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Income Taxes | 12 Months Ended
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Dec. 31, 2013
Income Tax Disclosure [Abstract] |
Income Taxes |
| Income Taxes
Income Tax Expense Income before income tax provision and the income tax expense consist of the following:
| For the Years Ended December 31,
(In millions) | 2013 |  | 2012 |  | 2011
Income before income taxes (benefit): |  |  |  |  |
Domestic | $ | 1,953.0 |  |  | $ | 1,398.0 |  |  | $ | 1,408.9 |
Foreign | 527.6 |  |  | 457.1 |  |  | 302.3 |
Total | $ | 2,480.6 |  |  | $ | 1,855.1 |  |  | $ | 1,711.2 |
Income tax expense (benefit): |  |  |  |  |
Current: |  |  |  |  |
Federal | $ | 700.9 |  |  | $ | 507.9 |  |  | $ | 231.7 |
State | 98.4 |  |  | 35.6 |  |  | 15.1 |
Foreign | 46.8 |  |  | 44.0 |  |  | 44.1 |
Total | 846.1 |  |  | 587.5 |  |  | 290.9 |
Deferred: |  |  |  |  |
Federal | $ | (200.6 | ) |  | $ | (133.0 | ) |  | $ | 160.9 |
State | (35.9 | ) |  | (13.0 | ) |  | (8.1 | )
Foreign | (8.6 | ) |  | 29.1 |  |  | 0.8 |
Total | (245.1 | ) |  | (116.9 | ) |  | 153.6 |
Total income tax expense | $ | 601.0 |  |  | $ | 470.6 |  |  | $ | 444.5 |
The 2012 deferred tax expense on foreign earnings includes an expense of $33.1 million related to capitalized interest at our Denmark manufacturing facility. Of this amount, $29.0 million represents the correction of an error in our accounting that had accumulated over several prior years. We do not consider this correction to be material. Deferred Tax Assets and Liabilities Significant components of our deferred tax assets and liabilities are summarized as follows:
| As of December 31,
(In millions) | 2013 |  | 2012
Deferred tax assets: |  |  |
Tax credits | $ | 64.1 |  |  | $ | 69.3 |
Inventory, other reserves, and accruals | 169.6 |  |  | 118.3 |
Capitalized costs | 7.9 |  |  | 7.6 |
Intangibles, net | 124.2 |  |  | 84.5 |
Net operating loss | 14.7 |  |  | 37.5 |
Share-based compensation | 85.0 |  |  | 58.6 |
Other | 76.9 |  |  | 57.8 |
Valuation allowance | (1.5 | ) |  | (12.3 | )
Total deferred tax assets | $ | 540.9 |  |  | $ | 421.3 |
Deferred tax liabilities: |  |  |
Purchased intangible assets | $ | (550.8 | ) |  | $ | (411.3 | )
Unrealized gain on investments and cumulative translation adjustment | (3.2 | ) |  | (1.2 | )
Inventory | (24.9 | ) |  | (50.8 | )
Depreciation, amortization and other | (112.6 | ) |  | (146.4 | )
Total deferred tax liabilities | $ | (691.5 | ) |  | $ | (609.7 | )
In addition to deferred tax assets and liabilities, we have recorded prepaid tax and deferred charges related to intercompany transactions. As of December 31, 2013 and 2012, the total deferred charges and prepaid taxes were $248.9 million and $33.4 million, respectively. During 2013, we recorded a deferred charge of $203.7 million in connection with an intercompany transfer of the intellectual property for Daclizumab HYP. The deferred charge will be amortized to income tax expense over the economic life of the Daclizumab HYP program. If the Daclizumab HYP program were to be discontinued, we will accelerate the amortization of this deferred charge and record an expense equal to its remaining net book value. Tax Rate A reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:
| For the Years Ended December 31,
| 2013 |  | 2012 |  | 2011
Statutory rate | 35.0 | % |  | 35.0 | % |  | 35.0 | %
State taxes | 3.1 |  |  | 0.9 |  |  | 1.7 |
Taxes on foreign earnings | (6.7 | ) |  | (6.2 | ) |  | (5.9 | )
Credits and net operating loss utilization | (2.6 | ) |  | (3.5 | ) |  | (4.4 | )
Purchased intangible assets | 1.5 |  |  | 1.2 |  |  | 1.3 |
Manufacturing deduction | (6.6 | ) |  | (2.1 | ) |  | (1.5 | )
Other permanent items | 0.8 |  |  | (0.4 | ) |  | 0.3 |
Contingent consideration | — |  |  | 0.5 |  |  | 0.7 |
Other | (0.3 | ) |  | — |  |  | (1.2 | )
Effective tax rate | 24.2 | % |  | 25.4 | % |  | 26.0 | %
