
	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)	2012			2011			2010
Income before income taxes (benefit):
Domestic	$	1,398.0		$	1,408.9		$	846.4
Foreign	457.1			302.3			383.5
Total	$	1,855.1		$	1,711.2		$	1,229.9
Income tax expense (benefit):
Current:
Federal	$	507.9		$	231.7		$	357.7
State	35.6			15.1			19.6
Foreign	44.0			44.1			35.4
Total	587.5			290.9			412.7
Deferred:
Federal	$	(133.0	)	$	160.9		$	(70.6	)
State	(13.0		)	(8.1		)	(6.6		)
Foreign	29.1			0.8			(4.2		)
Total	(116.9		)	153.6			(81.4		)
Total income tax expense	$	470.6		$	444.5		$	331.3

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)	2012			2011
Deferred tax assets:
Tax credits	$	69.3		$	60.0
Inventory, other reserves, and accruals	118.3			104.1
Capitalized costs	7.6			5.3
Intangibles, net	84.5			75.8
Net operating loss	37.5			22.9
Share-based compensation	58.6			54.7
Other	57.8			45.7
Valuation allowance	(12.3		)	(10.8		)
Total deferred tax assets	$	421.3		$	357.7
Deferred tax liabilities:
Purchased intangible assets	$	(411.3	)	$	(384.8	)
Unrealized gain on investments and cumulative translation adjustment	(1.2		)	(3.5		)
Inventory	(50.8		)	(76.8		)
Depreciation, amortization and other	(146.4		)	(133.1		)
Total deferred tax liabilities	$	(609.7	)	$	(598.2	)

Tax Rate

Reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:



	For the Years Ended December 31,
	2012		2011		2010
Statutory rate	35.0	%	35.0	%	35.0	%
State taxes	0.9		1.7		1.7
Taxes on foreign earnings	(6.2	)	(5.9	)	(10.7	)
Credits and net operating loss utilization	(3.5	)	(4.4	)	(3.0	)
Purchased intangible assets	1.2		1.3		1.9
IPR&D	—		—		5.0
Permanent items	(2.5	)	(1.2	)	(2.0	)
Contingent consideration	0.5		0.7		—
Other	—		(1.2	)	(1.0	)
Effective tax rate	25.4	%	26.0	%	26.9	%

As of December 31, 2012, we had net operating losses and general business credit carry forwards for federal income tax purposes of approximately $63.2 million and $2.9 million, respectively, which begin to expire in 2020. Additionally, for state income tax purposes, we had net operating loss carry forwards of approximately $95.6 million, which begin to expire in 2013. For state income tax purposes, we also had research and investment credit carry forwards of approximately $114.7 million, of which approximately $3.5 million begin to expire in 2013. For foreign income tax purposes, we had $8.8 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. At December 31, 2012, we have a full valuation allowance on the deferred tax assets of a variable interest entity which we consolidate, based on uncertainties related to the realization of all of those assets. These assets totalling $10.9 million are excluded from our credit and loss carryforwards described above. 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, 2012, undistributed foreign earnings of non-U.S. subsidiaries included in consolidated retained earnings and other basis differences aggregated approximately $3.3 billion. We intend to reinvest these earnings indefinitely in operations outside the U.S. The residual U.S. tax liability, if such amounts were remitted, would be between $800 million to $900 million as of December 31, 2012.

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)	2012			2011			2010
Balance at January 1,	$	64.4		$	121.5		$	147.1
Additions based on tax positions related to the current period	13.0			2.2			3.6
Additions for tax positions of prior periods	69.8			48.6			13.3
Reductions for tax positions of prior periods	(18.6		)	(75.8		)	(18.5		)
Statute expirations	(1.9		)	(2.3		)	(3.7		)
Settlements	(0.8		)	(29.8		)	(20.3		)
Balance at December 31,	$	125.9		$	64.4		$	121.5

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. During the year, we adjusted our unrecognized tax benefits to reflect new information arising during our on-going federal and state audit examinations including the filing of amended federal income tax returns to claim certain deductions.

In October 2011, in conjunction with our examination, the IRS has 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 will vigorously defend our position.

Included in the balance of unrecognized tax benefits as of December 31, 2012, 2011, and 2010 are $109.5 million, $31.3 million, and $26.2 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 2012, we recognized a net interest expense of $0.1 million. During 2011, we recognized net interest benefit of $12.9 million. In 2010, we recognized a net interest expense of approximately $0.7 million. We have accrued approximately $2.5 million and $3.9 million for the payment of interest as of December 31, 2012 and 2011, respectively.

We do not anticipate any 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.

Contingencies

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. We filed an abatement application with the DOR seeking abatements for 2001, 2002 and 2003. Our abatement application was denied and on July 25, 2007, we filed a petition with the Massachusetts Appellate Tax Board (Massachusetts ATB) seeking, among other items, abatements of corporate excise tax for 2001, 2002 and 2003 and adjustments in certain credits and credit carry forwards for 2001, 2002 and 2003. 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. This resolution did not have a significant impact on our results of operations, is related only to the 2001, 2002 and 2003 tax years, and does not resolve matters in dispute for subsequent periods.

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. We filed an abatement application with the DOR seeking abatement for 2004, 2005 and 2006. Our abatement application was denied in December 2010, and we filed a petition appealing the denial with the ATB on February 3, 2011, and hearing has been scheduled for April 2013. For all periods under dispute, we believe that positions taken in our tax filings are valid and we are contesting the assessments vigorously.

The audits of our tax filings for 2007 and 2008 are not completed. As these filings were prepared in a manner consistent with prior filings, we may receive an assessment for those years as well. Due to tax law changes effective January 1, 2009, the computation and deductions at issue in previous tax filings are not part of our subsequent tax filings in Massachusetts.

We believe that these assessments do not impact the amount of liabilities for income tax contingencies. However, there is a possibility that we may not prevail in defending all of our assertions with the DOR. If these matters are resolved unfavorably in the future, the resolution could have a material adverse impact on our effective tax rate and our results of operations.