Income Taxes

Income before income taxes is as follows:



	2015		2014		2013
U.S.	$	524.8	$	565.0	$	36.8
Non-U.S.	1,498.7		1,762.4		1,628.6
Income before income taxes	$	2,023.5	$	2,327.4	$	1,665.4

For the years ended December 31, 2015, 2014 and 2013, U.S. income before income taxes reflects charges related to share-based compensation, up-front collaboration payments, asset impairments, acquisitions and interest expense which in the aggregate, decreased in the United States from 2013 to 2014. Many of these charges are not deductible for U.S. income tax purposes. These charges were lower outside the United States in those years.

The provision (benefit) for taxes on income is as follows:



	2015			2014			2013
United States:
Taxes currently payable:
Federal	$	320.7		$	489.4		$	352.6
State and local	63.1			56.3			45.4
Deferred income taxes	(28.7		)	(273.8		)	(245.1		)
Total U.S. tax provision	355.1			271.9			152.9
International:
Taxes currently payable	71.1			54.1			64.1
Deferred income taxes	(4.7		)	1.5			(1.5		)
Total international tax provision	66.4			55.6			62.6
Total provision	$	421.5		$	327.5		$	215.5

Amounts are reflected in the preceding tables based on the location of the taxing authorities. We do not provide for U.S. federal or state income taxes on unremitted earnings of our international subsidiaries that are indefinitely invested outside the United States. As of December 31, 2015, we have not made a U.S. tax provision on $9.667 billion of unremitted earnings of our international subsidiaries. As these earnings are expected to be reinvested overseas indefinitely, it is not practicable to compute the estimated deferred tax liability on these earnings.

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as temporary differences. We record the tax effect on these temporary differences as deferred tax assets (generally items that can be used as a tax deduction or credit in future periods) or deferred tax liabilities (generally items for which we received a tax deduction but that have not yet been recorded in the Consolidated Statements of Income and the tax effects of acquisition related temporary differences). We periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes, tax planning strategies and other relevant factors. Significant judgment is required in making this assessment. At December 31, 2015 and 2014, it was more likely than not that we would realize our deferred tax assets, net of valuation allowances. The valuation allowances relate primarily to certain deferred tax assets acquired in the Receptos acquisition and certain fair value adjustments which are expected to result in non-deductible losses.

Approximately $900.0 million of our foreign earnings may not be required for use in offshore operations and may be available for use in the United States. These earnings are not treated as permanently reinvested, and our deferred tax liabilities include $316.5 million for the estimated U.S. federal and state income taxes that may be incurred should these earnings be repatriated. In drawing this conclusion, we considered our future sources of funds as well as our global operating and strategic liquidity needs, including common share repurchase activities and expansion of our commercial, research, manufacturing and administrative infrastructure worldwide.

At December 31, 2015 and 2014 the tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows:



	2015						2014
	Assets			Liabilities			Assets			Liabilities
NOL carryforwards	$	56.2		$	—		$	4.5		$	—
Deferred revenue	1.8			—			1.7			—
Capitalized research expenses	3.8			—			4.8			—
Tax credit carryforwards	10.7			—			5.0			—
Non-qualified stock options	340.9			—			250.5			—
Plant and equipment, primarily differences in depreciation	2.0			—			—			(7.4		)
Inventory	11.3			—			14.5			—
Other assets	43.0			(3.7		)	41.5			(4.0		)
Intangible assets	661.3			(1,135.4		)	654.7			(1,183.2		)
Accrued and other expenses	233.2			—			191.6			—
Unremitted earnings	—			(316.5		)	—			(316.5		)
Unrealized (gains) losses on securities	—			(129.9		)	—			(236.5		)
Subtotal	1,364.2			(1,585.5		)	1,168.8			(1,747.6		)
Valuation allowance	(90.8		)	—			(39.7		)	—
Total deferred taxes	$	1,273.4		$	(1,585.5	)	$	1,129.1		$	(1,747.6	)
Net deferred tax asset (liability)				$	(312.1	)				$	(618.5	)

At December 31, 2015 and 2014, deferred tax assets and liabilities were classified on our Consolidated Balance Sheets as follows:



	2015			2014
Current assets⁽¹⁾	$	—		$	11.7
Other assets (non-current)	65.6			56.6
Current liabilities⁽¹⁾	—			(131.2		)
Other non-current liabilities	(377.7		)	(555.6		)
Net deferred tax asset (liability)	$	(312.1	)	$	(618.5	)

⁽¹⁾ Balances reflect our early adoption of ASU 2015-17 on a prospective basis, which requires companies to classify all deferred tax assets and liabilities and associated valuation allowances as non-current on the balance sheet instead of separating deferred taxes and associated valuation allowances into current and non-current amounts. Prior periods were not retrospectively adjusted.

Reconciliation of the U.S. statutory income tax rate to the Company's effective tax rate is as follows:



Percentages	2015		2014		2013
U.S. statutory rate	35.0	%	35.0	%	35.0	%
Foreign tax rate differences	(21.0	)%	(22.3	)%	(28.8	)%
Unremitted earnings	—	%	—	%	—	%
State taxes, net of federal benefit	1.2	%	1.0	%	0.6	%
Change in valuation allowance	2.0	%	0.2	%	1.2	%
Acquisition related differences	4.5	%	(0.3	)%	3.7	%
Changes in uncertain tax positions	(0.5	)%	(0.4	)%	0.8	%
Other	(0.4	)%	0.9	%	0.4	%
Effective income tax rate	20.8	%	14.1	%	12.9	%

In our reconciliation of the U.S. statutory income tax rate to our effective tax rate, we disclose changes in uncertain tax positions which include the effect of settlements, expirations of statutes of limitations, and other changes in prior year tax positions.

