Income Taxes

6 Months Ended

Jun. 30, 2020

Coronavirus Aid, Relief and Economic Security Act

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in the U.S. in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three and six months ended June 30, 2020, or to our net deferred tax assets as of June 30, 2020.

TECFIDERA

On June 22, 2020, the U.S. District Court for the Northern District of West Virginia (the West Virginia Court)

entered judgment for Mylan Pharmaceuticals, Inc. (Mylan) that the asserted claims of our U.S. Patent No. 8,399,514

(the '514 Patent) are invalid for lack of written description. The '514 Patent covers treatment of MS with 480 mg of

dimethyl fumarate per day as provided for in our TECFIDERA label, and the litigation was filed pursuant to the Drug

Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act. We appealed the

judgment on June 23, 2020, to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) and filed an

emergency motion for an injunction pending resolution of the appeal. On June 30, 2020, the Federal Circuit entered

an interim injunction enjoining Mylan from launching its generic version of TECFIDERA pending the Federal Circuit's

consideration of our request for an injunction pending appeal. In the event that our request for an injunction pending appeal is denied, generic entry could occur during the appeal. The commercialization of a generic version of TECFIDERA would have an adverse impact on our TECFIDERA sales and our results of operations.

As of June 30, 2020, we have assessed the realizability of our deferred tax assets that are dependent on future expected sales of TECFIDERA in the U.S. and reduced the value of certain deferred tax assets by approximately $1,324.0 million and reduced the value of deferred tax liabilities associated with global intangible low-taxed income (GILTI) and tax credits by approximately $1,268.0 million. For the three and six months ended June 30, 2020, the income tax expense associated with these reductions was approximately $56.0 million. For additional information, please read Note 19, Litigation, to these condensed consolidated financial statements.

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,
	2020		2019		2020		2019
Statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State taxes	0.4		0.9		0.5		0.6
Taxes on foreign earnings	(3.4	)	(4.6	)	(3.7	)	(4.6	)
Tax credits	(1.0	)	(0.9	)	(1.0	)	(0.8	)
Purchased intangible assets	0.2		0.4		0.2		0.4
Divestiture of Denmark manufacturing operations	—		—		—		2.2
Internal reorganization of certain intellectual property rights	—		(5.0	)	—		(2.4	)
TECFIDERA impairment	2.7		—		1.5		—
GILTI	1.5		1.4		1.1		1.7
Other permanent items	0.1		0.4		0.1		0.3
Other	0.4		0.5		0.1		0.1
Effective tax rate	21.9	%	14.1	%	19.8	%	18.5	%

Changes in Tax Rate

For the three months ended June 30, 2020, compared to the same period in 2019, the increase in our effective tax rate was primarily due to an internal reorganization of certain intellectual property rights related to the intercompany sale of the intellectual property in 2019 and the $56.0 million income tax expense related to the establishment of a valuation allowance against certain deferred tax assets, the realization of which is dependent on future sales of TECFIDERA in the U.S., as discussed above.

For the six months ended June 30, 2020, compared to the same period in 2019, the increase in our effective tax rate was primarily due to the impacts of the valuation allowance described above and the internal reorganization of certain intellectual property rights, partially offset by the $61.3 million tax expense recognized in 2019 related to the planned divestiture of our Hillerød, Denmark manufacturing operations. Although we recognized a loss on the divestiture of our Hillerød, Denmark manufacturing operations, the divestiture required us to write off certain deferred tax assets and resulted in a taxable gain in certain jurisdictions.

As a result of the internal reorganization of certain intellectual property rights, we recorded a deferred tax asset of $856.7 million and a deferred tax liability of $685.3 million as of June 30, 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 2012.

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.

In April 2020 we became aware of a withholding tax regulation that could be interpreted to apply to certain of our previous transactions. As of June 30, 2020, we have recorded an immaterial reserve reflecting this uncertain tax position.

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

We estimate that it is reasonably possible that our gross unrecognized tax benefits, exclusive of interest, could decrease by up to approximately $75.0 million in the next 12 months as a result of various audit closures, settlements and expiration of the statute of limitations.