Entity information:
INCOME TAXES
 
The Company is subject to federal, state and local income taxes in the United States, and income taxes in Taiwan, R.O.C., the Republic of Ireland and the Netherlands. The provision for (benefit from) income taxes is comprised of the following (in thousands):

 
Years Ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal taxes
$
(55,844
)
 
$
21,386

 
$
48,078

State taxes
(372
)
 
266

 
2,286

Foreign taxes
639

 
1,377

 
(442
)
Total current tax (benefit) expense
(55,577
)
 
23,029

 
49,922

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal taxes
$
73,357

 
$
(133,387
)
 
$
(23,605
)
State taxes
(371
)
 
5,502

 
(5,733
)
Foreign taxes
917

 
562

 
(213
)
Total deferred tax expense (benefit)
73,903

 
(127,323
)
 
(29,551
)
 
 
 
 
 
 
Provision for (benefit from) income taxes
$
18,326

 
$
(104,294
)
 
$
20,371


 
A reconciliation of the difference between the tax provision (benefit) at the federal statutory rate and actual income taxes on income before income taxes, which includes federal, state, and other income taxes, is as follows (in thousands):

 
Years Ended December 31,
 
2017
 
2016
 
2015
(Loss) income before income taxes
$
(450,961
)
 
 

 
$
(576,325
)
 
 
 
$
59,368

 
 
Tax (benefit) provision at the federal statutory rate
(157,836
)
 
35.0
 %
 
(201,714
)
 
35.0
 %
 
20,779

 
35.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in tax rate resulting from:
 
 
 
 
 
 
 
 
 
 
 
Tax rate differential and permanent items on foreign income
662

 
(0.2
)%
 
186

 
—
 %
 
412

 
0.7
 %
State income taxes, net of federal benefit
(8,291
)
 
1.8
 %
 
(7,394
)
 
1.3
 %
 
365

 
0.6
 %
State research and development credits
(1,324
)
 
0.3
 %
 
(1,767
)
 
0.3
 %
 
(2,357
)
 
(4.0
)%
Federal research and development credits
(1,243
)
 
0.3
 %
 
(2,213
)
 
0.4
 %
 
(2,672
)
 
(4.5
)%
Share-based compensation
5,471

 
(1.2
)%
 
1,768

 
(0.3
)%
 
968

 
1.6
 %
Executive compensation
543

 
(0.1
)%
 
(761
)
 
0.1
 %
 
3,140

 
5.3
 %
Domestic manufacturing deduction
—

 
—
 %
 
(1,286
)
 
0.2
 %
 
(1,422
)
 
(2.4
)%
Other permanent book/tax differences
(1,846
)
 
0.4
 %
 
(258
)
 
—
 %
 
2,003

 
3.4
 %
Provision for uncertain tax positions
(807
)
 
0.2
 %
 
337

 
—
 %
 
184

 
0.3
 %
Revision of prior years’ estimates
1,371

 
(0.3
)%
 
(792
)
 
0.1
 %
 
859

 
1.5
 %
Taiwan rural area investment tax credit
—

 
—
 %
 
—

 
—
 %
 
(2,134
)
 
(3.6
)%
Impact on gross deferred net assets from 2017 Tax Reform Act
100,065

 
(22.2
)%
 
—

 
—
 %
 
—

 
—
 %
Foreign withholding tax
1,534

 
(0.3
)%
 
—

 
—
 %
 
—

 
—
 %
Other, net
2,888

 
(0.7
)%
 
842

 
(0.1
)%
 
246

 
0.4
 %
Valuation allowance
77,139

 
(17.1
)%
 
108,758

 
(18.9
)%
 
—

 
—
 %
Provision for (benefit from) income taxes
$
18,326

 
(4.1
)%
 
$
(104,294
)
 
18.1
 %
 
$
20,371

 
34.3
 %

 
Deferred income taxes result from temporary differences between the financial statement carrying values and the tax bases of the Company’s assets and liabilities. Deferred tax assets principally result from certain accruals and reserves currently not deductible for tax purposes, acquired product rights and intangibles, capitalized legal and share based compensation expense. Deferred tax liabilities principally result from acquired product rights and intangibles and the use of accelerated depreciation methods for income tax purposes.

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, the Company assesses all available positive and negative evidence. This evidence includes, but is not limited to, scheduled reversal of deferred tax liabilities, prior earnings history, projected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income (exclusive of reversing taxable temporary differences and carryforwards) to outweigh objective negative evidence of recent financial reporting losses for the years ended December 31, 2017 and 2016.

Based on an evaluation of both the positive and negative evidence available, the Company determined that it was necessary to establish a valuation allowance against all of the net deferred tax assets for the year ended December 31, 2017 and against a significant portion of the net deferred tax assets for the year ended December 31, 2016. Given the objectively verifiable negative evidence of a three-year cumulative loss which, under the provisions of FASB ASC Topic 740 is a significant element of negative evidence that is difficult to overcome, and the weighting of all available positive evidence, the Company excluded projected taxable income from the assessment of income that could be used as a source of taxable income to realize the deferred tax assets. The valuation allowance recorded against the consolidated net deferred tax asset in 2017 and 2016 were $185.9 million and $108.8 million, respectively.