Our effective tax rate for 2013 compared to 2012 decreased primarily as a result of a change in our uncertain tax position related to our U.S. federal manufacturing deduction and our unconsolidated joint business, described below under "Accounting for Uncertainty in Income Taxes", lower intercompany royalties owed by a foreign wholly owned subsidiary to a U.S. wholly owned subsidiary on the international sales of one of our products, the reinstatement of the federal research and development tax credit and the 2012 correction of an error in our deferred tax accounting, which increased our rate in the prior year. These favorable items were partially offset by higher relative earnings in the U.S. from the commercial launch of TECFIDERA, lower orphan drug credits due to reduced expenditures in eligible clinical trials and higher state taxes. Our effective tax rate for 2012 compared to 2011 decreased primarily as a result of higher orphan drug credits for our ELOCTATE, STX-100, dexpramipexole and other orphan credit eligible clinical trials, lower intercompany royalties owed by a foreign wholly owned subsidiary to a U.S. wholly owned subsidiary on the international sales of one of our products and higher deductions related to our manufacturing activities. These decreases were partially offset by the correction of an error which had accumulated over several years in our deferred tax accounting for capitalized interest which resulted in an expense of $29.0 million. As of December 31, 2013, we had net operating losses and general business credit carry forwards for federal income tax purposes of approximately $36.8 million and $4.2 million, respectively, which begin to expire in 2020. Additionally, for state income tax purposes, we had net operating loss carry forwards of approximately $108.1 million, which begin to expire in 2014. For state income tax purposes, we also had research and investment credit carry forwards of approximately $113.0 million, which begin to expire in 2014. For foreign income tax purposes, we had $5.9 million of net operating loss carryforwards, which do not expire. In assessing the realizability of our deferred tax assets, we have considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial reporting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Our estimates of future taxable income take into consideration, among other items, our estimates of future income tax deductions related to the exercise of stock options. Based upon the level of historical taxable income and income tax liability and projections for future taxable income over the periods in which the deferred tax assets are utilizable, we believe it is more likely than not that we will realize the benefits of the deferred tax assets of our wholly owned subsidiaries. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. As of December 31, 2013, undistributed foreign earnings of non-U.S. subsidiaries included in consolidated retained earnings and other basis differences aggregated approximately $3.8 billion. We intend to reinvest these earnings indefinitely in operations outside the U.S. The residual U.S. tax liability, if cumulative amounts were repatriated, would be between $900 million to $1 billion as of December 31, 2013. Accounting for Uncertainty in Income Taxes A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:
(In millions) | 2013 |  | 2012 |  | 2011
Balance at January 1, | $ | 125.9 |  |  | $ | 64.4 |  |  | $ | 121.5 |
Additions based on tax positions related to the current period | 11.9 |  |  | 13.0 |  |  | 2.2 |
Additions for tax positions of prior periods | 71.7 |  |  | 69.8 |  |  | 48.6 |
Reductions for tax positions of prior periods | (92.1 | ) |  | (18.6 | ) |  | (75.8 | )
Statute expirations | (1.9 | ) |  | (1.9 | ) |  | (2.3 | )
Settlements | (5.4 | ) |  | (0.8 | ) |  | (29.8 | )
Balance at December 31, | $ | 110.1 |  |  | $ | 125.9 |  |  | $ | 64.4 |
