Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income tax expense is based on income before income taxes as follows:

	Year Ended December 31,
	2019		2018			2017
U.S.	$	2.0	$	(451.4	)	$	(43.9	)
Non-U.S.	2,176.8		693.6			591.7
	$	2,178.8	$	242.2		$	547.8

During the fourth quarter of 2013, in connection with the centralization of our global supply chain and technical operations in Ireland, our U.S. parent company became a direct partner in a captive foreign partnership. The partnership income, which is derived in foreign jurisdictions, is classified as “non-U.S. income” for purposes of financial reporting. Substantially all non-U.S. income relates to income from our captive foreign partnership.

The components of income tax expense are as follows:

	Year Ended December 31,
	2019			2018			2017
Domestic
Current	$	71.8		$	57.0		$	42.9
Deferred	1,731.0			49.5			7.2
	1,802.8			106.5			50.1
Foreign
Current	158.2			74.7			107.5
Deferred	(2,186.5		)	(16.6		)	(53.1		)
	(2,028.3		)	58.1			54.4
Total
Current	230.0			131.7			150.4
Deferred	(455.5		)	32.9			(45.9		)
	$	(225.5	)	$	164.6		$	104.5

We continue to pay cash taxes in U.S. federal, various U.S. state, and foreign jurisdictions where we have utilized all of our tax attributes or have met the applicable limitation for attribute utilization.

Effective Tax Rate

The provision (benefit) for income taxes differs from the U.S. federal statutory tax rate. The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is as follows:

	Year Ended December 31,
	2019		2018		2017
U.S. federal statutory tax rate	21.0	%	21.0	%	35.0	%
Benefit of foreign earnings	(12.6	)%	(71.2	)%	60.1	%
Tax credits	(0.7	)%	(17.0	)%	(10.7	)%
Tax reserves	(0.1	)%	12.1	%	(14.0	)%
Re-measurement of deferred taxes as a result of the Tax Act	—	%	—	%	(53.4	)%
Acquired in-process research & development	—	%	102.6	%	—	%
Intra-entity asset transfer of intellectual property	(17.5	)%	—	%	—	%
Foreign-derived intangible income	(1.6	)%	(4.5	)%	—	%
U.S. state taxes	0.7	%	14.2	%	1.5	%
Other permanent differences	0.5	%	10.8	%	0.6	%
Effective Income Tax Rate	(10.3	)%	68.0	%	19.1	%

In our reconciliation of our statutory U.S. federal income tax rate to our effective tax rate above, we have included a benefit of foreign earnings amount which encapsulates the various tax impacts that result from our non-U.S. income. As a result of U.S. Tax Reform, a substantial portion of our foreign earnings are subject to the GILTI minimum tax at an effective rate which is lower than the U.S. statutory tax rate of 21.0%. While we are also subject to tax in foreign jurisdictions locally, substantially all of these current taxes are creditable against U.S. taxes imposed on foreign earnings. As a result, the effective tax rate on our foreign earnings is lower than the U.S. statutory rate.

In the year ended December 31, 2019, the benefit of foreign earnings includes foreign local tax expense of $193.2, which is offset by the benefit from U.S. foreign tax credits of $196.1, resulting in a net decrease to the effective tax rate of 0.1%. We incurred U.S. tax expense on our foreign earnings of $187.6, which includes GILTI minimum tax. The U.S. tax on our foreign earnings reflects a benefit of $269.5, or 12.4%, primarily related to the Section 250(a) deduction, compared to the statutory rate. The benefit from foreign earnings also includes certain one-time tax benefits associated with the intellectual property of Wilson Therapeutics. The deferred tax benefits include $95.7and $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. On July 1, 2019, the Wilson Therapeutics intellectual property was integrated into the Alexion corporate structure, resulting in income tax expense of approximately $10.2.

In the year ended December 31, 2019, the Company completed an intra-entity asset transfer of certain intellectual property to an Irish subsidiary within our captive foreign partnership. The Company recognized deferred tax benefits of $2,221.5 which represents the difference between the basis of the intellectual property for financial statement purposes and the basis of the intellectual property for tax purposes, applying the appropriate enacted statutory tax rates. The Company will receive future tax deductions associated with amortization of the intellectual property, and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax law. An offsetting deferred tax expense of $1,839.3 has been recognized to reflect the reduction of future foreign tax credits associated with the foreign local tax amortization deductions. These net deferred tax benefits resulted in a decrease of approximately 17.5% to our effective tax rate.

