Notes to Consolidated Financial Statements 5

Note 5 — Taxes on Earnings

(dollars in thousands)

Taxes on earnings reflect the annual effective rates, including charges for interest and penalties. 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 $12,330,000 at December 31, 2007. It is not practicable to determine the amount of deferred income taxes not provided on these earnings. 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. There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant. Reserves for interest and penalties are not significant.

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

Earnings Before Taxes	2007	2006	2005
Domestic	$669,984	$(868,384)	$2,068,232
Foreign	3,799,664	3,144,754	2,551,688
Total	$4,469,648	$2,276,370	$4,619,920

Taxes on Earnings	2007	2006	2005
Current:
U.S. Federal and Possessions	$533,460	$491,579	$526,213
State	30,134	17,352	89,483
Foreign	675,205	633,947	616,118
Total current	1,238,799	1,142,878	1,231,814
Deferred:
Domestic	(303,657)	(544,678)	4,709
Foreign	(74,367)	(35,564)	17,035
Enacted tax rate changes	2,559	(3,021)	(5,703)
Total deferred	(375,465)	(583,263)	16,041
Total	$863,334	$559,615	$1,247,855

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

	2007	2006	2005
Statutory tax rate	35.0%	35.0%	35.0%
Benefit of lower tax rates and tax exemptions in Puerto Rico, the Netherlands and Ireland	(12.6)	(18.4)	(6.4)
Effect of taxes on remittances of foreign earnings in connection with the American Jobs Creation Act of 2004	—	—	5.3
Effect of non-deductible acquired in-process research and development	—	19.4	—
State taxes, net of federal benefit	0.4	0.3	1.2
Adjustments primarily related to resolution of prior years' accrual requirements	—	(5.8)	(1.8)
Domestic dividend exclusion	(3.1)	(5.9)	(2.7)
All other, net	(0.4)	—	(3.6)
Effective tax rate on earnings	19.3%	24.6%	27.0%

As of December 31, 2007, 2006 and 2005, total deferred tax assets were $3,582,137, $3,172,933 and $2,040,906, respectively, and total deferred tax liabilities were $1,353,575, $1,136,964 and $1,355,181, 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:

	2007	2006	2005
Compensation and employee benefits	$861,483	$921,313	$37,578
Trade receivable reserves	336,542	236,218	227,251
Inventory reserves	219,795	163,004	161,934
Deferred intercompany profit	261,427	390,144	319,402
State income taxes	84,420	51,494	49,153
Depreciation	(104,773)	(134,649)	(157,272)
Acquired in-process research and development and other accruals and reserves not currently deductible	1,751,428	1,268,445	1,132,954
Other, primarily the excess of book basis over tax basis of intangible assets	(1,196,627)	(872,334)	(1,095,182)
Total	$2,213,695	$2,023,635	$675,818

On January 1, 2007, Abbott adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." Under this Interpretation, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Adoption of this Interpretation did not have a material impact on Abbott's financial position. The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled:

January 1, 2007	$712,700
Increase due to current year tax positions	339,600
Increase due to prior year tax positions	146,700
Decrease due to prior year tax positions	(10,900)
Settlements	(62,000)
December 31, 2007	$1,126,100

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $890,000. Abbott does not expect significant changes in the aggregate amount of unrecognized tax benefits that may occur within the next twelve months, other than tax settlements.

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.