Notes to Consolidated Financial Statements 5

Note 5 — Taxes on Earnings

(dollars in thousands)

Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. U.S. income taxes are provided on those earnings of foreign subsidiaries, which are intended to be remitted to the parent company. Except for taxes on dividends that were remitted under the American Jobs Creation Act of 2004, Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries. Undistributed earnings reinvested indefinitely in foreign subsidiaries as working capital and plant and equipment aggregated $7,319,000 at December 31, 2006. It is not practicable to determine the amount of deferred income taxes not provided on these earnings. Abbott has recorded reserves for income tax loss contingencies in accordance with SFAS No. 5. The maximum possible loss in excess of the recorded reserves is not material. In the U.S., Abbott’s federal income tax returns through 2003 are settled, and the income tax returns for years after 2003 are open.

Earnings from continuing operations before taxes, and the related provisions for taxes on earnings from continuing operations, were as follows:

Earnings From Continuing Operations Before Taxes		2006			2005			2004
Domestic	$	(868,384	)	$	2,068,232		$	2,278,180
Foreign		3,144,754			2,551,688			1,847,420
Total	$	2,276,370		$	4,619,920		$	4,125,600
Taxes on Earnings From Continuing Operations		2006			2005			2004
Current: U.S. Federal and Possessions	$	491,579		$	526,213		$	172,322
State		17,352			89,483			43,456
Foreign		633,947			616,118			461,740
Total current		1,142,878			1,231,814			677,518
Deferred: Domestic		(544,678	)		4,709			295,030
Foreign		(35,564	)		17,035			(24,272	)
Enacted tax rate changes		(3,021	)		(5,703	)		1,488
Total deferred		(583,263	)		16,041			272,246
Total	$	559,615		$	1,247,855		$	949,764

Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:

		2006			2005			2004
Statutory tax rate on earnings from continuing operations		35.0	%		35.0	%		35.0	%
Benefit of lower tax rates and tax exemptions in Puerto Rico, the Netherlands and Ireland		(18.4	)		(6.4	)		(7.8	)
Effect of taxes on remittances of foreign earnings in connection with the American Jobs Creation Act of 2004		—			5.3			—
Effect of nondeductible acquired in-process research and development		19.4			—			2.0
State taxes, net of federal benefit		0.3			1.2			1.1
Adjustments primarily related to resolution of prior years’ accrual requirements		(5.8	)		(1.8	)		(3.6	)
Domestic dividend exclusion		(5.9	)		(2.7	)		(2.6	)
All other, net		—			(3.6	)		(1.1	)
Effective tax rate on earnings from continuing operations		24.6	%		27.0	%		23.0	%

As of December 31, 2006, 2005 and 2004, total deferred tax assets were $3,172,933, $2,040,906 and $2,171,782, respectively, and total deferred tax liabilities were $1,136,964, $1,355,181 and $1,349,972, respectively. Valuation allowances for deferred tax assets were not significant. The tax effect of the differences that give rise to deferred tax assets and liabilities were as follows:

		2006			2005			2004
Compensation and employee benefits	$	921,313		$	37,578		$	247,885
Trade receivable reserves		236,218			227,251			223,507
Inventory reserves		163,004			161,934			129,052
Deferred intercompany profit		390,144			319,402			379,560
State income taxes		51,494			49,153			(7,336	)
Depreciation		(134,649	)		(157,272	)		(193,224	)
Acquired in-process research and development and other accruals and reserves not currently deductible		1,268,445			1,132,954			1,111,611
Other, primarily the excess of book basis over tax basis of intangible assets		(872,334	)		(1,095,182	)		(1,079,388	)
Total	$	2,023,635		$	675,818		$	811,667

Among the provisions of the American Jobs Creation Act of 2004 was a provision that allows for the exclusion from income of a portion of the remittances of earnings of foreign subsidiaries to U.S. shareholders through December 31, 2005. In 2005, Abbott remitted in accordance with the provisions of the Act approximately $4,300,000 of foreign earnings previously reinvested indefinitely. The additional income tax expense recorded for the remittance was approximately $245,000.

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