We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in the U.S. federal jurisdiction, various U.S. states, and foreign jurisdictions. With few exceptions, including the proposed disallowance we discuss below, we are no longer subject to U.S. federal tax examination for years before 2010 or state, local, or non-U.S. income tax examinations for years before 2004. Included in the balance of unrecognized tax benefits as of December 31, 2013, 2012, and 2011 are $32.5 million, $109.5 million, and $31.3 million (net of the federal benefit on state issues), respectively, of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods. We recognize potential interest and penalties accrued related to unrecognized tax benefits in income tax expense. In 2013, we recognized a net interest expense of $4.5 million. During 2012, we recognized net interest expense of $0.1 million. In 2011, we recognized a net interest benefit of approximately $12.9 million. We have accrued approximately $11.3 million and $2.5 million for the payment of interest as of December 31, 2013 and 2012, respectively. Federal Uncertain Tax Positions During 2013, we received updated technical guidance from the IRS concerning our current and prior year filings and calculation of our U.S. federal manufacturing deduction and overall tax classification of our unconsolidated joint business. Based on this guidance we reevaluated the level of our unrecognized benefits related to uncertain tax positions, and recorded a $49.8 million income tax benefit. This benefit is for a previously unrecognized position and relates to years 2005 through 2012. We recorded an offsetting expense of $11.3 million for non-income based state taxes, which is recorded in other income (expense) within our consolidated statements of income. In October 2011, in conjunction with our examination, the IRS proposed a disallowance of approximately $130 million in deductions for tax years 2007, 2008 and 2009 related to payments for services provided by our wholly owned Danish subsidiary located in Hillerød, Denmark. We believe that these items represent valid deductible business expenses and are vigorously defending our position. We have initiated a mutual agreement procedure between the IRS and SKAT (the Danish tax authorities) for the years 2001 through 2009, in an attempt to reach agreement on the issue. In addition, we have applied for a bilateral advanced pricing agreement for the years 2010 through 2014 to resolve similar issues for the subsequent years. It is reasonably possible that we will adjust the value of our uncertain tax positions related to our unconsolidated joint business and certain transfer pricing issues as we receive additional information from various taxing authorities. In addition, the IRS routinely examines our intercompany transfer pricing with respect to intellectual property related transactions and it is possible that the IRS may disagree with one or more positions we have taken with respect to such valuations. We do not anticipate any other significant changes in our positions in the next twelve months other than expected settlements which have been classified as current liabilities within the accompanying balance sheet. State Uncertain Tax Positions In 2006, the Massachusetts Department of Revenue (DOR) issued a Notice of Assessment against Biogen Idec MA Inc. (BIMA), one of our wholly-owned subsidiaries, for $38.9 million of corporate excise tax for 2002, which includes associated interest and penalties. The assessment asserted that the portion of sales attributable to Massachusetts (sales factor), the computation of BIMA’s research and development credits and certain deductions claimed by BIMA were not appropriate, resulting in unpaid taxes for 2002. On August 18, 2011, we reached a settlement with the DOR under which we agreed to pay $7.0 million in taxes, plus $5.0 million of interest, and agreed on the nature and amount of tax credits carried forward into 2004. On June 8, 2010, we received Notices of Assessment from the DOR against BIMA for $103.5 million of corporate excise tax, including associated interest and penalties, related to our 2004, 2005 and 2006 tax filings. On October 15, 2013, we reached a settlement with the Massachusetts DOR related to our 2004, 2005 and 2006 state tax filings under which we agreed to pay $5.0 million in taxes and interest and agreed on the nature and amount of tax credits carried forward into 2007. This resolution did not have a significant impact on our results of operations. The audit fieldwork associated with our Massachusetts state tax filings for 2007 and 2008 has been completed without a significant proposed adjustment.

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