Increase (decrease) in valuation allowances

  
The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | December 31, |
| (in millions) |  | 2021 |  | 2020 |
| Deferred income tax assets: |  |  |
| Net operating loss and capital loss carryforwards |  | $ | 212  |  |  | $ | 231  |  |
| Tax credit carryforwards |  | 375  |  |  | 369  |  |
| Accrued expenses and unearned income |  | 59  |  |  | 54  |  |
| Employee benefits |  | 212  |  |  | 228  |  |
| Lease liability |  | 92  |  |  | 139  |  |
| Foreign exchange on debt instruments  |  | —  |  |  | 143  |  |
| U.S. interest expense limitation |  | 62  |  |  | 75  |  |
| Other |  | 64  |  |  | 64  |  |
| Total deferred income tax assets |  | 1,076  |  |  | 1,303  |  |
| Valuation allowance for deferred income tax assets |  | (294) |  |  | (306) |  |
| Total deferred income tax assets (net of valuation allowance) |  | 782  |  |  | 997  |  |
| Deferred income tax liabilities: |  |  |  |  |
| Amortization and depreciation |  | (898) |  |  | (1,038) |  |
| Lease right-of-use assets |  | (81) |  |  | (133) |  |
| Foreign exchange on debt instruments |  | (36) |  |  | —  |  |
| Other |  | (53) |  |  | (50) |  |
| Total deferred income tax liabilities |  | (1,068) |  |  | (1,221) |  |
| Net deferred income tax liabilities |  | $ | (286) |  |  | $ | (224) |  |

  
During 2021 the net deferred tax liabilities increased mainly due to foreign exchange revaluations of debt instruments offset by a decrease in deferred tax liabilities mainly due to amortization of intangibles related to the merger between Quintiles and IMS Health.  
The Company had federal, state and local, and foreign tax loss carryforwards and tax credits, the tax effect of which was $631 million as of December 31, 2021. Of this amount, $22 million has an indefinite carryforward period, and the remaining $609 million expires at various times beginning in 2022. Some of the federal losses are subject to limitations under the Internal Revenue Code, however, management expects these losses to be utilized during the carryforward periods.  
In 2021, the Company decreased its valuation allowance by $12 million to $294 million as of December 31, 2021 from $306 million as of December 31, 2020. The valuation allowance decreased primarily due to current year state tax expenses on foreign exchange revaluations on debt instruments and in use of U.S. state net operating losses. The valuation allowance increased primarily due to branch basket foreign tax credits that the Company has determined are not more likely than not to be used before their expiration.  
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Year Ended December 31, |
| (in millions) |  | 2021 |  | 2020 |  | 2019 |
| Balance as of January 1, |  | $ | 118  |  |  | $ | 120  |  |  | $ | 94  |  |
| Additions based on tax positions related to the current year |  | 7  |  |  | 5  |  |  | 5  |  |
| Additions for income tax positions of prior years |  | 16  |  |  | 15  |  |  | 33  |  |
| Impact of changes in exchange rates |  | (3) |  |  | 3  |  |  | —  |  |
| Settlements with tax authorities |  | (2) |  |  | (2) |  |  | (1) |  |
| Reductions for income tax positions of prior years |  | (11) |  |  | (16) |  |  | (6) |  |
| Reductions due to the lapse of the applicable statute of limitations |  | (9) |  |  | (7) |  |  | (5) |  |
| Balance as of December 31, |  | $ | 116  |  |  | $ | 118  |  |  | $ | 120  |  |

97