The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Accrued expenses
$
60,069

 
$
114,825

Inventory reserves
17,602

 
15,873

Net operating loss carryforwards
2,518

 
2,302

Depreciation and amortization
2,657

 
651

Acquired product rights and intangibles
118,168

 
128,401

Capitalized legal fees
6,695

 
10,231

Credit carryforwards
11,205

 
8,453

Share based compensation expense
3,535

 
6,371

Sale of subsidiary
7,794

 
—

Other
495

 
525

Deferred tax assets
230,738

 
287,632

Deferred tax liabilities:
 
 
 
Tax depreciation and amortization in excess of book amounts
3,808

 
5,428

Acquired product rights and intangibles
35,698

 
95,517

Derivative
3,411

 
6,192

Foreign withholding tax
1,824

 
—

Other
3,326

 
1,871

Deferred tax liabilities
48,067

 
109,008

 
 
 
 
Deferred tax assets (liabilities), net
182,671

 
178,624

Valuation allowance
(185,897
)
 
(108,758
)
Deferred tax assets (liabilities), net after valuation allowance
$
(3,226
)
 
$
69,866



A rollforward of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

 
Years Ended December 31,
 
2017
 
2016
 
2015
Unrecognized tax benefits beginning of year
$
6,425

 
$
5,680

 
$
6,517

Gross change for current year positions
328

 
549

 
1,079

Gross change for prior period positions
(105
)
 
1,318

 
(673
)
Gross change due to Tower Acquisition
—

 
—

 
1,037

Decrease due to expiration of statutes of limitations
(972
)
 
—

 
—

Decrease due to settlements and payments
—

 
(1,122
)
 
(2,280
)
Unrecognized tax benefits end of year
$
5,676

 
$
6,425

 
$
5,680


 
The amount of unrecognized tax benefits at December 31, 2017, 2016 and 2015 was $5.7 million, $6.4 million and $5.7 million, respectively, of which $5.0 million, $5.3 million and $4.3 million would impact the Company’s effective tax rate, respectively, if recognized. The Company currently does not believe that the total amount of unrecognized tax benefits will increase or decrease significantly over the next 12 months. Interest expense related to income taxes is included in “Interest expense, net” on the consolidated statements of operations. Net interest expense related to unrecognized tax benefits for the year ended December 31, 2017 was $(24,000), compared to $125,000 in 2016. Accrued interest expense as of December 31, 2017 and 2016 was $0.3 million and $0.4 million, respectively. Income tax penalties are included in “Other income (expense)” on the consolidated statements of operations. Accrued tax penalties of $0.6 million were booked in 2015 related to the 2010-2011 California audit and were paid in 2016.

Tower Holdings, Inc. (“Tower”) is currently under audit for federal income tax by the U.S. Internal Revenue Service ("IRS") for the tax year ended March 9, 2015, which pre-dates the Company’s acquisition of Tower. The Company and the former stockholders of Tower are currently cooperating with the IRS in connection with the audit. Under the terms of the Stock Purchase Agreement related to the Tower Acquisition, the Company is not responsible for pre-acquisition income tax liabilities. Neither the Company nor any of its other affiliates is currently under audit for federal income tax.

Through March 31, 2017, no provision had been made for U.S. federal deferred income taxes on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiary since it had been the current intention of management to indefinitely reinvest the undistributed earnings in the foreign subsidiary.

As of June 30, 2017, following management’s announcement in May 2017 that it was reviewing potential options to either sell or close the Taiwan manufacturing facility and dissolve operations at Impax Taiwan, the Company changed its assertion related to the accumulated unremitted foreign earnings of its Taiwan subsidiary. The Company was no longer able to assert under ASC 740-30-25 that the unremitted foreign earnings are indefinitely reinvested outside the United States. Accordingly, the Company has recorded a deferred tax liability associated with remitting these earnings back to the United States.
    
Effect of 2017 Tax Reform Act

On December 22, 2017, the 2017 Tax Reform Act was signed into law. Among other things, the 2017 Tax Reform Act permanently lowers the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, U.S. GAAP require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment.

In connection with the Company's initial analysis of the impact of the 2017 Tax Reform Act, the Company recorded a discrete net tax benefit of $0.4 million in the period ending December 31, 2017. This net tax benefit primarily consisted of the corporate rate reduction of $0.5 million and a net expense for the Transition Tax (as described below) of $0.1 million.

Although the Company is able to make a reasonable estimate of the impact of the reduction in its corporate tax rate, due to the 2017 Tax Reform Act, the Company's estimate may be affected by other analyses related to the 2017 Tax Reform Act, including, but not limited to, the Company's calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. The deemed repatriation transition tax, also referred to as the "Transition Tax", is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of a company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company determined, in addition to other factors, the amount of post-1986 E&P of the Company's relevant subsidiaries - including Impax Laboratories (Netherlands) CV, Impax (Netherlands) BV, Impax Laboratories Ireland Limited, and Impax Taiwan Inc, - as well as the amount of non-U.S. income taxes paid on such earnings. As such, the Company has made a reasonable estimate of the Transition Tax and recorded a Transition Tax obligation of $0.1 million, however, the Company continues to gather additional information to more precisely compute the amount of the Transition Tax. The Company continues to evaluate legislative changes, regulations, and notices regarding the applicable mechanics of the relevant rules impacting the estimate of the Transition Tax, and, the Company continues to evaluate cash versus non-cash earnings and profits, as the rates differ for the two different categories of earnings and profits.