Increase due to acquisition

  
Unrecognized Tax BenefitsWe classify interest and penalties associated with income taxes in income tax expense (benefit) within the consolidated statements of income. Net interest and penalties recognized were not significant during 2021, 2020 and 2019. The liability recognized related to interest and penalties was $19 million and $17 million as of December 31, 2021 and 2020, respectively. The total amount of gross unrecognized tax benefits that, if recognized, would impact the effective tax rate are $39 million, $48 million and $70 million as of December 31, 2021, 2020 and 2019, respectively.The following table is a reconciliation of our unrecognized tax benefits, including those related to discontinued operations, for the years ended December 31, 2021, 2020 and 2019. 

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
| as of and for the years ended (in millions) | 2021 | 2020 | 2019 |
| Balance at beginning of the year | $ | 90  |  | $ | 111  |  | $ | 127  |  |
| Increase due to acquisition | 11  |  | —  |  | —  |  |
| Increase associated with tax positions taken during the current year | 31  |  | 8  |  | 8  |  |
| Increase (decrease) associated with tax positions taken during a prior year | (3) |  | (1) |  | (3) |  |
| Settlements | (2) |  | (18) |  | (20) |  |
| Decrease associated with lapses in statutes of limitations | (16) |  | (10) |  | (1) |  |
| Balance at end of the year | $ | 111  |  | $ | 90  |  | $ | 111  |  |

Of the gross unrecognized tax benefits, $39 million and $47 million were recognized as liabilities in the consolidated balance sheets as of December 31, 2021 and 2020, respectively. Tax IncentivesWe have received tax incentives in Puerto Rico, Switzerland, Dominican Republic, Costa Rica and Thailand. The financial impact of the reductions as compared to the statutory tax rates is indicated in the income tax expense reconciliation table above. The tax reductions as compared to the local statutory rate favorably impacted earnings per diluted share by $0.38 in 2021, $0.33 in 2020, and $0.27 in 2019. The above grants provide that our manufacturing operations are and will be partially exempt from local taxes with varying expirations from 2023 to 2029.Examinations of Tax ReturnsAs of December 31, 2021, we had ongoing audits in the United States, Germany, United Kingdom, China and other jurisdictions. During 2021, we closed U.S. tax years 2009-2016 with the IRS with no material adjustments to our financial statements. Tax years 2017 and forward remain under examination by the IRS and tax years 2012 and forward remain under examination by various foreign taxing authorities. We believe that it is reasonably possible that our gross unrecognized tax benefits will be reduced within the next 12 months by $30 million. While the final outcome of these matters is inherently uncertain, we believe we have made adequate tax provisions for all years subject to examination.NOTE 14

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| EARNINGS PER SHARE |

The numerator for both basic and diluted earnings per share (EPS) is net income attributable to Baxter stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period. The dilutive effect of outstanding stock options, RSUs and PSUs is reflected in the denominator for diluted EPS using the treasury stock method.96
