023 | ||||||||
| Current | |||||||||||
| United States | |||||||||||
| Federal | $ | 118 | $ | 19 | $ | 1 | |||||
| State and local | 29 | 21 | 9 | ||||||||
| Foreign | 171 | 259 | 307 | ||||||||
| Current income tax expense (benefit) | 318 | 299 | 317 | ||||||||
| Deferred | |||||||||||
| United States | |||||||||||
| Federal | (34) | (197) | (123) | ||||||||
| State and local | 37 | (21) | (25) | ||||||||
| Foreign | 74 | (44) | (108) | ||||||||
| Deferred income tax expense (benefit) | 77 | (262) | (256) | ||||||||
| Income tax expense (benefit) | $ | 395 | $ | 37 | $ | 61 | |||||
On July 4, 2025, the United States enacted the One Big Beautiful Bill Act (OBBBA), which includes significant tax provisions, including extensions of key provisions from the 2017 Tax Cuts and Jobs Act and modifications to the U.S. international tax framework. The legislation has multiple effective dates, with certain provisions effective in 2025 and others to be implemented through 2027. The impact of the OBBBA legislation on our income tax expense for the year ending December 31, 2025 was not material. We will continue to monitor regulatory guidance and interpretations as they are issued.
Deferred Tax Assets and Liabilities
| as of December 31 (in millions) | 2025 | 2024 | ||||||
| Deferred tax assets | ||||||||
| Accrued liabilities and other | $ | 403 | $ | 310 | ||||
| Pension and other postretirement benefits | 124 | 131 | ||||||
| Tax credit and net operating loss carryforwards | 433 | 750 | ||||||
| Swiss tax reform net asset basis step-up | 103 | 92 | ||||||
| Operating lease liabilities | 66 | 139 | ||||||
| Valuation allowances | (543) | (536) | ||||||
| Total deferred tax assets | 586 | 886 | ||||||
| Deferred tax liabilities | ||||||||
| Unremitted earnings of subsidiaries | 33 | 21 | ||||||
| Long-lived assets and other | 536 | 632 | ||||||
| Operating lease right-of-use assets | 62 | 132 | ||||||
| Total deferred tax liabilities | 631 | 785 | ||||||
| Net deferred tax asset (liability) | $ | (45) | $ | 101 | ||||
At December 31, 2025, we had U.S. state operating loss carryforwards totaling $70 million, U.S. federal operating loss carryforwards totaling $9 million and tax credit carryforwards totaling $277 million, which includes a U.S. foreign tax credit carryforward of $235 million. The U.S. federal and state operating loss and tax credit carryforwards expire between 2026 and 2045, with $13 million of the operating loss carryforwards having no expiration date.
At December 31, 2025, with respect to our operations outside the U.S., we had operating loss carryforwards totaling $69 million and tax credit carryforwards totaling $16 million. The non-U.S. operating loss carryforwards expire between 2026 and 2044 with $47 million having no expiration date. All of the non-U.S. tax credit carryforwards have no expiration date.
Realization of the U.S. and foreign operating loss and tax credit carryforwards depends on generating sufficient future earnings. During 2025, because of a cumulative history of operating losses in the U.S., we recorded a valuation allowance against our U.S. deferred tax assets, including certain federal and state tax attributes such as foreign tax credits. Additionally, we recorded additional valuation allowance against deferred tax assets in Switzerland related to the tax basis step-up we received in connection with the 2019 Swiss tax reform. We also determined that certain tax losses in Malta would not be realizable due to legal entity restructuring activities and reduced our tax attributes and valuation allowance for the Malta losses accordingly.
The following table is a summary of changes in our deferred tax valuation allowance for the years ended December 31, 2025, 2024 and 2023.
| years ended December 31 (in millions) | 2025 | 2024 | 2023 | ||||||||
| Balance at beginning of period | $ | 536 | $ | 584 | $ | 631 | |||||
| Charged to income tax expense | 309 | 48 | 87 | ||||||||
| Deductions | (349) | (73) | (139) | ||||||||
| Currency translation adjustments | 47 | (23) | 5 | ||||||||
| Balance at end of period | $ | 543 | $ | 536 | $ | 584 | |||||
Income Tax Expense (Benefit) Reconciliation
As discussed in Note 1, Summary of Significant Accounting Policies, we have elected to prospectively adopt the guidance in ASU 2023-09. The following table is a reconciliation of the income tax expense (benefit) at the U.S. statutory rate to our income tax expense (benefit) for the year ended December 31, 2025.
