11. Income Taxes

The company’s effective tax rate was 21.3% during the year ended December 31, 2017 as compared to (50.6)% in the prior year comparative period. The company’s effective income tax rate for year ended December 31, 2017 differs from the U.S. federal statutory rate mainly due to state and local taxes partially offset by credits, permanent items, and the impact of a one-time deferred tax revaluation under the 2017 Tax Act.  The company’s effective income tax rate for year ended December 31, 2016 differ from the U.S. federal statutory rates mainly due to the release of a previously established valuation allowance.

Prior to the separation, the company’s income tax expense and deferred tax balances were calculated on a separate tax return basis although the company’s operations had historically been included in the tax returns filed by the respective Biogen entities, of which the company’s business was a part. For periods subsequent to the separation, Bioverativ files tax returns on its own behalf and its income tax expense and deferred income tax balances are recorded in accordance with the company’s standalone income tax positions. Biogen and Bioverativ entered into a tax matters agreement effective as of the date of separation. Under the terms of the tax matters agreement Bioverativ may be required to indemnify Biogen for certain tax matters.  To date, no amounts have been identified.

The 2017 Tax Act, which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings.  These changes are effective beginning in 2018.  The 2017 Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the Transition Toll Tax).  Changes in tax rates and tax laws are accounted for in the period of enactment.  During the year ended December 31, 2017, we recorded a benefit totaling $58.8 million related to our current estimate of the provisions of the 2017 Tax Act. The preliminary estimate of Transition Toll Tax was immaterial.

Our preliminary estimate of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the 2017 Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the 2017 Tax Act may require further adjustments and changes in our estimates, which could have a material adverse effect on our business, results of operations or financial conditions. The final determination of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.

Income before Income Tax Provision and Income Tax Expense

 

Deferred Tax Assets and Liabilities

 

In addition to deferred tax assets and liabilities, we have recorded prepaid tax and deferred charges related to intercompany transactions. As of December 31, 2017 the total deferred charges and prepaid taxes were $26.0 million.  

Income Tax Expense Reconciliation

 

Our effective tax rate for 2017 compared to 2016 fluctuated primarily due to a $58.8 million one-time deferred tax revaluation based on recent tax law changes in 2017 and the release of the $247.3 million valuation allowance on our domestic deferred tax assets in 2016.  Our effective tax rate for 2016 compared to 2015 benefitted primarily due to the release of a $247.3 million valuation allowance release in 2016.

As of December 31, 2017, we had acquired net operating losses and general business credit carry forwards for federal income tax purposes of approximately $68.8 million and $4.0 million, respectively, which begin to expire in 2025 and 2020, respectively.  Additionally, for state income tax purposes, we had acquired net operating loss carry forwards of approximately $102.3 million, which begin to expire in 2033. Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in the case of an “ownership change” of a corporation. Any ownership changes, as defined, may restrict utilization of carryforwards.

In assessing the realizability of our deferred tax assets, we have considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial reporting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Our estimates of future taxable income take into consideration, among other items, our estimates of future income tax deductions related to the exercise of stock options. Based upon the reversal of taxable temporary differences, its level of historical taxable income and income tax liability and projections for future taxable income over the periods in which the deferred tax assets are utilizable, we believe it is more likely than not that we will realize the net benefits of the deferred tax assets of our wholly owned subsidiaries. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

As of December 31, 2017, we are subject to taxation in the U.S. federal jurisdiction, various U.S. states, and foreign jurisdictions. The Company is subject to examination for tax years beginning in 2017.