We have operations in many foreign tax jurisdictions, which impose income taxes at different rates than the United States. The impact of these rate differences is included in the foreign tax rate differences that we disclose in our reconciliation of the U.S. statutory income tax rate to our effective tax rate. The benefit related to foreign tax rate differences primarily results from our commercial operations in Switzerland, which include significant research and development and manufacturing for worldwide markets. We operated under an income tax agreement in Switzerland through 2015 that provided an exemption from most Swiss income taxes on our operations in Switzerland. In 2013, we entered into a new agreement with the Swiss tax authorities which reflects the planned expansion of our Swiss operations and coupled with a 2014 reorganization of our Swiss operations will result in similar tax benefits through the end of 2024. The difference between the maximum statutory Swiss income tax rate (approximately 17.0% in 2015, 18.4% in 2014 and 19.7% in 2013) and our Swiss income tax rate under the tax agreement resulted in a reduction in the 2015, 2014 and 2013 effective tax rates of 25.7, 18.0 and 25.1 percentage points, respectively. The increase in benefits reflected in the foreign tax rate differences from 2014 to 2015 resulted primarily from an increase in the proportion of consolidated income before taxes from Swiss operations.

At December 31, 2015, we had federal NOL carryforwards of approximately $114.2 million and combined state NOL carryforwards of approximately $883.5 million that will expire in the years 2016 through 2035. We also have research and experimentation credit carryforwards of approximately $16.8 million that will expire in the years 2018 through 2034. Excess tax benefits related to stock option deductions incurred after December 31, 2005 are required to be recognized in the period in which the tax deduction is realized through a reduction of income taxes payable. As a result, we have not recorded deferred tax assets for certain stock option deductions included in our state NOL carryforwards and research and experimentation credit carryforwards. At December 31, 2015, deferred tax assets have not been recorded on state NOL carryforwards of approximately $476.4 million and for research and experimentation credits of approximately $4.0 million. These stock option tax benefits are expected to be recorded as an increase in additional paid-in capital when realized.

We realized share-based compensation deduction benefits in 2015, 2014 and 2013 for income tax purposes and have increased additional paid-in capital in the amount of approximately $302.1 million, $252.6 million and $170.0 million, respectively. We have recorded deferred income taxes related to net unrealized gains on securities as a component of accumulated other comprehensive income resulting in a deferred income tax liability at December 31, 2015 and 2014 of $129.9 million and $236.5 million, respectively.

On August 27, 2015, we acquired all of the outstanding common stock of Receptos. The acquisition was accounted for using the acquisition method of accounting, and we recorded a deferred tax liability of $2.519 billion related to the acquisition. Upon integration of the acquired assets into our offshore research, manufacturing, and commercial operations, the deferred tax liability was reclassified to a non-current tax liability. This liability represents an estimate of income tax that may be incurred in the future. This income tax liability is contingent upon successful development of the acquired IPR&D into a commercially viable product and would be incurred over the product's economic useful life.

Our tax returns are under routine examination in many taxing jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. Our U.S. federal income tax returns have now been audited by the IRS through the year ended December 31, 2008. Tax returns for the years ended December 31, 2009, 2010, and 2011 are currently under examination by the IRS. We are also subject to audits by various state and foreign taxing authorities, including, but not limited to, most U.S. states and major European and Asian countries where we have operations.

We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience. These evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if management's estimates are not representative of actual outcomes, our results of operations could be materially impacted.

Unrecognized tax benefits, generally represented by liabilities on the consolidated balance sheet and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2015			2014
Balance at beginning of year	$	251.8		$	219.2
Increases related to prior year tax positions	—			2.8
Decreases related to prior year tax positions	—			—
Increases related to current year tax positions	84.8			44.4
Settlements	—			(10.0		)
Lapse of statute	(10.8		)	(4.6		)
Balance at end of year	$	325.8		$	251.8

These unrecognized tax benefits relate primarily to issues common among multinational corporations. If recognized, unrecognized tax benefits of approximately $300.8 million would have a net impact on the effective tax rate. We account for interest and penalties related to uncertain tax positions as part of our provision for income taxes. Accrued interest at December 31, 2015 and 2014 is approximately $32.6 million and $28.1 million, respectively.

We have recorded changes in the liability for unrecognized tax benefits for current and prior year tax positions related to ongoing income tax audits in various taxing jurisdictions. The liability for unrecognized tax benefits is expected to increase in the next twelve months relating to operations occurring in that period. Any settlements of examinations with taxing authorities or statute of limitations expirations would likely result in a decrease in our liability for unrecognized tax benefits and a corresponding increase in taxes paid or payable and/or a decrease in income tax expense. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period as a result of settlements or statute of limitations expirations. Finalizing examinations with the relevant taxing authorities can include formal administrative and legal proceedings and, as a result, it is difficult to estimate the timing and range of possible change related to the Company’s unrecognized tax benefits. An estimate of the range of the possible change cannot be made until issues are further developed or examinations close. Our estimates of tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire.