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)	2018			2017			2016
Income before income taxes (benefit):
Domestic	$	3,877.0		$	3,540.4		$	3,655.4
Foreign	2,022.6			1,588.4			1,277.6
Total	$	5,899.6		$	5,128.8		$	4,933.0
Income tax expense (benefit):
Current:
Federal	$	1,131.8		$	2,201.4		$	1,304.3
State	45.5			57.0			55.1
Foreign	140.0			108.6			52.9
Total	1,317.3			2,367.0			1,412.3
Deferred:
Federal	$	(62.0	)	$	241.0		$	(125.6	)
State	(7.4		)	9.9			(3.8		)
Foreign	177.7			(159.2		)	(45.6		)
Total	108.3			91.7			(175.0		)
Total income tax expense	$	1,425.6		$	2,458.7		$	1,237.3

2017 Tax Act

The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI, and includes base erosion prevention measures on non-U.S. earnings. These changes became effective in 2018. During the fourth quarter of 2018 we elected to recognize deferred taxes for basis differences expected to reverse as GILTI is incurred and have established initial deferred tax balances, as of the enactment date of the 2017 Tax Act.

During the fourth quarter of 2017 we recognized within our provision for income taxes a $1.2 billion provisional estimate pursuant to the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 118. Our provisional estimate included an amount of $989.6 million associated with a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the Transition Toll Tax), as discussed below, and $184.0 million related to the impact of remeasuring our deferred tax balances to reflect the new federal statutory rate and other changes to U.S. tax law.

During the year ended December 31, 2018, we recognized a net reduction of $34.6 million in our estimated Transition Toll Tax, an expense of $12.7 million to remeasure our deferred tax balances, an expense of $135.8 million related to establishing deferred taxes for GILTI and an expense of $11.0 million to reflect other aspects of the 2017 Tax Act.

Transition Toll Tax

The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax. The Transition Toll Tax was assessed on our share of our foreign corporations' accumulated foreign earnings that were not previously taxed. Earnings in the form of cash and cash equivalents were taxed at a rate of 15.5% and all other earnings were taxed at a rate of 8.0%.

As of December 31, 2018 and 2017, we have accrued income tax liabilities of $697.0 million and $989.6 million, respectively, under the Transition Toll Tax. The decrease in this liability is primarily attributed to our 2018 Transition Toll Tax payment of $85.0 million, the application by the U.S. Internal Revenue Service (IRS) of an approximately $150.0 million overpayment against the accrual and the impact of the $34.6 million net reduction described above. Of the amounts accrued as of December 31, 2018, no amounts are expected to be paid within one year due to the overpayment discussed above. The Transition Toll Tax will be paid in installments over an eight--year period, which started in 2018, and will not accrue interest.

Status of our Assessment

The final determination of the Transition Toll Tax and the remeasurement of our deferred assets and liabilities was completed during the fourth quarter of 2018 under SEC Staff Accounting Bulletin No. 118. Throughout 2018 proposed regulations were issued by the IRS, which are expected to be finalized in 2019 and may have an impact on our income tax provision. We will assess the impact of any additional guidance when it is issued.

Unremitted Earnings

At December 31, 2018, we considered none of our earnings to be permanently reinvested outside the U.S. and therefore recorded deferred tax liabilities associated with an estimate of the total withholding taxes expected as a result of our repatriation of earnings. Other than for earnings, we are permanently reinvested for book/tax basis differences related to foreign subsidiaries. These differences are estimated to total approximately $1.5 billion and primarily arose through the impacts of purchase accounting. These basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of December 31, 2018. The residual U.S. tax liability, if these differences would reverse, would be between $0.3 billion to $0.4 billion as of December 31, 2018.

Article 20 Procedure of ZINBRYTA

As a result of the Article 20 Procedure of ZINBRYTA, for the year ended December 31, 2017, we recognized a net impairment charge on certain tax assets related to ZINBRYTA reflected within income tax expense of $48.8 million. This charge reflected the write-off of $142.6 million related to prepaid taxes, which was partially offset by the recognition of an unrecorded deferred tax benefit of $93.8 million. For additional information on our collaboration arrangement with AbbVie, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.

Deferred Tax Assets and Liabilities

Significant components of our deferred tax assets and liabilities are summarized as follows:



	As of December 31,
(In millions)	2018			2017
Deferred tax assets:
Tax credits	$	102.8		$	60.0
Inventory, other reserves and accruals	163.9			147.8
Intangibles, net	2,298.6			378.8
Net operating loss	213.1			209.8
Share-based compensation	25.8			26.9
Other	38.9			25.1
Valuation allowance	(20.0		)	(16.6		)
Total deferred tax assets	$	2,823.1		$	831.8
Deferred tax liabilities:
Purchased intangible assets	$	(232.8	)	$	(250.7	)
GILTI	(544.6		)	—
Tax credits	(1,425.7		)	—
Depreciation, amortization and other	(102.3		)	(107.9		)
Total deferred tax liabilities	$	(2,305.4	)	$	(358.6	)

In addition to deferred tax assets and liabilities, we have recorded prepaid tax and deferred charges related to intra-entity transactions. As of December 31, 2018 and 2017, the total deferred charges and prepaid taxes were $239.2 million and $617.7 million, respectively.

