Income Taxes

6 Months Ended

Jun. 30, 2019

Tax Rate

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,
	2019		2018		2019		2018
Statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State taxes	0.9		0.6		0.6		0.8
Taxes on foreign earnings	(4.6	)	(1.8	)	(4.6	)	(2.0	)
Credits and net operating loss utilization	(0.9	)	(0.7	)	(0.8	)	(0.8	)
Purchased intangible assets	0.4		0.6		0.4		0.6
Denmark assets held for sale	—		—		2.2		—
Internal reorganization of certain intellectual property rights	(5.0	)	—		(2.4	)	—
Global Intangible Low-Taxed Income (GILTI)	1.4		1.8		1.7		1.6
Other permanent items	0.4		0.4		0.3		0.4
Other	0.5		0.5		0.1		0.3
Effective tax rate	14.1	%	22.4	%	18.5	%	21.9	%

Changes in Tax Rate

For the three months ended June 30, 2019, compared to the same period in 2018, the decrease in our effective tax rate was primarily due to the combination of an internal reorganization of certain intellectual property rights related to the intercompany sale of the intellectual property (the effective tax rate decrease from this internal reorganization is not expected to recur post 2019) and a higher effective tax rate in 2018 resulting from the sale of

inventory, the tax effect of which had been included within prepaid taxes at January 1, 2018, at a higher effective tax rate.

For the six months ended June 30, 2019, compared to the same period in 2018, the decrease in our effective tax rate was primarily due to the combination of the internal reorganization of certain intellectual property rights, offset by a $61.3 million tax expense related to the proposed divestiture of our subsidiary that owns our Hillerød, Denmark manufacturing operations and a higher effective tax rate in 2018 resulting from the sale of inventory, the tax effect of which had been included within prepaid taxes at January 1, 2018, at a higher effective tax rate.

Specifically in regard to the Hillerød, Denmark manufacturing operations, although we are recognizing a loss on the proposed divestiture of such subsidiary, the proposed divestiture requires us to write off certain deferred tax assets upon the classification of the operations as held for sale and results in a taxable gain in certain jurisdictions.

As a result of the internal reorganization of certain intellectual property rights, we have recorded a deferred tax asset of $856.7 million and a deferred tax liability of $685.3 million in the second quarter of 2019.

Accounting for Uncertainty in Income Taxes

We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in various U.S. states and in U.S. federal and other foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal tax examination for years before 2013 or state, local or non-U.S. income tax examinations for years before 2010.

The U.S. Internal Revenue Service 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.

Federal and State Uncertain Tax Positions

It is reasonably possible that we will adjust the value of our uncertain tax positions related to certain transfer pricing, collaboration and other issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.

International Uncertain Tax Positions

We have made payments totaling approximately $60.0 million to the Danish Tax Authority (SKAT) for assessments received for 2009, 2011 and 2013 regarding withholding taxes on certain payments made by our subsidiary that owns our biologics manufacturing operations in Hillerød, Denmark. We continue to dispute the assessments for all of these periods and believe that the tax positions taken related to these payments are valid. Any amount refunded by SKAT associated with this withholding tax receivable will be paid to our subsidiary that owns our biologics manufacturing operations in Hillerød, Denmark.

Proposed Divestiture of Hillerød, Denmark Manufacturing Operations

In March 2019 we entered into a share purchase agreement with FUJIFILM under which FUJIFILM will acquire all of the outstanding shares of our subsidiary that owns our biologics manufacturing operations in Hillerød, Denmark. This withholding tax receivable from SKAT will be included within the assets that will be transferred to FUJIFILM as part of the proposed transaction. Under the share purchase agreement, FUJIFILM is required to remit any future proceeds refunded by SKAT to us. We have assessed the collectability of the receivable from FUJIFILM and regard it as a contingent gain, which does not meet the probable threshold for recognition under ASC 450, Contingencies, and therefore we have recorded a pre-tax charge of $60.0 million to write the asset down to zero as a component of the loss on assets and liabilities held for sale in the first quarter of 2019.

We have also reclassified $53.8 million of our deferred tax liability to liabilities held for sale in our condensed consolidated balance sheets as of June 30, 2019.

For additional information on the proposed divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these condensed consolidated financial statements.