Income Taxes

9 Months Ended

Sep. 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 adjusted a number of provisions of the tax code, including the calculation and eligibility of certain deductions and the treatment of net operating losses and tax credits. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three and nine months ended September 30, 2020, or to our net deferred tax assets as of September 30, 2020.

TECFIDERA

In June 2020 and September 2020 judgments were entered in favor of the defendants in the patent infringement proceedings relating to TECFIDERA Orange-Book listed patents pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, in West Virginia and Delaware. We have appealed the judgments in both actions. For additional information, please read Note 19, Litigation, to these condensed consolidated financial statements.

Multiple TECFIDERA generic entrants are now in the U.S. market, some of which have deeply discounted prices compared to TECFIDERA. The generic competition for TECFIDERA significantly reduced our TECFIDERA revenues during the third quarter of 2020 and is expected to have a substantial negative impact on our TECFIDERA revenues for as long as there is generic competition.

As of September 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 $1,627.9 million and reduced the value of deferred tax liabilities associated with global intangible low-taxed income (GILTI) and tax credits by approximately $1,538.6 million. For the three and nine months ended September 30, 2020, the income tax expense associated with these reductions was approximately $33.3 million and $89.3 million, respectively.

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 September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State taxes	0.9		0.9		0.6		0.7
Taxes on foreign earnings	(3.0)		(5.0)		(3.6)		(4.7)
Tax credits	(2.3)		(1.5)		(1.3)		(1.0)
Purchased intangible assets	2.9		0.4		0.8		0.4
Divestiture of Denmark manufacturing operations	—		—		—		1.5
Internal reorganization of certain intellectual property rights	—		(1.5)		—		(2.1)
TECFIDERA impairment	3.5		—		1.9		—
GILTI	2.2		1.6		1.3		1.6

Swiss tax reform	—		(3.1)		—		(1.0)
Other permanent items	(0.6)		(0.1)		—		0.2
Other	0.5		(0.8)		0.2		(0.3)
Effective tax rate	25.1	%	11.9	%	20.9	%	16.3	%

Changes in Tax Rate

For the three months ended September 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 such intellectual property in 2019, the enactment of a new taxing regime in the country and certain cantons of Switzerland in 2019 (Swiss Tax Reform) and the net $33.3 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 nine months ended September 30, 2020, compared to the same period in 2019, the increase in our effective tax rate was primarily due to the $89.3 million impact from the valuation allowance described above, the internal reorganization of certain intellectual property rights and Swiss Tax Reform, partially offset by the $64.7 million tax expense recognized in September 30, 2019, related to the 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. For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to our condensed consolidated financial statements included in this report.

As a result of the internal reorganization of certain intellectual property rights, we recorded a deferred tax asset of $754.2 million and a deferred tax liability of $603.4 million as of September 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.

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.