We also completed a comprehensive analysis of our prior year estimate related to our foreign-derived intangible income (“FDII”) based on additional guidance provided in the proposed regulations issued by the U.S. Treasury Department in 2019. The analysis resulted in income tax benefit of $17.0 related to prior year, which was recorded as a change in estimate in income tax expense in our consolidated statements of operations, resulting in a decrease of approximately 0.8% to our effective tax rate.

In the year ended December 31, 2018, the benefit of foreign earnings includes foreign local tax expense of $58.1, substantially all of which is offset by the benefit from U.S. foreign tax credits of $54.2, resulting in a net increase to the effective tax rate of 1.6%. We incurred U.S. tax expense on our foreign earnings of $206.1, which includes GILTI minimum tax. The U.S. tax on our foreign earnings reflects a benefit of $108.7, or 44.8%, primarily related to the Section 250(a) deduction, compared to the U.S. statutory rate. Also included in this component is a benefit of $67.7 from adjustments to 2018 provisional accounting for the Tax Act, which resulted in a decrease to our effective tax rate of approximately 28.0%.

In the year ended December 31, 2017, the benefit of foreign earnings includes foreign local tax expense of $54.4 partially offset by the benefit from U.S. foreign tax credits of $33.2, resulting in a net increase to the effective tax rate of 3.9%. We incurred transition tax imposed by the Tax Act of $177.9 and US deferred taxes related to the GILTI provisions of the Tax Act of $165.4. These Tax Act-related adjustments resulted in an increase to our effective tax rate of approximately 62.7%. Additional U.S. tax imposed on our foreign earnings of $171.7 reflects a benefit of $35.4 or 6.5% compared to the U.S. statutory rate.

The effective tax rate reconciliation includes the tax impact of acquisitions of IPR&D assets. Absent successful clinical results and regulatory approval, there is no alternative use for certain acquired IPR&D assets. An increase to the effective tax rate results when the value of such assets are expensed, and no tax benefit is recognized. In the year ended December 31, 2018, this component of the effective tax rate includes an increase to tax expense of $248.4 related to the acquired IPR&D costs for the acquisitions of Wilson Therapeutics and Syntimmune, which increased our effective tax rate by 69.7% and 32.9%, respectively.

In the year ended December 31, 2018, other permanent differences includes tax expense of $21.1 or 8.7% related to nondeductible compensation.

In 2017, we concluded the IRS examination of our 2013 and 2014 tax years. Conclusion of the IRS examination resulted in a decrease to the tax reserves component of the 2017 effective tax rate of approximately 3.6%.

The Tax Act

In December 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted into law. The Tax Act decreased the US federal corporate tax rate to 21.0%, imposed a minimum tax on foreign earnings related to intangible assets (GILTI), a one-time transition tax on previously unremitted foreign earnings, and modified the taxation of other income and expense items. With regard to the GILTI minimum tax, foreign earnings are reduced by the profit attributable to tangible assets and a deductible allowance of up to 50.0%, subject to annual limitations. We have elected to account for the impact of the minimum tax in deferred taxes.

At December 31, 2017, the Tax Act resulted in an increase to tax expense and the effective tax rate of $45.8 and 8.4%, respectively:

(a) Income tax expense increased $177.9 or 32.5% related to the transition tax on unremitted earnings imposed by the Tax Act. This increase includes foreign income subject to US tax of $195.6, partially offset by a related benefit of foreign tax credits of $17.7.

(b) The decrease to the U.S. federal tax rate resulted in a decrease to deferred tax expense of $292.4 or 53.4%. This decrease includes the $121.3 or 22.2% benefit of re-measuring domestic deferred taxes and an additional decrease attributable to re-measuring deferred taxes on foreign earnings of $171.1 or 31.2%.

(c) Other permanent differences includes a decrease to tax expense of $5.1 or 0.9% related to the re-measurement of income taxes payable as a result of changes in U.S. federal tax rates under the Tax Act.