In October 2016 the FASB issued ASU 2016-16. This standard eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset other than inventory and associated changes to deferred taxes will be recognized when the transfer occurs. We adopted this standard on January 1, 2018, using the modified retrospective method, through a cumulative-effect adjustment to retained earnings as of that date. Upon adoption, we recognized additional deferred tax assets of approximately $2.0 billion offset by a corresponding increase to deferred tax liabilities, related to an expected reduction in future U.S. foreign tax credits of approximately $1.5 billion and an increase to retained earnings of approximately $0.5 billion. In the fourth quarter of 2018, when we elected to begin recognizing deferred taxes on the GILTI tax calculation, we recorded an additional deferred tax liability of $0.4 billion with a corresponding reduction to our retained earnings as these differences are related to inter-entity transactions. We will recognize incremental deferred income tax expense thereafter as these deferred tax assets and liabilities are utilized.

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,
	2018		2017		2016
Statutory rate	21.0	%	35.0	%	35.0	%
State taxes	0.6		0.8		0.9
Taxes on foreign earnings	(1.9	)	(11.1	)	(9.6	)
Credits and net operating loss utilization	(0.9	)	(0.8	)	(1.4	)
Purchased intangible assets	1.2		1.4		1.2
Manufacturing deduction	—		(1.9	)	(1.9	)
Other permanent items	0.3		0.7		0.5
2017 Tax Act	2.1		22.9		—
GILTI	1.6		—		—
Impairment of ZINBRYTA related tax assets	—		0.9		—
Other	0.2		—		0.4
Effective tax rate	24.2	%	47.9	%	25.1	%

Changes in Tax Rate

For the year ended December 31, 2018, as compared to 2017, the decrease in our effective tax rate was primarily due to the enactment of the 2017 Tax Act. The effects of an overall reduction in the federal statutory rate in the U.S. were partially offset by the elimination of the manufacturing deduction, the imposition of the GILTI tax on international earnings, our recording of deferred taxes on GILTI in 2018, limits on the deductibility of certain benefits on executive compensation and a reduction in the tax benefit associated with the Orphan Drug Credit, all resulting from the 2017 Tax Act, and a change in accounting rules related to recording the tax impacts of intra-entity transactions. Included in taxes on foreign earnings in the above rate reconciliation for 2018 was an increase of approximately 350 basis points related to the sale of inventory, the tax effect of which had been included within prepaid taxes at December 31, 2017, at a higher effective tax rate. The effective tax rate for the year ended December 31, 2017, also reflected the impact of a favorable settlement related to a state tax matter in 2017.

For the year ended December 31, 2017, as compared to 2016, the most significant factors contributing to the increase in our effective tax rate was the effect of the enactment of the 2017 Tax Act and the impairment of certain ZINBRYTA related tax assets, both of which are discussed above. Excluding the effect of these items, our income tax rate would have decreased due to a lower percentage of our earnings being recognized in the U.S., a higher tax jurisdiction. The geographic split of our earnings was affected by milestone and upfront payments in the current year and the spin-off of our hemophilia business, partially offset by growth from the U.S. launch of SPINRAZA and increases in our revenues from anti-CD20 therapeutic programs in the U.S. In addition, in 2017 we earned a lower benefit from the Orphan Drug Credit due to the FDA's approval of SPINRAZA.

Tax Attributes

As of December 31, 2018, we had net operating losses and general business credit carry forwards for federal income tax purposes of approximately $1.0 million and $1.3 million, respectively, which begin to expire in 2022. Additionally, for state income tax purposes, we had net operating loss carry forwards of approximately $4.6 million that begin to expire in 2020. For state income tax purposes, we also had research and investment credit carry forwards of approximately $133.1 million that begin to expire in 2019. For foreign income tax purposes, we had $2.2 billion of net operating loss carryforwards that begin to expire in 2024.

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 net 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 consolidated financial position and results of operations.

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:



	For the Years Ended December 31,
(In millions)	2018			2017			2016
Balance at January 1,	$	66.8		$	32.4		$	67.9
Additions based on tax positions related to the current period	0.5			5.7			7.2
Additions for tax positions of prior periods	58.7			7.3			36.3
Reductions for tax positions of prior periods	(13.6		)	(21.8		)	(13.3		)
Statute expirations	(2.9		)	(1.4		)	(1.4		)
Settlement refund (payment)	4.7			44.6			(64.3		)
Balance at December 31,	$	114.2		$	66.8		$	32.4

Our 2017 activity above reflects a refund received from a state, related to the settlement of an uncertain tax position.

We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in various U.S. states and in U.S. federal and other foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal tax examination for years before 2013 or state, local or non-U.S. income tax examinations for years before 2010.

Included in the balance of unrecognized tax benefits as of December 31, 2018, 2017 and 2016, are $109.1 million, $64.3 million and $26.9 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 2018, 2017 and 2016 we recognized a net interest expense of $2.2 million, $4.8 million and $9.1 million, respectively. We have accrued $13.8 million and $16.1 million for the payment of interest and penalties as of December 31, 2018 and 2017, respectively.

International Uncertain Tax Positions

We have made payments totaling approximately $60.0 million to the Danish Tax Authority (SKAT) for assessments received for 2009, 2011 and 2013 regarding withholding taxes and the treatment of certain intercompany transactions involving a Danish affiliate and another of our affiliates. We continue to dispute the assessments for all of these periods and believe that the positions taken in our historical filings are valid. It is reasonably possible that we will adjust the value of our uncertain tax positions related to Danish withholding taxes based on potential European court decisions expected in 2019 on similar matters.

Federal and State Uncertain Tax Positions

It is reasonably possible that we will adjust the value of our uncertain tax positions related to certain transfer pricing issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.