Income Taxes

For the three and nine months ended September 30, 2013, our effective tax rate was 27.4% and 22.5%, respectively, as compared to 24.7% and 23.5%, 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 September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes	2.5		0.8		3.7		0.8
Taxes on foreign earnings	(6.6	)	(7.1	)	(7.7	)	(7.6	)
Credits and net operating loss utilization	(2.2	)	(3.4	)	(3.0	)	(3.7	)
Purchased intangible assets	1.9		1.3		1.6		1.2
Manufacturing deduction	(2.5	)	(2.5	)	(8.0	)	(2.3	)
Other permanent items	(0.3	)	0.4		1.0		(0.4	)
Other	(0.4	)	0.2		(0.1	)	0.5
Effective tax rate	27.4	%	24.7	%	22.5	%	23.5	%

The increase in our tax rate for the three months ended September 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 reduced expenditures eligible for the orphan drug credit and higher state taxes. These factors were partially offset by 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 nine months ended September 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 tax credit. These favorable items were partially offset by higher relative earnings in the United States from the commercial 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 in the table above is primarily related to changes in the valuation of our federal uncertain tax positions, as discussed below under "Accounting for Uncertainty in Income Taxes".

During the nine months ended September 30, 2013, we recorded a deferred charge of $203.7 million in connection with an intercompany transfer 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. Subsequent to establishing the uncertain tax position, we have remeasured the uncertain tax position upon receiving new information and recorded a net benefit of approximately $7.0 million.

In October 2011, in conjunction with our examination, the IRS proposed a disallowance of approximately $130.0 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. 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

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. 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 state tax filings for 2007 and 2008 has been completed without a significant proposed adjustment.