(d) The enactment of the GILTI minimum tax increased US deferred taxes on foreign earnings $165.4 or 30.2%. This increase includes deferred tax expense related to the GILTI minimum tax of $236.9. This deferred expense is partially offset by a related decrease to deferred expense for the release of reserves for uncertain tax positions of $71.5.

We calculated provisional amounts for the tax effects of the Tax Act that could be reasonably estimated, but not completed, in our results for the year ended December 31, 2017. As of the fourth quarter 2018 we had completed our analysis of all provisional estimates, and concluded as follows:

(a) We calculated a reasonable estimate of the one-time transition tax on previously unremitted earnings, which resulted in an increase to U.S. Federal tax expense of $177.9 and an increase to taxes payable, net of tax credits, of $28.0 in the period ended December 31, 2017. Our initial accounting for the transition tax was not complete as of December 31, 2017 because there was uncertainty regarding the calculation of the amounts subject to the tax. We completed our analysis of the transition tax and related interpretive guidance during the third quarter 2018. No significant measurement period adjustment to our initial accounting was required.

(b) We calculated a reasonable estimate of the impact of the GILTI minimum tax on deferred taxes, which resulted in an increase to U.S. Federal tax expense and the deferred tax liability of $236.9 in the period ended December 31, 2017. Our initial accounting for the minimum tax was incomplete because there was uncertainty regarding the calculation of the temporary differences subject to the minimum tax. We completed our analyses of these temporary differences and the expected timing and manner of their reversal during the fourth quarter 2018. We recorded measurement period adjustments during 2018 which resulted in a decrease to U.S. federal tax expense of $67.7.

(c) We calculated a reasonable estimate of the Tax Act’s limits on deductions for employee remuneration, including remuneration in kind, which resulted in an insignificant impact to tax expense, taxes payable, and deferred taxes in the period ended December 31, 2017. Our initial accounting for these limits was incomplete because there was uncertainty regarding the value of the deduction-limited remuneration. We completed our analysis of the relevant employee remuneration arrangements during the third quarter 2018. No measurement period adjustment to our initial accounting was required.

(d) We calculated a reasonable estimate of the impact of the Tax Act to U.S. state income taxes, which resulted in an increase to tax expense, taxes payable, and deferred taxes of $2.9, $2.2, and $0.7, respectively, in the period ended December 31, 2017. We interpreted the effect of the Tax Act's changes to federal law on each U.S. state's system of taxation as of the date of enactment. We completed additional analysis of the effect of modifications to federal deductions and income inclusions on U.S. state tax systems in the fourth quarter 2018. No measurement period adjustment to our initial accounting was required.

(e) We calculated the deferred tax liability related to our foreign captive partnership in the period ended December 31, 2017 consistent with our calculation in periods prior to enactment of the Tax Act. As a result, the deferred tax liability we recorded as of December 31, 2017 of $533.4 related to our foreign captive partnership was provisional.  We completed additional analysis of the direct and indirect effects of the Tax Act during the fourth quarter 2018. We recorded measurement period adjustments during 2018 which resulted in an increase to U.S. state income tax expense and deferred taxes of $11.1.

Deferred Taxes

Provisions have been made for deferred taxes based on the differences between the basis of the assets and liabilities for financial statement purposes and the basis of the assets and liabilities for tax purposes using currently

enacted tax rates and regulations that will be in effect when the differences are expected to be recovered or settled. The components of the deferred tax assets and liabilities are as follows: 

	December 31,			December 31,
	2019			2018
Deferred tax assets:
Net operating losses	$	102.9		$	41.8
Income tax credits	328.1			371.6
Stock compensation	57.1			47.6
Accruals and allowances	65.2			105.8
Unrealized losses	18.8			—
Research and development expenses	3.5			5.2
Accrued royalties	0.8			89.1
ROU leases	46.2			—
Intangible assets	1,967.3			—
	2,589.9			661.1
Valuation allowance	(72.6		)	(19.6		)
Total deferred tax assets	2,517.3			641.5
Deferred tax liabilities:
Depreciable assets	(5.1		)	(88.7		)
Unrealized gains	—			(6.6		)
Investment in foreign partnership	(2,249.5		)	(566.6		)
ROU leases	(53.9		)	—
Intangible liabilities	—			(268.8		)
Total deferred tax liabilities	(2,308.5		)	(930.7		)
Net deferred tax (liability) asset	$	208.8		$	(289.2	)

At December 31, 2019, we have tax effected federal and state net operating loss carryforwards of $12.5 and $43.7, respectively. Our net operating losses expire between 2022 and 2040. We also have federal and state income tax credit carryforwards of $280.5 and $67.3 respectively. The federal income tax credits expire between 2033 and 2039, whereas $47.2 of state income tax credit carryforwards expire between 2020 and 2034. The remaining $20.1 of state income tax credits can be carried forward indefinitely.