| year ended December 31 (in millions) | 2025 | % | ||||||
| Income tax expense (benefit) at U.S. statutory rate | $ | (106) | 21.0 | % | ||||
State and local income taxes, net of federal (national) income tax effect1 | 62 | (12.3) | % | |||||
| Foreign tax effects | ||||||||
| Costa Rica | ||||||||
| Local tax incentive rate | (23) | 4.6 | % | |||||
| Other | 10 | (2.0) | % | |||||
| Netherlands | 26 | (5.1) | % | |||||
| Puerto Rico | ||||||||
| Local tax incentive rate | (19) | 3.8 | % | |||||
| Other | 9 | (1.8) | % | |||||
| Switzerland | ||||||||
| Changes in valuation allowances | 54 | (10.7) | % | |||||
| Other | (5) | 1.0 | % | |||||
| Other jurisdictions | 37 | (7.3) | % | |||||
| Effect of cross-border tax laws | ||||||||
| Global intangible low taxed income, net of tax credits | 18 | (3.6) | % | |||||
| Effect of internal reorganization | (56) | 11.1 | % | |||||
| Other | (8) | 1.6 | % | |||||
| Tax credits | ||||||||
| Foreign tax credits | (24) | 4.8 | % | |||||
| Research and development tax credits | (18) | 3.6 | % | |||||
| Changes in valuation allowances | 88 | (17.4) | % | |||||
| Nontaxable or Non-deductible items | ||||||||
| Non-deductible goodwill impairment | 90 | (17.8) | % | |||||
| Other, net | 15 | (3.0) | % | |||||
| Changes in unrecognized tax benefits | 246 | (48.7) | % | |||||
| Other adjustments | ||||||||
| Other, net | (1) | 0.2 | % | |||||
| Income tax expense (benefit) | $ | 395 | (78.2) | % | ||||
1 State taxes in IL, IN, CA, and PA made up the majority (greater than 50 percent) of the tax effect in this category.
The following table is a reconciliation of the income tax expense (benefit) at the U.S. statutory rate to our income tax expense (benefit) for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09.
| years ended December 31 (in millions) | 2024 | 2023 | ||||||
| Income tax expense (benefit) at U.S. statutory rate | $ | (61) | $ | 51 | ||||
| Tax incentives | (176) | (200) | ||||||
| State and local taxes, net of federal benefit | (9) | (2) | ||||||
| Impact of foreign taxes | 137 | 190 | ||||||
| Non-deductible goodwill impairments | 86 | — | ||||||
| Notional interest deduction expense (benefit) | (37) | 31 | ||||||
| Valuation allowances | (25) | (51) | ||||||
| Stock compensation (windfall) shortfall tax expense (benefit) | 9 | 10 | ||||||
| Research and development tax credits | (19) | (17) | ||||||
| Uncertain tax positions | 9 | 6 | ||||||
| Unutilized foreign tax credits | 15 | 32 | ||||||
| Subpart F income | 18 | 26 | ||||||
| Foreign tax credits | (5) | (7) | ||||||
| Pillar Two taxes | 11 | — | ||||||
| Revaluation of Swiss basis step-up deferred tax asset | 58 | — | ||||||
| Tax law changes on Section 987 | 17 | — | ||||||
| Other, net | 9 | (8) | ||||||
| Income tax expense (benefit) | $ | 37 | $ | 61 | ||||
Our effective income tax rate can differ from the 21% U.S. federal statutory rate due to a number of factors, including tax incentives, foreign rate differences, state income taxes, non-deductible expenses, non-taxable income, increases or decreases in valuation allowances and liabilities for uncertain tax positions, excess tax benefits or shortfalls on stock compensation awards, audit developments and legislative changes.
In 2025, the difference between our effective income tax rate and the U.S. federal statutory rate was primarily driven by an increase in liabilities for uncertain tax positions, an increase in the valuation allowance related to the realizability of our deferred tax assets, changes in the treatment of accumulated earnings that are considered indefinitely reinvested as of December 31, 2025 and a tax benefit driven by an entity classification election that we made for U.S. tax purposes, which resulted in a capital loss for the period.
In 2024, the difference between our effective income tax rate and the U.S. federal statutory rate was adversely impacted by a non-deductible impairment of goodwill and legislative changes under IRC Section 987 (which is the exchange gain or loss on foreign branch remittances in the U.S., effective in 2024), and a net revaluation of the Swiss basis step-up deferred tax asset and related valuation allowance that arose from Swiss tax reform legislation in 2019, partially offset by a favorable geographic earnings mix, a decrease in valuation allowance mainly related to U.S. foreign tax credit carryforward, and a tax benefit related to research and development tax credits.
