Income Taxes

For the three and six months ended June 30, 2014, our effective tax rate was 27.0% and 26.9% respectively, as compared to 24.4% and 19.6%, 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,
	2014		2013		2014		2013
Statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes	1.1		1.9		1.1		4.4
Taxes on foreign earnings	(8.7	)	(7.2	)	(8.5	)	(8.4	)
Credits and net operating loss utilization	(0.7	)	(3.5	)	(0.9	)	(3.4	)
Purchased intangible assets	1.2		1.8		1.3		1.5
Manufacturing deduction	(1.7	)	(2.4	)	(1.8	)	(11.1	)
Other permanent items	0.4		(1.0	)	0.4		1.8
Other	0.4		(0.2	)	0.3		(0.2	)
Effective tax rate	27.0	%	24.4	%	26.9	%	19.6	%

For the three and six months ended June 30, 2014, compared to the same periods in 2013, the increase in our income tax rate was primarily the result of a 2013 change in our uncertain tax position related to our U.S. federal manufacturing deduction and our unconsolidated joint business described below, the reinstatement for 2013 of the federal research and development tax credit which is now expired and lower current year expenses eligible for the orphan drug credit, partially offset by a higher percentage of our 2014 income being earned outside the U.S.

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 and state uncertain tax positions in 2013, as discussed below under "Accounting for Uncertainty in Income Taxes".

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 2013, we received updated technical guidance from the IRS concerning the calculation of our U.S. federal manufacturing deduction and overall tax classification of our unconsolidated joint business for the current and prior year filings. Based on this guidance we reevaluated the level of our unrecognized benefits related to uncertain tax positions, and recorded a $49.8 million income tax benefit. This benefit was for a previously unrecognized position and related to years 2005 through 2012. We recorded an offsetting expense of $10.3 million for non-income based state taxes, which was recorded in other income (expense) within our condensed consolidated statements of income.

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. We have initiated a mutual agreement procedure between the IRS and SKAT (the Danish tax authorities) for the years 2001 through 2009, in an attempt to reach agreement on the issue. In addition, we have applied for a bilateral advanced pricing agreement for the years 2010 through 2014 to resolve similar issues for the subsequent years.

It is reasonably possible that we will adjust the value of our uncertain tax positions related to our unconsolidated joint business and certain transfer pricing issues as we receive additional information from various taxing authorities, including reaching settlements with the authorities. In addition, the IRS and other national tax authorities routinely examine our intercompany transfer pricing with respect to intellectual property related transactions and it is possible that they may disagree with one or more positions we have taken with respect to such valuations.