Included in the year ended December 31, 2019 are $27.3 of Connecticut state net operating loss carryforwards and $39.7 of Connecticut state income tax credit carryforwards. A change in the Connecticut state tax regime signed into law during 2019 phases out the capital-based component of the business tax. Once fully phased out, the Company will be subject to income-based taxes in the state of Connecticut. The Company anticipates generating tax credits in future years that exceed the amount that can otherwise be utilized. As a result, a full valuation allowance has been established against these carryforward attributes.

The increase in our net operating losses primarily relates to our technical operations center in Ireland, which received a tax benefit during the year for previously accrued but unpaid royalties. The decrease in income tax credits is attributable to the utilization of Orphan Drug credits, partially offset by an increase to fully valued Connecticut state tax credits due to the change in the state tax regime. We continue to maintain a valuation allowance against other certain deferred tax assets where realization is not certain.

The increase in our intangible deferred tax assets relates to the intra-entity asset transfer of certain intellectual property to an Irish subsidiary within our captive foreign partnership. The recognized deferred tax benefit represents the difference between the basis of the intellectual property for financial statement purposes and the basis of the intellectual property for tax purposes. This transaction also increased our investment in foreign partnership deferred tax liability due to the recognition of anticipatory foreign tax credits that reflect the reduction of future foreign taxes associated with the foreign local tax amortization deductions.

Included in our investment in foreign partnership above is $(1,408.2) associated with GILTI minimum tax.

Unrecognized Tax Benefits

We follow authoritative guidance regarding accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.

The beginning and ending amounts of unrecognized tax benefits reconciles as follows: 

	2019			2018			2017
Beginning of period balance	$	92.7		$	60.9		$	138.9
Increases for tax positions taken during a prior period	3.4			9.1			5.6
Decreases for tax positions taken during a prior period	(4.9		)	(5.8		)	(85.8		)
Increases for tax positions taken during the current period	43.8			28.8			19.3
Decreases for tax positions related to settlements	—			—			(15.8		)
Decreases for tax positions related to lapse of statute	(1.2		)	(0.3		)	(1.3		)
	$	133.8		$	92.7		$	60.9

The total amount of accrued interest and penalties were not significant as of December 31, 2019. The total amount of tax benefit recorded during 2019, 2018, and 2017 which related to unrecognized tax benefits was $4.6, $35.4, and $27.1, respectively. All of our unrecognized tax benefits, if recognized, would have a favorable impact on the effective tax rate.

It is reasonably possible that a portion of our unrecognized tax benefits could reverse within the next twelve months. Reversal of these amounts is contingent upon the completion of field audits by the taxing authorities in several jurisdictions, whether a tax adjustment is proposed, the nature and amount of any adjustment, and the administrative path to resolving the proposed adjustment. We cannot reasonably estimate the range of the potential change.

Tax Audits

We file federal and state income tax returns in the U.S. and in numerous foreign jurisdictions. The U.S. and foreign jurisdictions have statutes of limitations ranging from 3 to 6 years. However, the limitation period could be extended due to our tax attribute carryforward position in a number of our jurisdictions. The tax authorities generally have the ability to review income tax returns for periods where the limitation period has previously expired and can subsequently adjust tax attribute values.

In 2017, the IRS commenced an examination of our U.S. income tax returns for 2015. We anticipate this audit will conclude within the next twelve months. We have not been notified of any significant adjustments proposed by the IRS. It is reasonably possible that previously unrecognized tax benefits could be recognized upon the conclusion of the IRS examination. At this time, an estimate of the change in unrecognized tax benefits cannot be made.

Undistributed Earnings

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.