Income Taxes

For the three and six months ended June 30, 2013, our effective tax rate was 24.4% and 19.6%, respectively, as compared to 23.8% and 22.7%, respectively, in the prior year comparative periods.

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



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes	1.9		0.8		4.4		0.8
Taxes on foreign earnings	(7.2	)	(7.6	)	(8.4	)	(7.9	)
Credits and net operating loss utilization	(3.5	)	(3.9	)	(3.4	)	(3.8	)
Purchased intangible assets	1.8		1.1		1.5		1.1
Manufacturing deduction	(2.4	)	(2.1	)	(11.1	)	(2.1	)
Other permanent items	(1.0	)	(0.3	)	1.8		(1.0	)
Other	(0.2	)	0.8		(0.2	)	0.6
Effective tax rate	24.4	%	23.8	%	19.6	%	22.7	%

The increase in our tax rate for the three months ended June 30, 2013 compared to the same period in 2012, is primarily attributable to the commercial launch of TECFIDERA in the United States, which has resulted in a higher relative percentage of our earnings being recognized in the U.S., a higher tax jurisdiction. In addition, in 2013 we are recognizing the unfavorable effect of the amortization of the deferred charge relating to the Daclizumab program noted below, reduced expenditures eligible for the orphan drug credit and higher state taxes. These factors were partially offset by the revaluation of uncertain tax positions due to new information received related to our U.S. federal manufacturing deduction discussed below and 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.

For the six months ended June 30, 2013, the reduction in our income tax rate compared to the same period in 2012, was primarily the result of a change in our uncertain tax position related to our U.S. federal manufacturing deduction, described below, 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 the reinstatement of the federal research and development credit. These favorable items were partially offset by higher relative earnings in the United States from the launch of TECFIDERA, lower orphan drug credits due to reduced expenditures in eligible clinical trials and higher state taxes.

The change in the state taxes, manufacturing deduction and other permanent items of the effective tax rate reconciliation for the periods disclosed above is primarily related to changes in the valuation of our federal uncertain tax positions, in "Accounting for Uncertainty in Income Taxes" discussed further below.

During the three months ended June 30, 2013, we recorded a deferred charge of $203.7 million in connection with certain intercompany transfers of the intellectual property for Daclizumab. The deferred charge will be amortized to income tax expense over the economic life of the Daclizumab program. If the Daclizumab 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.

Accounting for Uncertainty in Income Taxes

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.

Federal Uncertain Tax Positions

During the three months ended March 31, 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 related to our unconsolidated joint business. Based on this guidance we reevaluated the level of our unrecognized benefits related to uncertain tax positions, and recorded a $33.0 million benefit, which is net of ancillary federal and state tax effects. This benefit is for a previously unrecognized position and relates to years 2005 through 2012 and is net of a $10.0 million expense for non-income based state taxes, which is recorded in other income (expense) within our condensed consolidated statements of income. During the three months ended June 30, 2013, we remeasured the uncertain tax position upon receiving new information and recorded a net benefit of approximately $7.4 million.

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.

It is reasonably possible that we will adjust the value of our uncertain tax positions related to the manufacturing deduction as we receive additional information from various taxing authorities. 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

On June 8, 2010, we received Notices of Assessment from the Massachusetts Department of Revenue (DOR) against Biogen Idec MA Inc. (BIMA), one of our wholly-owned subsidiaries, for $103.5 million of corporate excise tax, including associated interest and penalties, related to our 2004, 2005 and 2006 state tax filings. The assessment asserted that the portion of sales attributable to Massachusetts, the computation of BIMA's research and development credits and certain deductions claimed by BIMA were not appropriate. On February 3, 2013, we filed a petition with the Massachusetts Appellate Tax Board (Massachusetts ATB) appealing the denial of our application for abatement. We have been in discussions with the Massachusetts DOR to resolve our outstanding matters and have recorded adjustments to our uncertain tax positions to reflect those discussions and our best estimate of the outcome.

The audits of our state 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 Massachusetts 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.