In 2023, our effective income tax rate was impacted favorably by geographic earnings mix, a $50 million net tax benefit after related valuation allowances from notional interest deductions that are received by certain wholly-owned foreign subsidiaries that have financed their operations with equity capital and a $17 million tax benefit related to research and development tax credits, partially offset by tax shortfalls on stock compensation awards.
Certain of our unremitted foreign earnings are considered to be indefinitely reinvested. The determination of taxes that would be incurred upon the future remittance of such earnings is not practicable.
Our tax provisions for 2025, 2024 and 2023 do not include any significant tax charges related to either the Base Erosion and Anti-Abuse Tax (BEAT) or Global Intangible Low Taxed Income (GILTI) provisions, except for the inability to fully utilize foreign tax credits against such GILTI. Our accounting policy is to recognize any GILTI charge as a period cost.
Unrecognized Tax Benefits
We classify interest and penalties associated with income taxes in income tax expense (benefit) within the consolidated statements of income (loss). Net interest and penalties recognized were not significant during 2025, 2024 and 2023. The liability recognized related to interest and penalties was $15 million and $21 million as of December 31, 2025 and 2024, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate are $110 million, $51 million and $47 million as of December 31, 2025, 2024 and 2023, respectively.
The following table is a reconciliation of our unrecognized tax benefits for the years ended December 31, 2025, 2024 and 2023.
| as of and for the years ended (in millions) | 2025 | 2024 | 2023 | ||||||||
| Balance at beginning of the year | $ | 96 | $ | 89 | $ | 87 | |||||
| Increase associated with tax positions taken during the current year | 5 | 10 | 9 | ||||||||
| Increase (decrease) associated with tax positions taken during a prior year | 258 | 5 | 3 | ||||||||
| Settlements | — | (1) | (2) | ||||||||
| Decrease associated with lapses in statutes of limitations | (30) | (7) | (8) | ||||||||
| Balance at end of the year | $ | 329 | $ | 96 | $ | 89 | |||||
Of the gross unrecognized tax benefits, $109 million and $39 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2025 and 2024, respectively.
Tax Incentives
We have received tax incentives in Puerto Rico, Dominican Republic, Costa Rica, and Switzerland. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense (benefit) reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings (loss) by $57 million in 2025, $176 million in 2024, and $200 million in 2023, and favorably impacted earnings (loss) per diluted share by $0.11 in 2025, $0.34 in 2024 and $0.39 in 2023. The Switzerland incentive program expired at the end of 2024 and therefore did not provide any benefit in 2025, however did contribute to the benefits recognized in 2024 and 2023. The other tax incentives provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2025 to 2034.
Examinations of Tax Returns
As of December 31, 2025, we had ongoing audits in the United States, Belgium, Germany, Italy and other jurisdictions. We are currently under examination by the Internal Revenue Service (IRS) for transfer pricing matters related to transactions with our manufacturing operations in Costa Rica and Puerto Rico for the 2019 and 2020 tax years. While we have not yet received a final Notice of Proposed Adjustment (NOPA) from the IRS, the examination is ongoing, and we are in the process of responding to inquiries from, and engaging in ongoing discussions with, the IRS related to certain intercompany transactions between our U.S. entities and these foreign manufacturers. As a result, we have recorded reserves for uncertain tax positions related to these transfer pricing matters for tax years 2019 through 2025. These reserves in aggregate are recorded to expense for approximately $280 million, exclusive of any potential penalties and interest. While we believe that our transfer pricing positions are well documented, properly supported, and adequate amounts have been reserved to account for any adjustments that may ultimately result from this examination, the ultimate outcome of this matter is uncertain (upon the receipt of a final NOPA or otherwise).
Tax years 2012 and forward remain open to examination by various foreign taxing authorities. While the final outcome of these matters is inherently uncertain, we believe we have made adequate tax provisions for all years subject to examination.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 12, 2026 | Showing above |
| 2024 | Feb 21, 2025 | |
| 2023 | Feb 8, 2024 | |
| 2022 | Feb 9, 2023 | |
| 2021 | Feb 23, 2022 | |
| 2020 | Feb 11, 2021 | |
| 2019 | Mar 17, 2020 | |
| 2018 | Feb 21, 2019 | |
| 2017 | Feb 23, 2018 | |
| 2016 | Feb 23, 2017 | |
| 2015 | Feb 26, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.