Income Taxes

6 Months Ended

Jun. 30, 2020

Coronavirus Aid, Relief and Economic Security Act

In response to the market volatility and instability resulting from the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Under the 2017 Tax Act, federal net operating losses (NOLs) generated after 2017 could not be carried back and utilization was limited to 80% of taxable income. The CARES Act allows for a five-year carryback of federal NOLs generated in 2018 through 2020 and eliminates the 80% taxable income limitation by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018 through 2020. In addition, the CARES Act generally allows taxpayers to deduct interest up to 50% of adjusted taxable income (30% limit under the 2017 Tax Act) for tax years 2019 and 2020. The CARES Act also allows taxpayers with prior year alternative minimum tax (repealed by the 2017 Tax Act) (AMT) credits to accelerate refund claims to tax years beginning in 2018 and 2019 instead of recovering the credits over a period of years, as originally enacted by the 2017 Tax Act.

Additionally, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and provides a technical correction to the 2017 Tax Act to generally provide qualified improvement property a 15-year cost-recovery period and allow 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 U.S. federal and state net deferred tax liabilities as of June 30, 2020.

Tax Rate

The following table provides a comparative summary of our income tax expense and effective income tax rate for the three and six months ended June 30, 2020 and 2019:


	Three months ended									Six months ended
	June 30,									June 30,
	2020			2019			2020			2019
Income tax (benefit) expense	$	(284.0)		$	39.7		$	(178.0)		$	(6.4)
Effective income tax rate	21.0		%	7.9		%	25.9		%	(0.6)		%

Income tax (benefit) expense is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. During the second quarter 2020, we recognized an impairment charge of $2,042.3 related to the KANUMA intangible asset, resulting in a deferred tax benefit of $377.3. See Note 5, Intangible Assets and Goodwill, for additional information on the impairment charge. These deferred tax benefits increased the effective tax rate for the six months ended June 30, 2020 by approximately 11.1%.

The income tax expense for the six months ended June 30, 2019 includes one-time tax benefits recorded during the first quarter 2019, in connection with the future integration of intellectual property of Wilson Therapeutics into the Alexion corporate structure. The deferred tax benefits included $95.7 and $30.3 associated with a tax election made with respect to intellectual property of Wilson Therapeutics and a valuation allowance release and corresponding recognition of net operating losses, respectively. These deferred tax benefits decreased the effective tax rate for the six months ended June 30, 2019 by approximately 12.1%.

In April 2020 we became aware of a European withholding tax regulation that could be interpreted to apply to certain of our previous intra-group transactions. We continue to evaluate whether the interpretation of this regulation applies to our facts and circumstances, and, based on our preliminary analysis, we recorded an immaterial reserve related to this matter during the second quarter of 2020.

In July 2020, the U.S. Department of Treasury released certain proposed and final regulations which were originally enacted under the 2017 Tax Act. We are currently assessing the impact of these regulations on our financial condition and results of operations.

In 2017, the Internal Revenue Service (IRS) commenced an examination of our U.S. income tax returns for 2015. During the second quarter of 2020 we received a Revenue Agent Report (RAR) and held discussions with the IRS regarding a proposed adjustment related to the valuation of certain intellectual property that was contributed into our captive partnership during 2015. The Company agrees with the adjustment as outlined in the RAR and has

recognized a previously unrecognized tax benefit in the second quarter of 2020 that did not result in a significant impact to the financial statements. We anticipate the audit will conclude within the next six months.

We have recorded tax on the undistributed earnings of our controlled foreign corporation (CFC) subsidiaries. To the extent CFC earnings may not be repatriated to the U.S. as a dividend distribution due to limitations imposed by law, we have not recorded the related potential withholding, foreign, local, and U.S. state income taxes.

We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.